Solar ETFs Could Brighten In 2016

Let's just eschew all the weather-related analogies and metaphors to say 2015 has been unkind to solar stocks and relevant exchange-traded funds. Over the past six months, the Market Vectors Solar Energy (ETF) KWT and the Guggenheim Solar ETF TAN are down 19.5 percent and 25.1 percent, respectively.

Those performances include Wednesday, during which solar stocks surged after Congress introduced legislation that includes an extension of the solar investment and wind protection tax credit.

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Moves On Tax Credit Extension

TAN, the larger of the two solar ETFs, surged almost 9 percent on volume that was more than quadruple the 90-day trailing average.

Short covering certainly helped the solar ETF rally. Stocks found in KWT and TAN are often among the most shorted on U.S. exchanges. “Currently constituents average 7.3 percent of shares outstanding on loan for TAN. This is around three times the average for companies in the S&P 500 and twice the short interest for constituents of the Russell 2000,” said financial data provider Markit in a recent research note.

Spotlight On TAN

TAN, which is home to nearly $291 million in assets, includes well-known solar stocks such as First Solar, Inc. FSLR, SolarCity Corp SCTY, SunPower Corporation SPWR and Trina Solar Limited (ADR) TSL.

On Wednesday, S&P Capital IQ analyst Angelo Zino raised his rating on SunPower. A research note out by the firm, stated that SunPower was raised “to strong buy from buy today upon understanding the prospects of the tax credit extension. Zino believes this provides more visibility into SPWR's U.S. business over the next 6 years while the company continues to find growth internationally. S&P Capital IQ thinks SPWR is best-positioned to succeed given its Total relationship and technology advantage.”

First Solar, which S&P Capital IQ raised to buy from hold, is TAN's largest holding and combines with SunPower 16.5 percent of the ETF's weight. Elon Musk's SolarCity is TAN's second-largest holding at a weight of 7.5 percent.

Solar And Oil's Torrid Relationship

Solar stocks still have an oil problem— as in falling oil prices are problematic for the solar industry because inexpensive oil takes some of the shine off alternative fuel sources.

As much is confirmed by TAN tumbling over the past six months, a period in which the United States Oil Fund LP (ETF) USO is off 45.6 percent.

Sunedison Inc SUNE, a stock that has plunged 68.1 percent year-to-date, is TAN's tenth-largest holding.

Analysts and investors have voiced concerns about SunEdison focusing “around the renewable energy developer and its yieldco's abilities to execute on two major acquisitions announced earlier this year. Investors have concerns 'about Sunedison's debt levels, cash flow and what some have described as opaque financial structures,” said S&P Capital IQ.

The research firm has a marketweight rating on TAN.