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Hello, Sunshine

|Includes: First Solar, Inc. (FSLR), JASO, YGE

Solar Sense

As an environmentalist and a fiscally intelligent American, I was not happy when Solyndra went bankrupt after receiving a $535 million loan guarantee. When I found out that Solyndra executives might receive $30,000 bonuses while lower-level employees are still being denied back pay and accrued vacation time, I was outraged.

Lifelong Sun Belt resident that I am, I believe in solar power. I've used solar-powered gadgets, I've eaten food prepared in solar cookers, and I even know a small business owner whose tiny storefront is solar-powered (thanks to a cooperative landlord). I understand the importance of supporting companies in the clean energy sector.

However, when buying stocks, it's not enough for these companies to be green. They must also be financially viable. While Solyndra was not publicly traded, it is a prime example of a fiscally unsound business.

A century ago, there were over a hundred automotive companies, most of them based in Detroit. Now, there are only a few dozen, and the majority are based in Asia. As the industry progressed, the most profitable car companies stayed in business while their less profitable counterparts closed down or faced takeovers, one by one. I believe something similar will eventually happen with clean-energy companies.

I have read profiles of several dozen companies in the solar power business, and sadly, most of them lack a competitive edge and are simply not growing quickly enough to pay off their debts. That's not to say there aren't a few worth considering.

First Solar, Inc. (Nasdaq: FSLR) is one of the brightest spots in the solar power field. Like Solyndra, First Solar makes and sells thin-film solar semiconductors, and also makes and sells photovoltaic solar power systems. However, unlike Solyndra, First Solar has one of the best balance sheets in the solar power industry. The company is profitable, is growing, has a P/E under 6, and has $763 million in cash. At $610 million, debt is higher than I prefer, but I consider the debt reasonable for as long as growth continues. First Solar has also recently stated that the company must develop new markets that are not dependent on subsidies, realizing they cannot rely on government incentives to build a healthy business. The stock is currently $36.40 - try and get it under $35 if you can.

JA Solar (NasdaqGS: JASO) is worth considering. JA Solar is the world's largest solar cell producer, and can manufacture inexpensively due to being based in Shanghai. The company makes and sells solar products under its own name, and also produces solar products for other companies under their brand names. This gives JA Solar a larger piece of the solar-power pie than the average solar company. However, I do not recommend buying the stock just yet. Although the stock is not expensive (at $1.91 per share, anyone can afford a few shares) and P/E is a very low 2.92, revenue has been shrinking significantly in recent months, and the company has more debt than cash. Rather, I suggest watching the stock for the time being, and investing only if the company's debt begins to fall and/or profits begin to rise. I suspect investors have been reluctant to buy JA Solar shares partly because the company is based in China; however, sooner or later, ethical consumers must accept the fact that the majority of solar companies are based in China, and that most solar products use Chinese materials, labor, or both.

I'm also watching Yingli Green Energy (NYSE: YGE). This photovoltaic product company, also based in China, has a global presence and a decent balance sheet. P/E is under 4, growth is good, debt isn't too terrifying, and the company has nearly $1 billion in cash. It's true that there are larger solar companies, but Yingli is making a profit while several of the biggest players are losing money and going deeper into debt. As an added bonus for ethical investors, earlier today Yingli's US subsidiary renewed its GRID Alternatives partnership, which provides solar-electric job training and inexpensive solar power to low-income California residents (the project will soon be introduced in Colorado as well). Today's price is $3.91; consider buying under $4.

Like the deep collapse of the automotive industry before World War II in the US, we should probably expect a number of solar firms to fail. They operate capital-intensive businesses in a highly competitive environment. If you choose, do so carefully - and use stop-losses so you don't get burned.

If you decide that FSLR has merit at $36.40, an interesting way to play this company is to sell the April $35 puts for $3.25 or better. If the stock declines and you get put, you're paying $31.75. If the puts expire worthless, you've collected a healthy premium.

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