(Solar sector article updated with analysis of U.S. trade complaint, poll question on the outlook for solar stocks.)

NEW YORK ( TheStreet) -- Solar stocks know only one direction, and it's up. Whether it's a solar cell, wafer or solar module maker, the solar rally is living to see at least one more day with the gains on Thursday across many sector stocks.

Solar cell leader JA Solar ( JASO) is up 37% in the past month.

Chinese solar wafer leader LDK Solar ( LDK) is up 60% in the past month. LDK Chinese wafer making mate ReneSola ( SOL) is up 45% in the past month.

The gains by the major module makers are paltry in comparison. A mere 18% gain for Yingli Green Energy ( YGE), and a mere 20% gain for SunPower ( SPWRA). Suntech Power ( STP) has also rallied over the past month.

The biggest module maker of all, First Solar ( FSLR) stoked the flames of optimism twice in the past two weeks, first announcing 380 megawatts of orders for Europe in 2011, above and beyond its existing guidance, and on Thursday, announcing that it's expanding its manufacturing capacity by another 500 MW, planning two new plants in the U.S. and Vietnam.


It's no surprise that as the general optimism in solar remains high, module makers who have been dogs for one reason or another will be lifted by the general tide. Yingli Green Energy, for example, has faced persistent questions about an earnings drag from its polysilicon plant ramp up. Additionally, Yingli has not been an aggressive currency hedger, so the euro rebound stands to benefit its earnings in the forex column. The rest of the module maker gains are in the low double-digits over the past month, so not even worth printing.

SunPower faces persistent questions about its pricing, but for investors who are concerned about ASPs in 2011, a module maker like SunPower with a captive sales channel through its solar project pipeline could be judged a more defensive way to play the sector, especially since its shares are down 36% this year.

In the micro-cap crowd, U.S. solar stocks often neglected, like Evergreen Solar ( ESLR) and Ascent Solar ( ASTI) are up 88% and 70% respectively in the last month. This week, in particular, the micro-cap solar stocks rallied as a group to a level not seen in some time.
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It's a company-by-company story in solar, with the wafer makers, for example, benefiting from tight pricing and expectations that the pricing dynamic will drive outperformance, at least in the short-term. The flip side of this coin is that less vertically integrated module market could be setting investors up for a negative margin surprise in upcoming earnings, caused by their increased costs for spot market input purchases. Solarfun Power ( SOLF) has been cited as a potential margin disappointment in the quarter. Even though on the currency front it should benefit, its active hedging program means gains in the euro possibly won't materialize until the fourth quarter. Solarfun is notably flat in trading over the past month, not something that can be said for many solar stocks, but all the same it's gained 55% year-to-date.

LDK Solar is up 60% this month and it's far from the rising tide lifting all boats. The wafer market pricing will be a boon to LDK, leading to a guidance raise from the company, and the massive loan package it received from the China Development Bank, helped to alleviate concerns about its debt-laden balance sheet.

It's also the solar sector outlook and the macro environment which have continued to shift. With the euro back above $1.40, the cause of the last solar stock crash, when the euro seemed headed for $1.20 in June, has disappeared.

There will always be an exogenous event that could turn investors sour on the solar sector in a heartbeat, also, and make it justifiable to exit at a tidy profit, as the Walton family does with its First Solar holding over and over again. Last Friday provided an example of the kind of unexpected event that can turn investors against solar stocks, when the U.S. Trade Representative said the U.S. government would be taking the next step in considering a petition made by the United Steelworkers to cite China for illegal trade support of its clean energy companies.

Chinese solar stocks sold off on Friday after the announcement from the government, but those losses didn't continue into Monday's trading, which was a mixed session for Chinese solar stocks.

At least one solar analyst was out with a report on Monday downplaying the risk to Chinese solar stocks from the trade war with China. Dan Ries of Collins Stewart said the United Steelworkers complaint fails in several key areas as it relates to Chinese solar companies. Solar companies have not received loan packages with rates that would be illegal under trade law; China has not restricted access to raw materials of vital importance to solar companies (only First Solar even requires a raw material that is supplied by China, tellurium);and Chinese solar companies have not brought the average sales price of solar supply down by way of unfair subsidies, but by way of a massive decline in the price of polysilicon and rapid progress in ramping up large scale manufacturing.

Additionally, the United Steelworkers' petition cites as an example of an unfair trade practice that a local government in China negotiating with First Solar on conditions for First Solar to build a production facility in its region is requiring the U.S. solar company to develop a domestic supply chain for the facility. A skeptic of the attack on China might note that Senator Charles Schumer (D.-NY) threatened to shut down funding to a West Texas wind farm project being built by China's A-Power Energy if it didn't create a U.S. manufacturing plant for the project.
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Putting the China trade war to the side, the outlook for solar management teams at last week's Solar Power International conference in Los Angeles remained optimistic about not just demand but pricing. The level of optimism reflected at the big solar conference, however, depended not just on the individual company who is speaking, but the individual person.

