How to Stop Worrying and Learn to Love Sun-Stock Speculation

For a while, it seemed like this year’s promising sector was solar power. Then it started to look like it wasn’t.

Now the solar stocks are being whipsawed around on the kind of mundane news that is the bread and butter of every other industry: contracts, partnerships, delayed deals. A case in point: SunPower (SPWR) secured $190 million from Morgan Stanley for solar electric power installations.

Now, $190 million is nothing to sneeze at, but neither does it justify a 15 percent surge in SunPower’s stock in a single day. SunPower’s market cap increased by $1.3 billion on news of a $190 million facility. That’s a jump in market value nearly seven times as big as the money Morgan Stanley is putting up. And I’m sitting here scratching my head over how that makes sense. Especially if you look at the nature of the deal as explained in the press release:

“Under the terms of the facility, Morgan Stanley and SunPower jointly own a holding company that will finance project companies established for individual installations. The project companies will purchase solar systems from SunPower and resell the electricity to customers. Morgan Stanley will finance up to $190 million and SunPower will finance up to $10 million through the facility.”

I’m far from an expert on these kinds of facilities, but if anyone can explain in the comments just how this can add to SunPower’s revenue and profit enough to warrant the stock surge, while also making it a worthwhile outlay of capital for Morgan Stanley, I’d love to hear it.

The news was so joyous it caused several other solar stocks, none of which were beneficiaries of Morgan’s largesse, to rally more than 5 percent Wednesday.

SunPower’s rally wasn’t an aberration. Earlier this week, Hoku Scientific (HOKU) signed a $306 million deal to ship polysilicon to Solarfun Power Holdings (SOLF). A pretty bullish headline, and it sent Hoku’s stock up surging to $8.22 from $5.92 in a single day.

But there were a few details in the announcement that sucked the air out. First, the deal was for “up to $306 million” – so it could be less. Second, the shipments won’t even begin until July 2009, or 20 months from now. Third, it will extend over eight years, which really means $38 million a year. Sorry – up to $38 million a year.

But here’s some good news: “Under the Supply Agreement, Solarfun paid a cash deposit to Hoku Scientific of $1 million upon signing the agreement, and is required to pay an additional cash deposit of $9 million on or before December 28, 2007, as a prepayment for future product deliveries.”

That’s $10 million this quarter alone! But does that $10 million deposit mean that Hoku deserves a 37% increase in stock value since that announcement was made on Monday? In a rational market, no. In a speculative market – like it or not – the answer is yes.

The trouble with speculating on these kinds of announcements is that they don’t guarantee a long-lasting rally. On Monday, Yingli Green Energy (YGE) said it signed a $56 million contract with GT Solar to expand its production capacity; and the news drove the stock up 4 percent in the first hour. But by day’s end, it was down 5 percent from the previous day’s close.

None of this is to say that solar energy won’t deliver on its promise. It’s just to say that, if you want to invest in that promise at this point of 2007 you had better learn to start loving speculative volatility.