This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

5 Themes in Solar Stock Trading You Shouldn't Ignore

NEW YORK ( TheStreet) -- The seemingly unstoppable rally in solar stocks -- which hit a fever pitch on Thursday, ironically the same day that the U.S. government gave approval for $8 billion in loans for two nuclear power plants -- may not be over.

However, there are a few key solar sector trading rules to keep in mind given the run-up in stocks this year. Here are five ways to think about whether the latest short-term burst in the sector will continue to be a trading opportunity for long-only investors or for shorts to step in and profit from the madness.
  • 1. There are only two sentiments in solar, and there is only enough room in town for one of them at a time: It can only be excessive optimism or excessive pessimism.
  • It's no surprise, then, that given solar stocks were trading as if the industry had died -- it wasn't even possible at the beginning of the year to borrow some Chinese solar stocks that investors wanted to keep shorting -- sentiment turned early in 2012. Tack on top of that the risk-on equities environment with the S&P 500 already up more than 7% this year, and many of the worst-performing stocks in 2011 have been in rally mode, including solar.
  • 2. Optimism about solar demand doesn't equal better margins and profits for publicly traded companies.
  • Solar supporters rant and rave about anyone who can't accept the exponential growth of solar demand annually. There is good reason to be more optimistic about demand in 2012, however, there is still runaway capacity from solar manufacturers that needs to be constrained for a healthier operating environment and supply/demand balance.

    Think of it this way: To say that the technology sector and use of microchips grows exponentially doesn't imply that every semiconductor company will be successful. In fact, the semiconductor space has been littered with failures throughout the history of the tech revolution. It's no different in solar: An industry where demand grows annually is not proof of success for publicly traded companies competing in a crowded, increasingly commoditized space.

    The Chinese solar stocks, led by the three primary solar panel makers, Suntech Power (STP), Trina Solar (TSL - Get Report) and Yingli Green Energy (YGE), have rallied this year by 90%, 68% and 55%, respectively. LDK Solar is up 60%, too.

    Stocks like Suntech and LDK have been so extensively shorted that a big part of the rally is covering on the part of the biggest solar bears. For an investor that shorted Suntech at $2 earlier this year, the pain has been severe, even if nothing has improved in terms of the long-term earnings power or financial strength of the company.

    Talk to many solar analysts and balance sheet risks still weigh heavily on shares of Suntech and LDK, while the need for consolidation among Chinese solar manufacturers makes it difficult to make a long-term call on any of these companies.

    Trina Solar and Suntech CEOs have recently talked up the demand profile of China, which has helped to fuel the rally on top of other sector reads that demand is going to be better than previously forecast.

    Another reason cited for optimism about demand was the outlook that European solar company REC provided with its results on Wednesday. REC said 2012 demand is expected to shift from Europe to Asia and the U.S. It also stated that there have been "clear signs of reduced capacity in the entire value chain." REC permanently shuttered 50% of its solar wafer and cell production in Norway.

    However, the company also said, "Current pricing puts severe pressure on margins across the industry." And added, "Overall demand outlook for 2012 is highly uncertain."

    REC summarized its 2012 outlook by stating, "Except in silicon, hardly anyone in the industry make profits."

    Deutsche Bank has been leading the charge on behalf of a better demand scenario, and on Thursday, the firm's solar analyst Vishal Shah, said for the second time in 2012 that things are getting better.
    1 of 2

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free
    TSL $9.72 0.67%
    YGE $0.69 4.80%
    STP $0.53 0.00%
    LDK $0.00 0.00%
    AAPL $118.13 -0.14%


    Chart of I:DJI
    DOW 17,825.52 +105.60 0.60%
    S&P 500 2,092.71 +12.30 0.59%
    NASDAQ 5,133.4790 +24.8130 0.49%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs