I dropped First Solar (FLSR) from my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to the portfolio.)
Why? Because the kind of good news that First Solar announced on December 15 simply doesn’t count in the current solar energy market.
That day, in a conference call, First Solar announced new targets for manufacturing costs and solar panel efficiency that would put the company significantly in front of solar cell manufacturers that use silicon-based technology. Costs would drop, the maker of thin-film panels projected, to 50 cents to 54 cents a watt by 2015, from an earlier target of 52 cents to 63 cents a watt, and the efficiency at which the company’s panels convert sunlight to electricity would climb to 14.5% to 15% from an earlier target of 13.5% to 14.5%. According to First Solar that would mean that silicon solar companies would need to hit a cost target of 57 cents a watt to be competitive in 2015. Currently, again according to First Solar, silicon solar companies are guiding to 72 cents a watt by 2015.
Great news for First Solar, right?
Except that in the current market for solar power I’m afraid it just doesn’t matter. First Solar’s strategy has been built upon the superiority of its technology: Thin films aren’t yet as efficient at turning sunlight into electricity as crystalline silicon technology is, but they are a whole lot cheaper. Make them cheap enough and improve efficiency as well and at some point the technology leaves crystalline silicon solar cells in the dust.
Looking at the December 15 announcement, I’d have to conclude that First Solar is a good way toward achieving that strategic goal.
But this year the key competitive advantage in the solar sector shifted from technology to financing. If you had access to cheap money, you could provide cheap financing to utilities to build projects that used your solar product. If you had access to cheap money, you could continue to build production capacity, even if the industry was awash in capacity that no one needed, and then cut prices to gobble up market share even if you lost money on what you produced and sold. That gives the big edge to Chinese solar manufacturers (Yingli Green Energy (YGE) and Trina Solar (TSL), for example,) and manufacturers in other countries with parents with deep pockets (such as Sunpower (SPWR)).
I don’t see this competitive landscape shifting back toward First Solar’s technology-based strategy in 2012 or 2013 or maybe even 2014. Given that kind of timetable, I think I’ll sit this one out for a while. This pick lost 74.1% in 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yingli Green Energy as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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