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Solar Roundup: Speed Bump or Roadblock?

|Includes: CSIQ, First Solar, Inc. (FSLR), SUNEQ, TAN, TSL
Solar stocks are off sharply this morning following a disappointing earnings report from industry leaders First Solar Inc. (NASDAQ:FSLR) and MEMC Electronic Materials (WFR).  Despite a quick rebound in the overall market, the solar sector has remained under pressure - raising questions about the longevity of the sector's rebound...

Last night after the close, WFR announced that full year earnings will be below the level management had previously targeted.   Revenue will actually be quite strong, but pricing trends are continuing to pressure margins.

In contrast, FSLR actually raised its EPS guidance for the full year.  Still, the Q2 earnings report showed an increase in revenue with a corresponding decline in earnings as profit margins were crimped.

Over the last couple of months, the solar sector had begun showing signs of a rebound as many of the leaders were showing signs of more stable profit, and investors began to see hope beyond the immediate challenges related to cuts in European stimulus programs.  This week's weakness calls the young rebound into question, so today I want to take a closer look at the group leaders to determine whether this is a simple setback or a more serious problem.

MEMC Electronic Materials (WFR)

WFR is currently the red-headed step child of solar stocks.  In fact, with a number of customers outside of the solar market, there is some argument that WFR shouldn't even be considered a part of the solar sector.  However, many traders will make industry decisions based off WFR's outlook so it is important to have a bead on the fundamentals in this bellwether.

Looking more carefully at the company's Q2 presentation, it appears that the weakness in their solar business was driven by lower revenue - and more importantly by some delays in particular projects in the SunEdison solar unit.  The weakness at least initially appears to be more of a company specific issue - and not a reflection of the broad solar industry.

Since WFR is diversified into several different business lines, I would steer away from using the stock as a proxy for solar - and obviously with the negative price action, WFR is off limits from a long-position perspective until there is some evidence of support.

First Solar Inc. (FSLR)

For the most part, the FSLR earnings report was very attractive.  The company actually beat analyst expectations, reporting earnings of $1.84 per share versus consensus views at $1.61.  Revenue came in above expectations as well and 11.8% over last year's reported revenue.

Management also increased guidance for the full year
- pegging EPS at $7.00 to $7.40 per share which appears favorable to the consensus expectations for $7.12 per share.  The Q2 presentation was impressive with a number of new projects announced and significant technology advancements in the works.  Since FSLR is known for its cutting edge technology, it is important for the company to remain at the front of the R&D curve.

As we can see in the chart below, FSLR has exited the negative trend it experienced for the majority of 2009.  Uncertainty in Europe caused the sharp drop in May and June, but it appears that investors are now focusing on opportunities in China, the US and other growth markets for the company.

If FSLR passes the test and finds support at the confluence of moving averages between $125 and $135, I will be interested in buying and holding through a break above $140 and $150.  Fundamentally, the company's earnings could support a significant ramp in the stock price - assuming new contracts are signed and revenue and earnings continue to grow.

Trina Solar Ltd. (NYSE:TSL)

Trina Solar will announce Q2 earnings on August 16.  The company has already put together two quarters of strong growth coming out of the economic slump, and shareholders are buying into the growth story.

Analysts are expecting quarterly earnings to increase 33% over last year's numbers on revenue that should be more than 120% above Q2, 2009.  After the FSLR and WFR reports, there is less likelihood that investors will be negatively surprised with Trina's report.  In fact, if management is able to raise guidance, we could see the opposite effect as short-term traders have already trimmed their positions.

I'll be watching for TSL to begin to rebound from this most recent leg lower.  f the stock is able to find support between $20 and $21, I would likely take a starter position relatively quickly and then consider adding to the position if the earnings report is good and the stock clears resistance near $24 and $27.

Canadian Solar (NASDAQ:CSIQ)

Canadian Solar is still in the process of shaking off the effects of an SEC investigation.  At issue is the period in which revenue was reported which at first blush is a relatively minor issue.  If CSIQ emerges with just a slap on the wrist, the stock would likely react very positively.  On the other hand, I believe much of the negative issues raised in the investigation are already priced into the stock.

Based on the company's earnings and sales growth, as well the strength of its customers, fundamental investors could easily justify paying twice the current stock price and still consider the stock to be a strong value.  This leads to an asymmetric return profile where the potential gains dwarf the risk associated with a declining stock price.

The company announces earnings next week (August 2) and I will be very interested to hear whether management has anything to say about the investigation.  More importantly, it will be important for investors to see growth in revenue and relatively stable profit margins.

I'm not involved in the stock yet, but may consider purchasing on a quick rebound back above the 50 EMA.

When looking at the decline in solar stocks over the past week, keep in mind that the industry is still one of the best performing sectors for the month of July.  There is plenty of turbulence as uncertainties are weighed and discussed, but if traders are turning over a new speculative leaf, the solar industry is likely to benefit significantly.

Disclosure: No positions in stocks mentioned