Thursday’s ETF To Watch: Solar ETF (TAN)

by on July 29, 2010 | ETFs Mentioned:

With low levels of economic growth predicted for much of the world, demand for many commodities has been modest to say the least. This has helped to keep the price of oil in check and force the commodity to trade in a $20 dollar range between $70-$90 a barrel for much of 2010. While welcomed news for most consumers who have been especially hard hit by the crisis, this has been a terrible development for the alternative power industry which thrives on higher costs for traditional power sources in order to make its products competitive [also read Why Clean Energy ETFs Are No Slam Dunk].

In the past, alternative power companies could compete with oil and coal thanks to large subsidies from governments around the world. However, as balance sheets have become more bloated, many governments have resorted to cutting solar power subsidies in order to cut expenses without having to fire state workers or cut benefits. Germany, one of the world’s leaders in alternative energy, cut solar power subsidies by close to 16% which sent many solar companies tumbling and has set the stage for further cuts in other developed markets, including the U.S. where a small company was forced to abandon a $400 million project after failing to obtain financing earlier this year. In addition to cutting into solar power company earnings, these cuts in subsidies have also pushed up the price point at which solar is competitive with oil which is helping to further cloud the outlook for the solar industry in 2010 [see Light Out For Solar ETFs As Oil Continues Plunge].

However, the picture for the rest of 2010 looks to become a little clearer after today as one of the most important companies in this industry, First Solar (FSLR), reports earnings. The company is currently the largest manufacturer of thin film solar modules in the world and as such, is seen as a barometer for the rest of the solar industry. After plummeting in the early part of the year, the $11 billion company rebounded in late April but fell back again at the start of the summer. The company has recently been surging higher and now has a PE of just 18.2 which is very reasonable considering the high-growth prospects of the company and the industry at large [also see Definitive Guide To Clean Energy ETFs].

On average, analysts expect the company to report earnings of $1.64 on sales of $545 million compared to last year’s figures of $2.11 a share in profits on sales of $526 million. While these numbers are down from last year, the most important thing will be outlook for the future and “management commentary on demand and average selling prices,” Simmons & Co analyst Burt Chao said in an interview. “I would expect Q3 demand to improve, and if they talk that down that would be very negative for the stocks.”

For this reason, we decided to make the Claymore/MAC Global Solar Energy Index ETF (TAN), which allocates 9.9% of its assets to First Solar, today’s ETF to watch. In addition to this Claymore fund’s top weighting to FSLR, the fund maintains large allocations to Meyer Burger Technology (5.3%) and Trina Solar Limited (5.2%). Roughly 72.3% of the fund is allocated to international securities with a heavy focus on European and emerging Asian counties; China (28.7%) takes the top country weighting, followed closely by the U.S. (27.7%), and Germany (27.5%). TAN holds just 32 securities in total and has a heavy focus on small cap companies which make up 42.4% of the fund’s total assets. Like many ETFs in the Energy Equities ETFdb Category, TAN has fallen substantially so far in 2010 posting a loss of 22% since the beginning of the year. However, the fund has soared higher recently, jumping by 22.9% over the past four weeks leaving investors to hope that this trend will continue after today’s crucial earnings report from market bellwether First Solar [also make sure to read Solar ETFs: Bright Future Or Headed For A Burnout?].

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Disclosure: No positions at time of writing.