Sun Shining on Solar in 2010

by: Daryl Montgomery

Some of the biggest gainers in the beginning of 2010 were solar stocks. While the rest of the stock market rallied starting in March 2009, these stocks were left behind. Some solar stocks are still not that far off their lows, so they are long overdue for a bounce. Solar power ETFs, TAN and KWT, were up 10.0% and 9.9%, respectively, in the first week of trading. Many individual stocks were up much more, with the biggest gainer being SolarFun Power (SOLF) - up 32%. This powerful first week rally is justified if you think energy prices are going up in the long run or that inflation is in our future because of all the government money printing taking place globally.The news has also been good for the solar sector recently. On January 8th, private company eSolar signed an agreement with China to build a series of solar thermal power plants with a 2000-megawatt capacity. Last September, First Solar (NASDAQ:FSLR) also inked a contract with China to build an equally large photovoltaic plant. JA Solar Holdings (NASDAQ:JASO) helped wake the sector up in December when it announced that it expected its 2010 product shipments to increase 50% in 2010.

As a young industry, solar will be prone to consolidation. This energy source is still not economically viable without government subsidies and support, and these are likely to continue until rising oil prices turn solar into a self-sustaining industry. While the risk of bankruptcy was at its height in the fall of 2008, it is still a good idea for intermediate to longer-term investors to weed out stocks that might face a liquidity crunch. Running out of cash is the biggest risk for insolvency. To avoid this, look for stocks with a Current Ratio (short-term assets divided by short-term liabilities) greater than 2.0 and keep an eye on this number. Solar industry stocks that met this standard at the end of 2009 are: Ascent Solar Technologies (NASDAQ:ASTI), Energy Conversion Devices (NASDAQ:ENER), Evergreen Solar (ESLR), First Solar, JA Solar Holdings, MEMC Electronics (WFR), and SunPower (SPWRA). Solarfun Power is on the cusp.

The solar stocks that performed above average for the sector in the first trading week of 2010 were:

Solarfun Power (SOLF) Up 32%
ReneSola (NYSE:SOL) Up 21%
Energy Conversion Devices (ENER) Up 19%
China Sunergy (NASDAQ:CSUN) Up 19%
Evergreen Solar (ESLR) Up 19%
JA Solar Holdings (JASO) Up 16%
Yingli Green Energy (NYSE:YGE) Up 14%
Ascent Solar Technologies (ASTI) Up 14%
LDK Solar (NYSE:LDK) Up 14%
Canadian Solar (NASDAQ:CSIQ) Up 13%
Trina Solar (NYSE:TSL) Up 13%

Except for momentum traders with very short-term trading horizons, it is generally not a good idea to chase performance. Pullbacks almost always take place after a good rally. Investors interested in the sector should wait for these and take advantage of them.

Disclosure: Long ASTI, ENER, ESLR, and WFR.