Solar Rally Halted On German Subsidy Cuts

by: Bill Maurer

Before 2011, I was a huge solar bull. I was in favor of the industry's long term potential, and I was a big fan of First Solar (NASDAQ:FSLR) and Trina Solar (NYSE:TSL). However, over the last couple of months, I have been a bear on the solar industry. Why? Because the industry has too much supply, and there are just too many players out there. That means not enough demand for each. Solar panel prices and polysilicon prices have been coming down, which has forced analysts to slice estimates for 2012 earnings left and right. First Solar has took its 2011 numbers down multiple times. Many of these names, including several of the Chinese solar companies, are expecting huge losses in 2012.

Well, I've been criticized for being a bear because the solar names have rallied hard to start 2012. On Thursday morning, the rally continued, with names such as Suntech Power (NYSE:STP), Canadian Solar (NASDAQ:CSIQ), and Yingli Green Energy (NYSE:YGE) up rather nicely. The two other solar names I follow, Sunpower (NASDAQ:SPWR) and LDK Solar (NYSE:LDK) were up as well. But then the rally started to fade. It initially seemed like profit taking, but then some bad news came out. The German Environment Minister said that Germany would start to cut subsidies, on a monthly basis instead of twice a year. That sparked a huge sell-off in these names. The solar rally came to a sudden halt, and it left some of the names down double digits, percentage wise.

Initially, here's how the names were faring at their highs:

Change $1.17 $0.43 $0.25 $0.42 $0.31 $0.19 $0.35
High $44.16 $10.24 $3.73 $4.12 $7.90 $5.49 $5.45
Percent 2.72% 4.38% 7.18% 11.35% 4.08% 3.58% 6.86%
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Unfortunately, things turned around, and quickly. Here's how the names finished down on the day.

And those percentage losses were just on the day. If you bought early in the morning, you lost even more. Here is the range for how they traded throughout the day. The range number is calculated by the percentage drop from the high to the low.

High $44.16 $10.24 $3.73 $4.12 $7.90 $5.49 $5.45
Low $38.36 $8.26 $3.12 $3.11 $7.12 $4.80 $4.33
Range 13.13% 19.34% 16.35% 24.51% 9.87% 12.57% 20.55%
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And of course, I wouldn't be telling the whole story if I didn't tell you about the volumes traded in these names. All seven names traded above their 3-month average volume, although Sunpower and LDK did not trade as much as the others. Here's how the volume numbers looked at the closing bell.

Day 10.56 8.71 2.69 13.55 1.06 3.05 11.92
Average 4.47 2.98 1.11 3.48 0.93 2.26 3.35
Rate 236% 292% 243% 389% 114% 135% 356%
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Now, all of these names lost 6% or more on quite a bit of volume. The subsidy news is not good. Unfortunately, all of those critics that came out attacking me for getting the rally wrong are now running for the exits. These names all had huge gains going into Thursday, some having even bigger gains early on in the day. Here's how the 2012 rally looked for each, before and after Thursday's performance. The top number shows the 2012 rally at its highest point for the name, and the retreat is how much of that rally has been cut thanks to today's downturn in the sector.

As you can see, all seven have lost at least 46% of their 2012 rally. Some half lost 60% of their gains, and that is just in a few hours. Another day like this, and they could easily have lost all of their gains, and in fact, be down on the year. It's quite possible.

So why have I been such a bear? Well, look at the following table, showing each of these names' projected 2012 earnings, as given by the average estimate on the street.

9/15 $10.95 $2.06 $1.12 $0.44 $1.32 $0.65 $0.82
11/30 $7.47 ($0.11) ($0.15) ($0.61) $0.44 ($0.89) ($0.20)
12/15 $7.42 ($0.19) ($0.51) ($0.70) $0.41 ($1.02) ($0.24)
1/12 $4.19 ($0.31) ($0.52) ($0.81) $0.34 ($1.19) ($0.27)
1/19 $4.18 ($0.30) ($0.51) ($0.83) $0.33 ($1.19) ($0.30)
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Finally, the estimate revisions have leveled off, but I feat that they could go lower after news out of Germany today. More cuts means lower prices, and perhaps demand could be lower as well. This is not good for an industry that is oversupplied at the moment, and even during last week's positive coverage of the sector, one analyst said that "more firms will need to go out of business" before this sector can move forward again. Many of these names trade below $10 already, and a few of them can't go much lower, in dollar terms. I've been a bear on the sector, and today's news makes me even more bearish.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.