Trina Solar Outshines Peers: Under the Radar

NEW YORK (TheStreet) -- Solar stocks have enthralled Wall Street for the past two years, but making money on the sector requires a keen eye for stock picking.

Our quantitative equity model rates most solar stocks "sell" because of their spotty returns and extreme volatility. Only two of the solar companies we rate have earned "buy" recommendations: industry leader First Solar(FSLR) and the lesser-known Trina Solar(TSL).

While First Solar is the obvious choice for investors, China's Trina Solar offers a stronger stock performance and margin expansion that could boost earnings. Here's an industry breakdown with market capitalizations and one-year returns:

Trina Solar(TSL), $1.6 billion: 552%

Canadian Solar(CSIQ), $1 billion: 464%

Yingli Green Energy(YGE), $1.7 billion: 175%

JA Solar(JASO), $883 million: 123%

Suntech Power(STP), $2.5 billion: 56%

First Solar(FSLR), $11 billion: -2.7%

MEMC Electronic Materials(WFR), $2.8 billion: -13%

Evergreen Solar(ESLR), $258 million: -16%

SunPower(SPWRA), $2.6 billion for A and B shares: -37%

Energy Conversion Devices(ENER), $350 million: -71%

Trina is scheduled to report fourth-quarter results Feb. 23. In the third-quarter, net income jumped 25% to $40 million, but earnings per share climbed 10% to 65 cents, diluted by a share offering in August. While revenue dropped 14% to $250 million, its gross margin widened from 22% to 28%, and its operating margin expanded from 16% to 19%.

Panel shipments, measured in megawatts, rose 85% to 123 units, beating its forecast of 90 to 110. Trina cut operating expenses to 10% of revenue, compared to 15% in the previous quarter. Profit spreads benefitted from lower input pricing, presumably a benefit of extending a supply agreement with Zhongneng Polysilicon Technology by five years.

Trina's margins trump those of peers, except First Solar, whose most recent quarterly gross margin was 58%. Trina's gross margin was 29% in the third-quarter.

Trina's research and development group recently unveiled a square monocrystalline cell that's expected to achieve conversion efficiency of 19%. While that rates trails the 22% efficiency of commercially available SunPower modules, Trina is still a better bet for investors.