Top Hedge Fund Sees Solar Power Viability, Profitability Around The Corner

The naysayers regarding solar power have always made one accurate point: the technological cost effectiveness was not the same as cheap burning coal or other carbon emitting sources. Government investing in “green energy” was a boondoggle that will never provide dividends, was one line of thought. Contrast this with the first quarter report from the big UK hedge fund Lansdowne Energy Dynamics Fund, which for the first time is seeing the light of day relative to solar power profitability, and perhaps witness one of the great trend changes of our time.

Also see a Curated list of top hedge fund letters

Solar power is nature power and it can mean profits… at last

Solar power technology has had numerous problems in a free market.  The scarcity of key materials needed to produce solar panel technology is one reason the cost is so high. This, along with the power supply intermittency and high land usage, are some of the issues holding back widespread adoption.

All this is changing and professional investors such as Lansdowne – citing free market logic – are taking notice.

The hedge fund plans to “capture alpha from the U.S. solar boom” it sees coming, with a few caveats. The found cites four core reasons for the coming boom:

So long as government subsidies still exist, renewables are now becoming competitive with conventional energy generation. While this is an important caveat, it nonetheless benchmarks an important moment in the industry’s development. Increasingly, renewables are becoming the only growth venue for US utilities, the report noted. Further, regulatory visibility has massively improved. This all leads to a 2020 forecast where Lansdowne sees solar becoming competitive with conventional sources assuming one is within 40 degrees of latitude from the equator and the industry achieves further 20% to 25% cost reductions.

Solar power stock plays

Recently solar and wind technology are the lowest cost generation option when the 30% federal tax credit is considered. “This means that solar and wind can now enter into the main stream regulated generation market,” the report said. “These positive developments can be seen in the share prices for more successful players, which have doubled over the last 5 years.”

Given the outlook, Lansdowne likes two plays: First Solar (FSLR) and SunPower (SPWR). The hedge fund likes Solarcity (SCTY) and Sunrun (RUN), but sees their stories much more complex than that of First Solar and SunPower. “Both companies have sector leading cash generation and profitability. This is despite the companies investing 4-5x as much in R&D as its largest Chinese competitors, and hence we think the technology gap will continue to widen.”

Lansdowne near the flat line during the first quarter with low volatility

Solar and wind energy aside, Lansdowne had a non-eventful first quarter, -0.42% relative to the MSCI World Energy indices, which were up +5.12%. But in the back and forth market action that was the first quarter of 2016, Lansdowne was just happy to control volatility through its risk management protocols. While the fund wasn’t satisified with the returns performance, “the low volatility of the portfolio (at 60% of the market) and avoidance of losses in a challenging energy sector and wider macro environment, hopefully speaks to the strength of our risk management framework.”

On the quarter the fund’s key positions generated positive returns with a geographic focus and some small cap exposure weighing on performance on a larger relative value basis. Winners were stocks such as Kepco, Snam, Nextera, BG/Shell, Ingersoll Rand, while the company earned money on short exposure in European power generation and European wind shorts.