Will Higher Volatility Leave Solar Stocks In the Shade?

It has been a crazy week in stock markets, with U.S. yields pushing higher and stocks trading sharply lower. The Fed's Geithner feels that volatility in U.S. Treasuries, at the highest in almost two years, may be returning to "normal." What's going on here, and how can solar investors position themselves for higher volatility?

Bond markets have realized that rates should be a little higher, given how strong the global economy is. But this isn't necessarily bad news for stocks. Treasury inflation-protected securities (TIPS) have sold off more than Treasuries since early March, which means the expected inflation rate has declined. Stronger global growth combined with absent inflationary pressures is good for stocks. I don't believe that much has fundamentally changed in the U.S. or international growth outlook.

If you're not convinced, just look at the recent movements of the Swiss franc and Japanese yen. The two currencies are usually favored in an environment of rising risk aversion, but have not benefited from the recent weakness in equity markets. Forex markets seem convinced that higher interest rates will not kill global economic growth, one more reason why investors should view the recent yield movements as a healthy correction. But I'm going to wait for Friday's U.S. CPI data before turning bullish on stocks in the near-term.

The bottom line: 2007 equity returns should be reasonably good, but volatility is expected to increase as the year progresses. Merrill Lynch strategist Richard Bernstein said that the market is in transition from "a liquidity-driven, leverage-driven speculative phase to a more fundamentally-driven phase." Similar to 1989, "investors today can't imagine how liquidity might dry up, but history suggests liquidity can, and will, dry up as central banks tighten monetary policy."

Volatility could become the big story of 2007, and for that reason I've ranked the volatility of U.S.-listed solar stocks. No rocket science was used in compiling this ranking, since it is my intention to use this list as a starting point for future discussions. I calculated the standard deviation of all closing prices since the start of 2007 and this is what I came up with:

FSLR (Std deviation – 14.36)
SPWR (Std deviation – 6.37)
WFR (Std deviation – 6.05)
ASTI (Std deviation – 2.81)
ENER (Std deviation – 2.37)
ESLR (Std deviation – 1.14)
DSTI (Std deviation – 0.99)

Chinese solar plays:
TSL (Std deviation – 12.72)
JASO (Std deviation – 3.40)
SOLF (Std deviation – 1.94)
STP (Std deviation – 1.82)
CSIQ (Std deviation – 1.05)

Solar stocks have seen a strong pullback over the last few weeks, bringing some valuations back to attractive levels. Investors could use this list as a starting point if they want to play the expected increase in volatility. Just a friendly reminder: past volatility is no guarantee of future volatility.

Disclaimer: I do not own any of the stocks mentioned above. I do not own a solar panel.