Here Come the Sun Stocks

So many solar-panel stocks -- so much promise, so many risks. How do investors make intelligent picks?

Thanks to a flurry of new solar-power initial public offerings in the last year, including a burst of Chinese-based companies that went public in the waning months of 2005, investors interested in exposure to solar power as an increasingly popular alternative to oil have a broad buffet of options to choose from.

But two traits that unite all solar stocks are volatility and near-term unpredictability. For every promise that the industry holds out to investors -- falling prices that will make solar panels more competitive with grid electricity in a few years -- there is a counter-acting risk: Silicon prices, sorely needed by solar-panel manufacturers, are expected to keep rising through 2010.

Each company has its own formula to walk the deadly tightrope between falling prices for its products and rising prices for raw materials. Most of them turn to government subsidies in Japan, Germany and, increasingly, the U.S. Some companies bet on big production facilities to tap into economies of scale.

And some solar companies rely on lower-cost scraps left over from chipmakers (although the solar industry is quickly matching chip companies in terms of silicon demand), while others are pushing higher-efficiency panels that some customers will pay a premium for.

So far, in the first quarter of 2007, investors are not treating all solar stocks equally. Take the Chinese-based solar stocks. Wall Street has shown a strong preference for Trina Solar (TSL Quote), which so far this year has outperformed its recently listed siblings.

Despite the recent declines in Chinese-listed stocks -- and U.S.-traded shares of China-based companies -- Trina is up 120% as of last Friday's close.

Solarfun (SOLF Quote) and Suntech Power (STP Quote), while down from their late-February highs, are still eking out year-to-date gains, while JA Solar (JASO Quote) and Canadian Solar (CSIQ Quote) are underperforming the Nasdaq.

It helps that Trina recently gave 2007 guidance that was above what the Street had been expecting, followed by an announcement about a new cell production line. Trina's trailing 12-month P/E ratio of 35.4 is lower than many of its rivals, but even better is the estimated P/E of 11.6 that analysts are giving the stock for 2008. Its valuation remains that low even after the stock has more than doubled this year.

Solarfun's estimated P/E ratio for next year, at 15.8, is also lower than the average for companies in the S&P 500. And while Canadian Solar has been granted an estimated P/E of 16.2 for next year, it reported a fourth-quarter loss last week, sending its stock down to new lows for the year.

Among U.S.-based solar companies, there is emerging a similar, if lesser, discrepancy among stock performances this year. The clear winner for now is First Solar (FSLR Quote), which is up 73% this year.