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Solar Energy Investment Tax Credits

Written By Nick Hodge

Posted September 3, 2008

The buzz surrounding the extension of federal investment and production tax credits has reached a fever pitch.

And that’s good news for your portfolio.

If you’re not familiar with the situation, here’s a one-sentence rundown:

The U.S. investment tax credit (ITC), which affects solar, and the production tax credit (PTC), which affects wind, are set to expire at the end of the year, bringing the rebate down to 10% from 30%.

If these are allowed to expire, it would mean a drastic reduction in solar and wind demand the following year. Naturally, associated solar and wind stocks would also see a reduction in value.

In fact, I would argue that worries about the tax credits’ expiration have been partially to blame for the downward pressure on renewable energy stocks so far in the second half of this year.

This is a notion that the common investor has overlooked. Even some institutional buyers have shied away from these types of stocks because of uncertain guidance on the tax issue from Washington.

But I see no risk, and would actually be loading up on solar stocks right now, while they’re still on the cheap. Because they won’t be for long.

Tax Discussion Reaches Fever Pitch

There’s honestly not a doubt in my mind that the ITC and PTC will each be extended. It may not be the eight-year extension that the renewable energy industry is looking for, but it will be extended.

When that happens, the stocks that the tax credits affect are absolutely going to fly. I’ll get to that in a minute. First, let me let you in on how I know they will be extended…

With the economy in its current state, no politician is going to be held accountable for supporting legislation that will cost America jobs. And that’s exactly what allowing the credit to expire would do.

That’s why when the House voted to extend the credits back in May, they did so through a bill entitled "Energy and Job Creation Act of 2008." Of course, that bill didn’t make it through the Senate.

A Navigant Consulting report issued earlier this year stated the expiration of the tax credits would lead to $19 billion in lost investment and over 115,000 lost jobs. Take a look:

economic implications of the solar investment tax credit

Undoubtedly, it would lead to the loss of even more votes for incumbents’ re-election campaigns. They most certainly won’t let that happen.

Not only that, I’ve heard from numerous CEOs, association heads, and politicians that renewing the tax credits is a priority and they won’t be made to expire. Plus, Congress generally passes meaningful energy and tax legislation at the end of the year.

And then there’s the numerous Op-Ed pieces calling for the extension of solar and wind tax credits. Here are just a few of this week’s headlines in that respect:

  • Preserve Clean Energy Credits

  • Failing to Extend Solar Tax Credit Will Hurt Nation

  • Dying for a Tax Break

We also have local leaders, politicians, and businesspeople calling for the extension. And each Presidential candidate claims to support it.

So I’m fairly sure it will be passed by the end of the year. Now that we know that, all that remains is deciding which stocks will benefit the most when the tax credits are extended.

Playing Energy Tax Legislation for Profit

The first group of stocks that will receive a significant bump when the tax credits are extended are solar installers.

This is the sector of the solar industry that not only makes the highest margins, but that has also been most affected by lack of an extension thus far.

Clear Skies Solar (OTCBB: CSKH) is down 67%, from $1.50 to $.50, for the year so far.

Akeena Solar (OTCBB: AKNS) is down 65% in the same time.

And the newcomer to the installer arena, Real Goods Solar (NASDAQ: RSOL), has never traded higher than $9.25, which it did in its first few days of trading back in May. It now trades at $6.00.

All of these stocks are worthy of investment ahead of significant tax legislation votes. And I believe each would gain no less than 10% on the news.

The next place to look is oversold solar stocks, of which there is an abundance. It’s probably wise to target the companies that do a good portion of their business in the U.S.

Though well-established, I’m looking at companies here like SunPower (NASDAQ: SPWR), Suntech (NYSE: STP), and First Solar (NASDAQ: FSLR).

And if you’re looking for utility scale solar installers, I’d be looking at SolarWorld (XETRA: SWV) and Stantec (NYSE: STN).

Beyond that, there is a slew of smaller solar manufacturers that are currently undervalued, and that will receive a nice bump when the tax credits are extended. The largest of those include Trina Solar (NYSE: TSL) and Evergreen Solar (NASDAQ: ESLR).

Indeed, with most solar stocks still trading flat on a year-to-date (YTD) basis, there are some real bargains to be had. Buying them now, at discounted prices, will surely be a boon to any portfolio as the policy landscape improves, capacities are ramped up, and costs are reduced.

Now is certainly the time to be buying. And no savvy investor knows that better than readers of the Alternative Energy Speculator, who have earned three double-digit solar gains in the past two weeks by following my advice.

If you don’t want to miss the next winning recommendation, click here.

Call it like you see it,

nick hodge