Take these three comments from analysts at the Solar Power International conference last week:

Jesse Pichel, analyst at Jefferies:

"Day one of SPI solar conference was positive. Our downstream developer contacts were unable to procure 1H11 bankable supply at $1.60-1.65/w. The market remains effectively sold out with known pricing in 1H11."

Aaron Chew, analyst at Hapoalim Securities:

"Generally speaking, sentiment was positive with strong demand expected through year-end, and pricing firm for not only modules but cell, wafer, and polysilicon as well. Though there was less consensus regarding the outlook for 2011, module manufacturers held firm in their optimism, while the onslaught of rising supply was amply evident across the showroom...Though Tier 1 module producers have pointed to only modest ASP declines in 1Q11, emerging Tier 2 producers have indicated a willingness to undercut pricing to gain share."

Christine Hersey, analyst Wedbush Securities:

"During our first day of meetings, we again noted a dichotomy in the commentary from module manufacturers and downstream installers and system integrators regarding 2011 demand and ASPs. Trina Solar is expecting module ASPs will be up sequentially in q4:10 with a slight decline in q1:11. Downstream installers we spoke to indicated that visibility on Q1:11 ASPs is still low. Uncertainty remains around the expected installations in Germany and Italy in 2010 and 2011...During our second day of meetings, we again noted a dichotomy in the commentary from module manufacturers and downstream installers and system integrators regarding 2011 demand and ASPs. Solarfun Power is expecting module ASPs will be flat sequentially in q4:10 with a slight decline in q1:11. Jinko Solar expects to end October with signed contracts for approximately 40% of expected 2011 output. Evergreen Solar indicated that the company has essentially sold its volume for q4:10 and visibility is improving for q1:11. Downstream installers we spoke to indicated that visibility on Q1:11 ASPs is still low."

Analysts can't agree on the latest data from Germany, either. Installations in Germany fell from a record 2.2 gigawatts in June to a level a fourth of that size in July, and the down even further in August. Jefferies analyst Jesse Pichel looks at the year-to-date number in Germany and sees it as a positive for the sector. Gary Hseuh, analyst at Oppenheimer & Co., looks at the drop-off since the July feed-in tariffs went into effect and asks how an investor can't read it as a negative. There is little sign it is being read as a negative, though. First Solar is up 5% on Thursday after announcing that it's again expanding capacity.

"It's alarming right now, and the German data looks worse than I was thinking before. Speaking to installers in Europe last week, they were more cautious and I tend to believe the guys closer to the situation," Hseuh said. Hseuh says he isn't comfortable with the "perfect offset" hypothesis: German demand was so high in the first half of the year that projects in every other country were delayed and will make up any slack.

"Everyone coming out of the solar conferences is thinking pricing is firmed up, and by the time they feel the pain it's too late. The set up is not looking that great," the Oppenheimer analyst said, adding, "something has to give or break and the first thing is pricing."
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"There's no smoking gun, but a valuation call on most of these stocks argues that the positive trends in solar are fully discounted in stock prices," says Auriga Securities analyst Mark Bachman. "Some defensibility exists in the low p/e multiples, but I think maybe it is time to sell out of solar. All the positives seemed priced in now and the negatives people haven't paid attention to as much. It's enough to call it a day," the Auriga analyst said.

ReneSola is up 92% in the past six months, but based on pricing in the wafer market and its low price to earnings ratio, Macquarie Securities initiated coverage of ReneSola at a buy last week, with earnings estimates in the stratosphere compared to the Street consensus.


Did the microcap solar stock rally this week represent the scraping of the bottom of the barrel of solar upside, so to speak, with upside potential exhausted in the better known solar stocks? Or is it just the filtering down of the seemingly unlimited upside that exists for the entire solar stock sector?

There's little doubt from the boom and bust trading action in solar that for every long-term investor devoted to the solar sector who views Trina Solar ( TSL) as a core long-term holding, there's at least one if not two, or maybe a dozen traders who could care less about whether solar stocks are up or down, as long as they are up or down by a lot, and trading momentum is generated.

"I think going into earnings valuations are pretty full and reflecting earnings revisions, and people are turning eyes away from potential negative news," Oppenheimer's Hseuh concluded. This doesn't mean Hseuh doesn't see upside in specific solar stocks. In fact, he remains bullish on shares of Solarfun even though Solarfun has been singled out by Auriga's Bachman as a solar module maker that could feel margin pressure from input costs.

Indeed, the continuing rally in the solar sector ahead of the earnings season, and ahead of another round of annual tariff cuts in Europe, raises the question, Is it time to take the money and run, or do solar sector fundamentals mean it's onwards and upwards for years to come with stock prices? Take the poll below to see what TheStreet thinks.

Is it time to take the money and run, or do solar sector fundamentals mean it's onwards and upwards for years to come with solar stock prices?

It's time to take the money and run.
I'm waiting for one last earnings pop to take profits.
The long-term outlook has made solar stocks a core holding.

--Written by Eric Rosenbaum in New York.

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