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Cloudy Forecast for Solar Sector

The first quarter earnings report from First Solar is shining a light on solar today but questions still remain about the industry's longer term outlook.
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NEW YORK (TheStreet) -- The first quarter earnings report from First Solar (FSLR) - Get First Solar, Inc. Report is shining a light on solar today, but the long-term outlook for the sector and Claymore/MAC Global Solar Energy (TAN) - Get Invesco Solar ETF Report is cloudy.

Shares of FSLR increased by about 7% in after-hours trading Wednesday following the release of their

first quarter earnings report. The company's profits for the quarter beat expectations and sales are surging after a sluggish 2009. Shares continued to climb in morning trading, up as much as 17% at one point.

Solar companies in general are expected to see strong sales this earnings season but questions still remain about how healthy the longer term outlook for the industry is.

Of significance for the rest of the solar sector was FSLR's outlook, which shows that the company believes there will be no significantly negative impact to business after Germany cuts solar subsidies in July. Strong demand is growing for solar products outside of Germany but there is still concern that solar companies will be hurt when the government stops supporting solar development there.

Despite FSLR's confidence, there is still the concern that stiff competition between companies in the solar sector will drive profit margins downward.

Strong competition between firms from Asia, Europe and America could make it difficult to draw a large profit from a consumer base that is still in its incipient stages.

Also, some markets, such as Germany's, still depend on government subsidies to help make solar purchases more cost effective. If subsidies disappear, firms may have to cut into profit margins in order to price solar products at a level where consumers will be able to purchase, install and use their solar systems for cheaper than they could with another energy type.

With the threat of

Greek debt contagion spreading to other countries in Europe, governments in the euro-zone may be hard pressed to find money to subsidize solar projects. Even if the European government debt-crisis is quarantined to only Greece, governments in the euro-zone will still be faced with funding a bailout for the country and may have scant fiscal resources for supporting solar energy development.

In contrast though, there is the possibility that demand will pick-up for alternative energy products, solar included, in the United States. Climate and energy policy legislation will soon be a hot issue in Washington and President Obama, along with some of his supporters, believes that supporting clean energy will be a way to reduce unemployment.

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Therefore, in terms of making a long-term investment in a solar ETF such as TAN or the similar but less heavily traded

Market Vectors Solar Energy


, the skies look cloudy at the moment. This is because even if demand for solar energy in Europe does not drop off and demand in America picks up, there is still the issue of competition between firms eating away at profit-margins.

Although the fundamentals for TAN and KWT are hazy, their charts provide a clearer idea for an investment strategy on the sector.

In the first weeks of April, it looked as though TAN and KWT were making a steady move upwards from the levels of long-term resistance that were tested multiple times in February and March.

In the second half of April though, both funds, which move almost in tandem, turned downward and are once again approaching long-established resistance levels. TAN is up nearly 5% today, but that only puts it about 10% above where it was trading last year at this time.

Investors interested in a play on the uncertain solar industry should be sure to get as much value as possible by buying shares near the levels at which they have habitually been bottoming, which for TAN is around $8 per share. This will work for short-term plays as well as for building a long-term position.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.