NEW YORK ( TheStreet) -- The latest pessimistic outlook for solar investors was provided on Tuesday by JPMorgan Chase analyst Christopher Blansett.

The JPMorgan analyst began his negative turn on solar by downgrading three of the U.S. solar stocks that he covers -- First Solar ( FSLR - Get Report), Evergreen Solar ( ESLR) and Energy Conversion Devices ( ENER).

More notably, however, Blansett recommended to JPMorgan clients -- from hedge funds to pension funds -- that they forsake solar and focus their renewable-energy investing on the growth of the U.S. wind industry, at least for the next two years.

Blansett is far from alone in this position. Several solar analysts have noted in recent weeks that institutional investors seem to have tired of solar and have been looking for alternatives in the renewable sector to maintain their exposure. Blansett says that most institutional investors have decided that solar is a lot of work for little reward. Over time, as there are more wind-focused pure-play companies, institutional investors will look more toward wind and move away from early solar-centric investing.

JPMorgan initiated coverage of the U.S. wind sector on Tuesday, with an overweight rating for Broadwind Energy ( BWEN - Get Report). The analyst's bullish call on wind sent shares of Broadwind up by more than 6% on the day.

Granted, just when the right moment to enter wind as an investment arrives -- if you believe in the wind theme -- is still unclear. The JPMorgan analyst noted that he expects Broadwind shares to bottom in the first quarter of 2010.

In fact, that bottoming may have been taking place on Friday, as Broadwind released a pretty ugly fourth quarter earnings report and shares fell 20%. Broadwind management also guided to a bottoming in the first half of 2010.

The eternal question in investing is whether the damage will get worse before it gets better, or whether investors who wait to long to call a bottom will miss the rally.

Solar companies have, of course, been using this earnings season as a pulpit to play up the first-half demand from Germany, and argue for the second half pull-in from other major markets including the U.S., China and Italy. What's more, some of the capacity expansion plans -- reaching as high as 1 GW to 1.25 GW per solar company -- have sparked fears of a seriously oversupplied sector.

The JP Morgan analyst shares these fears, estimating that the solar oversupply in the second half of 2010 could run as high as 3 gigawatts to 4 gigawatts on an annualized basis.

TheStreet spoke with Blansett on Tuesday about his sour solar sentiment and his newfound preference for wind.

TheStreet: What's your basic thematic argument in favor of wind, relative to your solar outlook?

Blansett: It is clear that Europe, which has been driving demand for solar, is basically saying subsidies will be coming down in all the countries -- at different times and at various levels of reductions, but the theme is clear from Europe.

To be completely honest, we never overly warmed up to the solar stocks, but we've never been so overtly negative either. Our research approach is to view sectors on a relative basis, and the fact is that there have been less pure-play alternative energy companies available to investors outside the solar sector.

Wind is a very large sector, yet it hardly gets news flow due to the lack of pure-play wind companies, and with General Electric ( GE) being the biggest player.

Yet when you talk to utilities, they look at wind as being the primary driver of their renewable energy generation. Solar is great in California, but what does a utility in Illinois do?

Our negative view of the solar outlook in Europe being based on subsidies cannot be separated from how we look at the wind industry, where we see a stable subsidy environment in the next two years. That's a long time for investors, and the three-year time horizon make the underlying fundamentals for wind more attractive than for solar.

TheStreet: So it's overweight wind and underweight solar?

Blansett: Wind industry fundamentals will rebound from a bottom in the first quarter Editor's Note: Since January, shares of Broadwind Energy lost $3 in value. Since July 2009, when Broadwind shares were at a 52-week high of $12.49, shares are down approximately $6.50.

It is an early cyclical play to participate in wind at this point with utilization rates at factories still relatively low. Broadwind is at an approximate 35% utilization rate -- and that should improve in the second half of the year -- whereas solar pricing comes under significant pressure and capacity concerns become a limiting factor for the solar stocks.

Let's put investing in the proper perspective though. We are talking about wind versus solar over an investable future of 12 to 24 months.

TheStreet: Why is the time frame for wind energy investing only a few years, when the role of renewable should extend over decades?

Blansett: One reason is the short-term subsidy opportunity in the U.S. for both wind and solar. There is a cash grant program available to all alternative energy projects that are started before the end of 2010 that will broadly benefit both wind and solar. However, wind does not face any of the headwinds that solar faces globally as European subsidies are reduced. Approximately 90% of all wind projects in the next three years, as long as they are started before the end of 2010, will be using the cash grant.

Overall, the history of the wind industry has been one of fairly inconsistent subsidies, but this opportunity with the cash grants represents the first time in a historical context that we have a multi-year horizon for wind energy investment. It started with 2009 and extends through 2012, as long as the projects are begun by the end of this year.

Even if the cash grant is not extended at the end of this year, which could happen, we know that projects begun before year-end will qualify for the cash grant through 2012.

Putting that in the larger context of cheap energy production, wind energy is so much cheaper than solar, and a utility can buy wind power in most U.S. regions for 5 cents a kilowatt hour.

We are estimating that there could be as much as 84 gigawatts(GW) of total wind capacity in the U.S. by 2012. This growth for the wind sector is based on the 34 GW that we estimate was in the ground already at the end of 2009, and 50 GW of growth.

TheStreet: The solar industry is striving for grid parity. Is inexpensive solar foreseeable?

Blansett: Unless feed-in tariffs expand meaningfully and on a global basis, I don't see a positive outlook for solar in the immediate future. And even a feed-in tariff (FIT) in the U.S., for example, wouldn't fix the core issue of solar being uncompetitive from a price perspective. If you look at the feed-in tariff in Germany, it makes solar eight times more expensive. Just going to a FIT doesn't fix the problem.

