A 'Stealth Rally' in Solar Stocks

by: Dr. Duru

OK, by “stealth” I really mean I have not paid close enough attention to the rallies in several solar stocks. 2010 has been a year of true divergence for solar stocks. Some solar stocks have been in year-to-date rallies and others have been declining all year. The net result is an awful -25% year-to-date performance for the Claymore/MAC global Solar Energy Index ETF (NYSEARCA:TAN). The winners are even more notable given the general stock market is down for the year. This year’s best performers are Renesola (NYSE:SOL) and Solarfun (SOLF) which are well-ahead of the entire sector. LDK and Trina Solar (NYSE:TSL) cling to small to marginal gains for the year after experiencing big losses earlier this year. First Solar (NASDAQ:FSLR) rounds out the list with a flat performance year-to-date.

ReneSola (SOL)
I wrote about SOL several times last year as bullish options activity brought the stock to my attention. I completely lost track of SOL this year. Too bad. SOL has nearly doubled this year and is sitting at two-year highs. I cannot recall the last time I could say something like that about a solar stock!

SOL issued a bullish earnings report last month, including increasing guidance for Q3 revenue to $300-320M vs. $273M consensus. The company also slightly boosted full-year revenue guidance to $1.00-1.05B vs. $991M consensus. The stock remains relatively cheap at a forward P/E of 6.7, price-to-book (P/B) of 1.7, and price-to-sales (P/S) of 1.0. However, debt versus cash is a bit higher than I would like, $577M vs. $171M respectively.

Until this trend breaks and/or SOL reports poor earnings, the stock is a buy on the dips.

SOL on an amazing run in 2010

SOL on an amazing run in 2010

Solarfun Power Holdings Co Ltd (SOLF)
I have never taken SOLF seriously. Yet, here it is up 53% for the year and re-challenging its 52-week and two-year highs. Trading has been extremely choppy, but good earnings news has prevailed for SOLF. SOLF is even cheaper than SOL with only a 2x debt-to-cash ratio. Despite this, I still cannot get over my bias that SOLF is only for pure speculation.

SOLF has survived steep sell-offs before setting 52-week highs

SOLF has survived steep sell-offs before setting 52-week highs

LDK Solar Co Ltd (NYSE:LDK)
I essentially wrote off LDK last year after revelations in financial disclosures that the company was struggling to remain a going concern. Nine months later and LDK is still humming along. The stock is up 9% for the year, but it has also been down as much as 29% – not a good risk/reward balance. The stock has a low valuation (of course), but the company sits on a massive $2.1B debt load. LDK holds $441K in cash. During August earnings, LDK issued revenue guidance that blew away analysts: Q3 revenue $570-600M vs. $422M consensus; FY10 revenue $1.95-2.00B vs. $1.59B consensus. A week after earnings, LDK announced it will heavily invest in a new solar cell and module facility. If LDK is doomed, the company is going down swinging.

Weekly chart of LDK is a reminder that the stock has a lot of work to do

Weekly chart of LDK is a reminder that the stock has a lot of work to do

Trina Solar Ltd (TSL)

Trina Solar was the darling of the solar industry last year and was its best performer with an amazing 482% gain. TSL did so well that the company could even boast about challenging First Solar. As is so often the case, and as expected, performance championships last no longer than a year, and in 2010, TSL is fortunate to eke out a 3.4% year-to-date gain (this is much better than the -57% performance of last year’s other darling, Canadian Solar, CSIQ!). TSL was down as much as 38% at the nadir in May.

TSL has sprinted 25% since reporting earnings in August when it reported strong year-over-year gains. For example, revenues rose 147% year-over-year to $371M on a 249% increase in shipments to 225MW. Gross margin of 32.1% far exceeded company projections for the high 20s. TSL boosted full year guidance on PV module shipments to 900 – 930 MW, far exceeding earlier guidance of 750 – 800 MW. Naturally, TSL is extremely bullish on its prospects; the company is aggressively expanding capacity and expects to continue driving the costs of its modules downward.

TSL remains relatively inexpensive: 9.8 forward P/E, 1.5 P/S, 2.1 P/B, $640M in cash, and just $627M in debt. The stock’s recent moves put it over its April highs and on a trajectory to regain the momentum it left behind in 2009.

TSL reaches for 2009

TSL reaches for 2009's momentum

First Solar (FSLR)

I have actively followed FSLR throughout the year. I last claimed the stock would stay stuck in limbo without any positive catalysts on the near-term horizon. This limbo lasted for a month. On Friday, FSLR pushed to break the deadlock with a small break-out that finally closed the gap down from July’s earnings. The move also flattened FSLR’s performance for the year, barely qualifying it as a “winner” for this list. FSLR has been down as much as 24% this year as it has tested its $100 support line twice.

FSLR is now right back to its downtrend line, and at the same time the stock is getting overbought, making it ripe for a pullback. I chose to fade the move as part of a hedge on other (non-solar) positions ahead of Friday’s job’s report and the expected return of trading volume after Labor Day. A continuation of the buying pressure from here will be very bullish for the stock.

FSLR remains as “expensive” as ever: 16.6 forward P/E, 3.8 P/B, 5.1 P/S. The cash hoard remains impressive at 796M with a paltry $141M in debt.

FSLR tries to break out

FSLR tries to break out

As we go through the final trading months of the year, I will be watching these and other solar stocks more closely. With long-time survivor Evergreen Solar (ESLR) on the ropes, the industry could finally be heading for a year in which the winners put a permanent distance between themselves and the losers (amongst the publicly-traded companies anyway).

Full disclosure: Long FSLR puts