NEW YORK (
) -- Solar stocks have been riding high headed into earnings even after a recent selloff. Riding high, though, means outperforming relative to the woeful underperformance last year.
The year-to-date gain in the solar sector has been most pronounced in stocks that deteriorated the most in value last year. In no sector has the "2011's stock market junk is 2012's market gold" been more pronounced than in solar.
There was a specific reason for this rally: German demand in the fourth quarter far exceeded expectations, making what was a terrible oversupply situation and weak pricing in the sector a little better for solar companies.
Which brings us to point No. 1 about solar earnings season.
1. Solar stocks have already rallied on the stronger-than-expected German fourth quarter, meaning the actual fourth-quarter results mean little to nothing at this point.
That trade is already over and done with. In fact, Wall Street consensus may still be too high for solar earnings in the fourth quarter based on an average sales price expectation for solar modules that is too generous, and earnings misses will be common. One-time write-offs of inventory may still factor in earnings: Even though demand increased, pricing didn't get any better for the module makers. Finally, the euro was weak in the fourth quarter, and Europe is solar's biggest market, and Chinese solar companies are notorious for being terrible foreign exchange managers. Expect one-time foreign exchange charges to mar earnings.
Guidance from solar companies, in particular Chinese solar companies, may end up being a wash. Chinese solar companies have a history of missing guidance by a mile, and given the uncertainty that continues about the full-year picture, Chinese solar companies may be reluctant to be too specific in guiding for 2012. So here is what to expect:
2. Solar companies guide shipments higher for the first quarter and for 2012
3. Solar companies don't provide bottom-line guidance.
The earnings guidance buck is likely to stop at shipments and revenue, and the all-important margin assumptions for the year won't be offered. That's what might make any higher shipment forecast less of a positive trade catalyst than an investor might assume -- it's higher shipments on uncertain profitability. That said, solar companies can't get away without giving any margin guidance and it's often in conference call Q&A with analysts that Chinese solar executives provide some general range for gross margin expectations.
4. Look to Chinese solar commentary of gross margins in the single-digits as a sign that the solar rally won't be extended.