Spain and Germany have realized that they put subsidies in place that they will be paying for, for a long time. In the U.S., I think it is fair to say we don't have the social willpower to subsidize solar at over 100% of the cost of electricity, which is what Europe does.

All the talk about grid parity is overdone. There were assumptions being made about the price of natural gas and the incremental cost of electricity production on the conventional side that have not panned out yet and, as a result, are not supporting more support for expensive renewable energy. Ultimately, utilities and utility commissions think about one thing, pricing, and it is only when and if we have more expensive natural gas that both solar and wind become much more attractive.

You tell me where you think natural gas prices are going in the next five years and I'll tell you whether solar will exist in five years. The common wisdom five years ago was that natural gas would become much more expensive and reset the viewpoint on fossil fuels driving the cost of electricity. What happens to natural gas prices in the next five years will have the single largest impact on the outlook for renewable energy.

TheStreet: One ongoing issue for solar is its intermittent generation of energy and potential problems integrating intermittent energy with the grid. Wind suffers from the same intermittency issue, so isn't it as big a headwind for more adoption of wind energy?

Blansett: There is also a lot of talk about wind not blowing at optimal times for the grid, being early morning or late evening biased, but at these penetration levels, it is not detrimental. We would need quite a lot of wind power before the grid would need to be concerned. Some individual states are already over 10% of wind and they are able to deal with it. They had to adjust their operating procedures but only at an incremental cost over the conventional cost of electricity.

We could go to 20% wind power nationally before intermittency would be a problem and based on the current U.S. subsidy scheme, we may never even reach that level.

TheStreet: You only cover U.S. solar stocks. Does your negative outlook on solar not extend to the Asian-based solar players that many street analysts think will win the solar wars as European subsidies come down?

Blansett: It's true that I am picking from a basket of U.S. stocks only. However, my thesis about the reduced prospects for solar stocks applies to all solar companies.

In a few years, what solar modules won't be made in some low cost Asian region, whether the headquarters of the company are in the U.S. or Asia?

In the near term, these Chinese solar players have a cost advantage, but there is no long-term advantage for them in performance or pricing.

On the wind-turbine side, there is not as great a threat from Asian players. Unlike solar, wind turbines are more complicated to manufacture and the wind industry has a long history of issues with new turbine design. I think it unlikely that over the timeframe that we are recommending investors focus on wind -- between 2010 and 2012 -- that a new foreign turbine maker could make significant inroads into the market with a disruptive technology.

TheStreet: Interestingly, you are less negative on Evergreen Solar (ESLR) than First Solar (FSLR - Get Report). Some think that Evergreen faces the risk of bankruptcy. Why are you neutral on Evergreen while moving to an underperform on First Solar?

Blansett: The discussion about low-cost manufacturing is one reason why we downgraded Evergreen Solar to neutral, whereas we downgraded First Solar and Energy Conversion Devices to underperform.

Evergreen has been late in making the transition to a low-cost manufacturing region, however, of all the solar companies we cover, their cost structure has the potential to change to the greatest degree, and yet Evergreen stock is trading as if it were about to go bankrupt.

An Evergreen bankruptcy is a risk given their current balance sheet , but we don't think it will happen if they can make it through the next year. We believe there is validity in their technology and if they can successfully make the transition to China-based manufacturing of cells and modules, their technology is as good as any solar company's technology. The poor balance sheet doesn't help during the period of transition, but we do think Evergreen will come through it and investors will add equity back into the company.

Unless subsidies elsewhere in the world pick up meaningfully, it will be tough for U.S. solar companies, with gross margins only able to reach 15% and high single-digit operating margins being the norm.

First Solar has a good balance sheet and it is the least likely solar company to disappear from that perspective. Many investors think of First Solar as the premier stock in the sector and it is a good company, but we think there is a lot more potential downside based on earnings power and the street only estimating a 10% decline in average sales price in 2010. We think the ASP decline will be closer to 20%.

Energy Conversion has an interesting opportunity in the building integrated photovoltaic market (BIPV), but that market has been modest so far.

It's fair to say that for Evergreen the next 12 months are the most critical in its life, because if it doesn't make the transition to China manufacturing smoothly, it won't exist.

TheStreet: Evergreen is moving manufacturing to China, as you note. Yet there is growing unease in Washington D.C. -- led by New York Senator Charles Schumer -- about funding for alternative energy companies that don't create U.S. job growth. What's your take on the pressure being applied to alternative energy companies from Washington D.C.?

Blansett: What industry doesn't have a problem with loss of jobs to China? China is a low-cost manufacturing locale for a variety of structural reasons, from lower tax rates and lower labor costs to better subsidies. It all adds up, and it doesn't matter if it is technology or alternative energy, or cars. The lack of consistent policy from Washington D.C. has been the biggest inhibitor to growth in U.S. alternative energy.

If you are a foreign alternative energy company or a U.S. company, how do you find the confidence to build a manufacturing plant here when the subsidies could be pulled in a few years? In Europe, there have been stable wind subsidies for 20 years.

Also, the sheer scale of components in wind is very large compared to solar, and that trend is continuing. Wind markets, at least to some degree, have to be domestically supplied because it is difficult and expensive to ship overseas 50 to 60 foot segments of wind towers that can weigh 200,000 pounds.

On the other hand, you can fill solar modules into shipping containers and it's not that expensive. So from a jobs-creation perspective, wind has more opportunity because its components can't be exported cost effectively.

Right now we have approximately 90% of wind towers broken down into segments that are manufactured domestically. Approximately 50% to 75% of wind blades are made domestically. As other wind energy components become larger in size, the domestic manufacturing trend should remain hard to export.

-- Reported by Eric Rosenbaum in New York.


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