SCTY Stock: This Could Send SolarCity Corporation Soaring

SCTY StockSCTY Stock Outlook for 2016

Christmas may have passed, but I still feel the holiday spirit every time I look at SolarCity Corporation (NASDAQ:SCTY). Although SCTY stock had a strong recovery towards the end of 2015 (as I predicted), the company remains underpriced by any reasonable metric.

Remember that SolarCity shares were trading near $60.00 as recently as August. The price collapsed by more than 50% thereafter, with investors fleeing the stock on myriad concerns. I’ve addressed most of those reasons in earlier posts, but here’s a quick recap.

A key tax credit was due for expiry. It was designed to help people make the leap to rooftop solar, but Congressional gridlock had investors uncertain the provision would be extended past 2016. But that all turned around after the climate talks in Paris.

The conference’s success emboldened domestic forces trying to get the tax credit extended, which happily coincided with budget negotiations between the White House and Congressional leaders. Both the budget and the tax credit were passed in December. (Source: “Wind, Solar Companies Get Boost From Tax-Credit Extension,” The Wall Street Journal, December 16, 2015.)

SolarCity Gets a Lifeline

Obviously, the extension of the tax credit breathed new life into SCTY stock. Investors quickly rebalanced the earlier losses, pushing the share price above $55.00 in late December. However, there’s been pullback in the last few weeks. Why?

Well, there are two reasons. For one, SolarCity’s losses aren’t company-specific. Macroeconomic pessimism has had the market in a chokehold ever since we saw a flurry of stock market crashes in China last week. The year 2015 may have ended with relative calm, but the New Year introduced a spike in volatility.

The Dow Jones Industrial Average has lost 3.16% of its value since the start of 2016, while the S&P 500 and NASDAQ are down 4.21% and 3.29%, respectively. SCTY stock is down significantly more, which leads me to the second issue.

SolarCity was muscled out of the entire state of Nevada by NV Energy, the state’s public utilities company. NV Energy managed to convince a state commission that they should pay solar users less money when those users feed energy back onto the grid. (Source: “Buffett’s Win in Nevada Prompts SolarCity to Make First Job Cuts,” Bloomberg, January 6, 2016.)

They also convinced the commission to hike administrative fees for solar panel users. As protest to these blatant attacks on the industry, SolarCity is abandoning its operations in the state. Obviously, investors aren’t too happy about that.

And yet, losing Nevada might be a blessing in disguise. One of the most common worries investors have over SCTY stock is its ever-growing cost base and how that affects profitability. The company’s labor force jumped from 4,300 to 15,000 in less than two years. Having to cut all those jobs was basically a forced trimming of the fat.

What to Expect from SCTY Stock

Right now, I’m looking for SolarCity to keep expanding its operations, while also staying vigilant on the expense side. Both are incredibly important to the company’s success.

Then there are the macroeconomic factors that are weighing on SolarCity. The entire world is terrified of what the stock market crash in China implies about the country’s economic health. China was the locomotive of world growth in the last seven years, meaning a slowdown there could jeopardize the global recovery.

As usual, these fears are overblown. The market has a tendency to overreact, which is exactly why I see the pullback in SCTY stock as a buying opportunity. Once investors get their confidence back, this stock could be headed sky-high.

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