Solar Investors Should Think Twice And Follow The Leader

Includes: FSLR, LDK, STP, YGE
by: Kevin Quon

Investors were sure to give a cheer Wednesday morning as solar stocks soared over word that German solar installations had climbed in the fourth quarter. This was compounded by the news of higher market prices for polysilicon that suggested rising demand for solar panel manufacturing output. Coming off the heels of the worst year yet for public solar companies, such a breath of fresh air was long overdue for an industry that had seen its many leaders lose over 60% of their valuations.

Major Chinese manufacturers of photovoltaic products like Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE), and LDK Solar (NYSE:LDK) saw their shares gain on Wednesday with an exuberant 27.34%, 20.39%, and 17.95% rebound respectively. Such price movement was surely a play on a common theme circulating amongst investors, that Solar may have finally hit a bottom low.

Solar stocks had begun bleeding as a solar panel inventory glut resulted from a combination of the European markets drying up (primarily due to financial risks on the part of lenders), the prospect of ending subsidies, and the abundance of manufacturing capacity that was coming online. Such an oversupply of inventories led to dumping that brought down panel prices well below levels of sustainability.

Yet solar has been finding support lately, leading to one of the greatest sector rallies thus far in the new year. The industry was first aided as news broke out that Warren Buffett took the large step of investing in two separate large scale solar projects. The projects were made using First Solar's (NASDAQ:FSLR) thin-film PV module technology, but it was the amount of private money being invested into the industry that put doubt in the minds of those who were beginning to scoff that solar could succeed without government subsidies.

Therefore the recent news that German demand was picking up again brings renewed ambitions for the industry as a whole. The news was even as lofty as to quote one analyst from Axiom Capital to cite:

The German residential solar market is showing resilience... One large German distribution vendor informed us that the residential market is now supply-constrained.

While ultimately this might be more of a testament to the fluctuating volatility of a new industry's supply and demand markets, the news brings renewed hope for an industry that was near abandoned in late 2011.

Yet undeniably there are still fundamental issues needing to be worked out for the industry. Despite the raised hopes of recovery, the reality of ending subsidies will still weigh heavily on many companies who's outlooks had drastically soured in the past few months. In a sign of the changing times, even profitable industry leader First Solar spelled need for change as it outlined its new restructured business model that puts a larger emphasis on utility-scale PV systems.

Perhaps as a word to the wise, investors looking to take opening positions in the solar sector may fair better by investing in individual companies who earnings remained in positive territory throughout the ongoing crisis. As consolidation still stands as a likely outcome, picking individual winners rather than diversifying throughout the industry itself may prove to be a beneficial maneuver.

The following is a table of several large solar companies that may assist in a side-by-side comparison. The total shareholder equity is a reflection of the company's most recent quarterly financials using the approximate exchange rate of 1 $USD = 6.378 CNY, the exchange rate as of 9/30/11. The market capitalization, forward analyst estimates, and current price are listed as of January 12, 2012.

Name Price Mkt. Cap Tot. Equity Fwd. Est.
Suntech Power $3.16 $570 M $1.61 B ($0.81)
Yingli Green Energy $4.98 $788 M $1.42 B ($0.27)
LDK Solar $5.28 $692 M $1.20 B ($1.19)
First Solar $41.59 $3.59 B $4.03 B $4.19
SunPower (NASDAQ:SPWR) $7.79 $780 M $1.17 B $0.34
Hanwha Solarone (HSOL) $2.00 $168 M $805 M ($0.47)
JinkoSolar (NYSE:JKS) $7.02 $163 M $515 M ($0.44)
ReneSola (NYSE:SOL) $2.34 $203 M $631 M ($0.51)
Trina Solar (NYSE:TSL) $10.32 $727 M $1.21 B ($0.31)

Disclosure: I am long FSLR.