Gordon Johnson: Inorganic Demand Driving US Solar Bull Market

In a way, the solar scene is poised to prove the maxim “ignorance is bliss.”

Gordon Johnson, managing director of Axiom Capital Management, thinks uncertain regulatory catalysts are cause for hope among solar investors.

Johnson expects a bull market in U.S. solar until November 2017 ━ possibly as late as January 2018 ━ considering the possible passage of a Section 201 tariff. The International Trade Commission is expected to recommend action to the president by Oct. 23, and the president will make his decision within one to three months.

If it fails to pass, the outcome could prove detrimental to the entire industry. If it succeeds, Axiom foresees positives for U.S. companies at the expense of Chinese competitors.

And in the meantime, the uncertainty is driving independent power producers to stockpile modules at presently inexpensive prices ahead of anticipated price hikes.

“It’s not organic demand,” Johnson said Wednesday on Benzinga's PreMarket Prep radio show. “It’s inorganic demand due to uncertainty around government policy, but nonetheless we believe it will drive estimates higher across the solar module space.”

Who Profits?

The circumstance has positive implications for First Solar, Inc. FSLR, which Axiom upgraded Wednesday from Hold to Buy.

“Based on our checks at the Intersolar Conference last week, we are hearing First Solar is delaying the ramp up of series 6 technology and instead focusing on ramping back up its series 4 technology, and given we believe First Solar is selling modules at $0.50 to $0.60 between that level, and also we’re hearing rumblings that it’s sold out through third quarter 2018, we believe the company is going to show potentially significant upside to consensus estimates,” Johnson said.

An anticipated earnings beat could also prompt a “continued violent move higher on the stock.”

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The optimism extends to JA Solar Holdings, Co., Ltd. (ADR) JASO, which Axiom upgraded from Sell to Hold.

“We don’t think it makes sense to be shorting J Sol right now,” Johnson said, asserting a $7 price target.

The stock is protected by Section 201, which drove demand for U.S. modules and prompted Chinese rivals to cancel forward-sold contracts and resell modules at higher prices.

“So they’re price gouging, but that will resonate for higher earnings price in both Q2 and we think more so in Q3,” Johnson said.

Additionally, Axiom maintains Buys on Canadian Solar Inc. CSIQ and JinkoSolar Holding Co., Ltd. JKS, but it sees little in Yingli Green Energy Holding Co Ltd (ADR) YGE and SunPower Corporation SPWR.

In fact, it considers the latter investment a “big mistake,” as the firm has great exposure to Section 201 and is expected to collapse with its passing.

Meanwhile, Yingi burns a lot of cash, has a lot of debt and operates at a higher cost per watt.

“Compared to its peers, it’s in the worst position,” he said.