Did SolarCity Corp (SCTY) Earnings Crush The Solar ETF Rally?

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November 8, 2013 4:16pm NYSE:KWT NYSE:TAN

solar-energy-etfSolarCity Corp (NASDAQ:SCTY), one of the leading U.S. solar installers, has been shining bright since its IPO last December and was one of the three best performers of last month. The stock had skyrocketed nearly 400% in the year-to-date time frame,

leading the surge in the solar space followed by First Solar, Inc (NASDAQ:FSLR) and Sunpower (NASDAQ:SPWR).

However, this run-up in SCTY shares seems to have hit the brakes. Although this market favorite reported a loss that was narrower than expected, a weak fourth quarter guidance dampened investor mood (read: Solar ETFs Stay White Hot, What’s Behind the Surge?).

Solar City Results in Focus 

Solar City surpassed our estimate on both the bottom and top lines. The adjusted loss per share came in at 43 cents versus the Zacks Consensus Estimate of a loss of 46 cents. Revenues climbed 52% year over year to $48.6 million and surpassed our estimate of $42 million.

Robust performances were credited to new energy contracts, a huge level of panel installations, and record lease revenues. The company installed a record 78 megawatts (MW) during the quarter, bolstered by a 151% year-over-year increase in residential demand (read: Inside the Incredible Surge in Solar ETFs).

Solar City nevertheless provided weak guidance for the fourth quarter. The company projects adjusted loss per share of 55–65 cents, much wider than the Zacks Consensus Estimate of a loss of 49 cents. In addition, SCTY expects to install 101 MW of new solar panels and thus reiterated its full-year guidance of 278 MW in deployment.

The discouraging guidance took a toll on SCTY shares, which fell nearly 10% in after-market trade yesterday, while shares were down 13% in trading on Thursday. This is indicative of investor caution on the company’s growth story and the call for locking in some gains at the current level.

Further, Solar City currently has a Zacks Rank #3 (Hold) for the short term, suggesting that the bullish trend might come to a standstill for the time being.

ETF Angle

A couple of ETFs having heavy exposure to this solar company is enjoying huge gains of late and emerged winners in the year-to-date time frame. With SCTY’s disappointing fourth quarter guidance and the large drop in its after-market share prices, this trend is less likely to continue.

Below, we have highlighted two solar ETFs having larger allocations to SCTY and will be in focus in the coming days:

Guggenheim Solar ETF (TAN)

This ETF emerged as a strong winner in the global space this year on good volumes of nearly 367,000 shares a day. The fund has amassed $347.9 million in assets so far and charges investors 70 bps in fees per year.

The product tracks the MAC Global Solar Energy Index, holding 31 stocks in the basket. Of these firms, SCTY takes the second spot, making up 5.97% of assets. Chinese firms dominate the fund’s portfolio with nearly 37%, closely followed by U.S. (31.30%) and Hong Kong (12.26%).

The fund surged nearly 141% year-to-date and has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that the product may outperform over the next one-year period (read: 3 Sector ETFs Crushing the Market in 2013).

Market Vectors Solar Energy ETF (KWT)

This fund manages a $21.2 million asset base and provides global exposure to a small basket of 33 solar stocks by tracking the Market Vectors Global Solar Energy Index. Here, SCTY occupies the sixth position in the basket with 5.04% of total assets.

In terms of country exposure, U.S. firms take roughly one-third of the portfolio, closely followed by China (26.5%) and Taiwan (18.6%). The product has an expense ratio of 0.66% and sees paltry volume of under 6,000 shares a day. The ETF added nearly 10.5% in the year-to-date time frame.

This article is brought to you courtesy of Eric Dutram.

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