Credit crunch casts cloud over solar-power industry

It was a sunny day for solar power when Congress decided to bail out Wall Street. The final bill included gifts for many industries, including the renewal of investment tax credits (ITCs) for solar power for eight more years.

While the future for the solar industry seems bright, the tax credits may provide little immediate relief.

Hapoalim Securities analyst Gordon Johnson points out that 50 percent to 70 percent of solar projects are financed by debt, and the credit situation in the country hasn’t improved to any extent, even with the massive bailout and capital injections the government has made. Thus, there is expected to be little lending available to finance solar projects, at least over the short term.

The eight-year ITC extension is important for unlocking the value inherent in the solar industry, but investors would be wise to use caution when deciding whether to invest in solar companies right now.

There’s a developing consensus that the U.S. can become a storehouse of demand for solar power, and the ITC is just one component furthering it. Yet with the country’s credit woes still uncertain, lending criteria tightening and supply issues that need to be worked out, what appear to be cheap valuations today may seem dear by next year. And that’s a cloud that shouldn’t pass over your portfolio.

Ask the Fool

Q: If I had put $1 in the market after the crash of 1929, how much would it be worth today? – Jim Gargotta, via e-mail

A: Not everyone realizes it, but the crash of 1929 really occurred over several months, not hours. The Dow Jones industrial average peaked in early September 1929, at 381. It then slid down to 199 in mid-November, before rising again to 294 five months later, in 1930. (In October 1929, it slid more than 11 percentage points on two successive days.) From there it began a long descent, falling to 41 in July 1932.

With the Dow recently around 9,000, it’s up some 220-fold since the low of 41. That’s enough to turn your $1 into $220.

Q: If I’ve made multiple purchases of a stock over time, how can I figure out my annual return? – M.W., Norwich, Conn.

A: What you want is the “internal rate of return” (IRR). If you invest $1,000 and it grows to $2,000 in one year, your holdings advanced 100 percent. But if you invest $1,000 and then add $500 midyear, and then end the year with $2,000, your holdings didn’t appreciate by 100 percent. Part of that gain is simply from the midyear cash infusion.

Calculating an internal rate of return can be very complicated. One shortcut is to plug your numbers into a spreadsheet on your computer and to use its IRR function to do the math for you. Another possibility is to enter your portfolio into an online portfolio tracker that calculates IRR.

To learn more, go to an online search engine such as www.google.com and type in “internal rate of return.”

My dumbest investment

My biggest blunder was several years ago, when I’d bought 100 shares of Wal-Mart. Shortly thereafter, my broker went to work for a different company. My new broker advised me to sell Wal-Mart and buy shares of Cisco Systems, for $22 per share. When it hit $30, he advised me to sell, which I did. After looking at the value of these two stocks today, I kick myself. Needless to say, I no longer have this broker. – James K., Cedar Hill, Mo.

The Fool Responds: As you’ve learned, a good way to make some big bucks is to stay invested in great and growing companies for many years. Wal-Mart shares have increased in value about fivefold since you bought them, and Cisco shares have risen more than 10-fold. Your Cisco story isn’t uncommon – many people sell their stock as soon as they hit a target price (representing, for example, perhaps a 10 percent or 20 percent gain). That’s profitable, but you can miss out on many more gains if the firm is still thriving and undervalued.