Solar Season Forecast: Six Stocks to Watch

NEW YORK (TheStreet) -- We begin our dissection of the top stocks in the solar sector with the one that's wreaking the most havoc with the markets this week: Trina Solar(TSL). Indeed, some solar investors and solar analysts disagree with the reaction on Wednesday to Trina Solar's earnings.

Trina's stock was down by more than 6% on Wednesday, with investor uncertainty about a deterioration in gross margins in the first quarter serving as one negative data point.

Trina bulls, however, believe the gross margins argument is bull. Trina has a history of conservative gross-margin guidance and will likely outperform the first quarter guidance, as it outperformed the gross-margin guidance for the fourth quarter. Collins Stewart made this point in its research note after the Trina earnings, referring to Trina's gross margin guidance of 26% to 28% as conservative.

Piper Jaffray made the case that gross margins aren't even the best way to think about the Trina outlook. Piper Jaffray analyst Jesse Pichel wrote that the sequential decline of gross should not be a concern because investors have always been expecting commoditization and low gross margin evidenced by a low PE ratio. The higher-than-expected fourth quarter average sales price ($1.91 versus a Piper Jaffray estimate of $1.85) was the result of the third quarter being sold out. Thus fourth quarter gross margins should not be used as a benchmark.

Trina management was asked about the gross margin issue on the Wednesday earnings conference call. Terry Wang, Trina's CFO, said the 32% gross margin in the fourth quarter was a record for Trina, and the company has always maintained that sustainable margins are in the high 20s.

Trina says it is just being prudent, with an average sales price drop of 5% to 10% expected in the first quarter, the depreciation in the euro since the beginning of the year -- Trina noted on the call that it has 90% of its sales in euros. Trina's CFO said the company believes there is upside to that gross margin estimate too. Indeed, on Thursday morning Trina's rebounded, helped at least in part by a Deutsche Bank upgrade on Trina and other Chinese names.

Of course, Trina's share price rose by a full one-third from the third quarter through the beginning of 2010. Maybe given the prudent outlook from Trina management, some investors decided that after a record quarter -- and with uncertainty lingering about solar in 2010 -- this was a good time to book profits.

Trina is still at a share price above where it was after third quarter earnings, and analysts like Adam Krop at Ardour Capital Management said on Wednesday they didn't see how Trina could deliver another quarter like the fourth quarter of 2009. Overall, though, the earnings message from Trina was mixed. The weak first and second quarters from 2009 still lead Ardour Capital to estimate 20% earnings growth for Trina in 2010, even with a second half of the year drop.

Jesse Pichel, an analyst with Piper Jaffray, said investors have always known that Trina is in a commodity business, and the argument as the market becomes more commoditized -- and margins come down -- should be about which companies are the best positioned, an argument which he believes Trina wins. "In my six years of covering renewable energy, I've never seen the sentiment around solar as negative,' Pichel said.