After a period of plunging prices and industry-wide consolidation, solar stock exchange traded funds have been basking in the market. While the sector has enjoyed its current period of strength, potential investors should be aware that the area is highly cyclical.
Year-to-date, the Guggenheim Solar ETF (NYSEArca: TAN) is up 22.4% and Market Vectors Solar Energy ETF (NYSEArca: KWT) is 14.2% higher.
For years, solar sector stocks saw their market capitalization shrink and many others went out of businesses as government subsidies fueled excess manufacturing capacity, which drove down prices and lowered profit margins across the board, Wall Street Journal reports.
From 2008 to 2012, solar-module manufacturing capacity grew at a compound annual rate of 52% while demand only account for 70% of capacity in 2008 and rose at a slightly slower pace over time.
However, the solar sector has since recovered from its 2012 downfall, with solar-module prices stabilizing. Now, annual growth capacity from 2012 to the end of this year is expected to rise only 10% while demand is projected to jump twice as fast. [Solar ETFs: Demand Outpacing Supply for First Time Since 2006]
Similar to the semiconductor industry, solar sector companies oscillate between cycles of varying price and capacity swings. Currently, the solar manufacturing sector may be heading toward the end of a consolidation phase to a point where growth in demand for panels is finally outpacing capacity.
Solar suppliers are reporting profit margins that topped 15% over the first quarter, compared to 10% at the end of 2013.