Updated with Mizuho analyst comments, an more on LDK Solar and Suntech Power)
NEW YORK (TheStreet) -- Solar stocks, as big a market dog as there was in 2011, are suddenly back in favor. The broad market rally to start 2012 had led to some gains in solar from the lows at which the stocks ended trading last year, but Wednesday morning was a monster solar rally on big volume.
The likely catalyst was a report from Deutsche Bank saying that solar stocks may have fallen too low given a reasonable demand forecast and a lessening inventory overhang. Any one positive trend plays out against bearish expectations, and solar stocks have been overly discounted, Deutsche Bank said in the report.Deutsche Bank analyst Vishal Shah wrote, "Recent conversations indicate investor sentiment is still very low and short interest near record levels. Given the rising 1H12 demand prospects in Europe/US, we now believe the recent trend of encouraging poly pricing data points could likely continue for the next month and as such, likely drive solar stocks higher. Although we expect solar companies to report losses during the upcoming Q4 earnings reports, we note that street estimates are already low and confirmation of the above trends could likely drive upside sentiment surprise." He added, "Our checks indicate that inventory levels across the supply chain are now at record low levels and we believe record December month shipments is likely to create a sense of rush among installers in 1H12 before another anticipated 15% subsidy cut from July." If you don't trust Deutsche Bank, you may want to take note of the fact that the biggest solar bear on Wall Street, Axiom Capital's Gordon Johnson, removed sell ratings on five solar stocks on Wednesday, saying that a German demand surge might lead to stabilization in the short-term -- though he remains a bear on solar in the longer-term, predicting that all of these stocks will reach new all-time lows by year-end. Last Friday, the German solar trade lobby announced that installations in Germany reached 7.5 gigawatts in 2011. It was a shocking number for a market expected to trail off from previous year levels, though it wasn't all rosy. For one, spot market pricing in solar showed no improvement in December even as Germany likely had a huge final month of the year. Also, the German method of "slowing" solar growth by setting annual digressions in feed-in tariff levels hasn't worked -- as evidenced by the rush in December leading to a 7.5 GW market -- and that has already led this week to chatter from German politicians about taking more severe steps to limit solar. To show the type of tortured logic that is inherent in betting on demand caused by looming subsidy revisions in Germany, Mizuho Securities analyst Paul Clegg noted, "Sure, Germany can be strong but you are talking about the fear of a hard cap on solar leading the German market to suck up modules in the first half of the year. That's a bad reason for getting strength in the first half of the year." Shah, the Deutsche Bank analyst, cited Trina, Yingli Green Energy (YGE) and Jinko Solar (JKS) -- all Chinese solar module makers -- as the solar stocks likely to benefit from an improving scenario.
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