NEW YORK ( TheStreet) -- Long-term and short-term bullishness were evident in the best solar stock performers on Monday.

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LDK Solar ( LDK) surged on Monday by 20% on the strength of a fourth quarter earnings pre-announcement that exceeded Street revenue consensus. LDK also released revised guidance for 2011 that exceeded its previous revenue and business targets across polysilicon, solar wafer, cell and module production.

At the same time, SunPower ( SPWRA) shares surged by 8.8%, after the U.S. solar company announced more 711 megawatts in projects sold to Southern California Edison and slated for development from 2014 to 2016.

For LDK, the bullish news about the fourth quarter performance and 2011 outlook run counter to lots of solar supply chain noise about recent prices decline, particularly at the level of solar cell manufacturers. Indeed, another report in Digitimes on Monday stated that the gross margins of Taiwan-based cell makers could fall below 10% in the first quarter of 2011, with cell pricing per watt falling below the $1.20 mark at which many cell manufacturers break even.

Hapoalim Securities reported on Monday that channel checks in Europe show module pricing down by 5% to 10% in the first quarter -- $1.55 to $1.60/watt.

It should be noted that both LDK and SunPower are among the large group of solar stocks that remain favorite targets of shorters -- and, therefore, any positive news, particularly bullish earnings pre-announcements, will lead to a round of short covering.

LDK trading volume was huge on Monday, with more than 20 million shares changing hands on Monday, and gain of 20% for the Chinese solar stock. Typical volume for LDK is in the range of 3.6 million.

There were 15.8 million shares short on LDK as of the most recent Nasdaq short interest report on Dec. 15.

Here are the some of the revisions from LDK that rallied solar on Monday:
  • Fourth quarter revenue: $870 million to $910 million, versus previous estimate of $710 million to $750 million
  • Fourth quarter wafer shipments: 615MW to 620MW, versus previous estimate of 580MW to 600MW.
  • Fourth quarter module shipments: 160MW to 165MW, versus previous estimate of 120MW to 130MW of modules
  • Fourth quarter gross margin: 25% to 27%, versus previous estimate of 24% to 26%
  • Fiscal year 2011 revenue: $3.5 billion to $3.7 billion, versus previous estimate of $2.9 billion to $3.3 billion
  • Fiscal 2011 wafer shipments: between 2.7GW and 2.9GW, versus previous range of 2.5GW to 2.8GW
  • Fiscal 2011 module shipments: 800MW to 900MW, versus a previous estimate of 700MW to 800MW. In-house cell production was also ratcheted up by a range of 100MW.
  • Fiscal 2011 gross margin: low-end revised upwards to 23%, from 22% previously.
  • If there seems to be a disconnect between the LDK outlook and the recent pricing checks in solar, it may simply be another indication that solar remains a short-term trader's market and a selective market at that, with a few top tier stocks positioned to withstand pricing pressure, while many other solar stocks face conditions at which full capacity would mean operating at a break even rate, or even at a loss.

    At least one LDK analyst is viewing the bullishness with skepticism. Sam Dubinsky of Wells Fargo wrote in a note on Monday that LDK' s optimism may be premature. The analyst says that as a new entrant in the module market he isn't confident that LDK can ship as much as 900MW of modules. Additionally, as LDK sells wafers near spot pricing, recent weakness in the spot market will negatively impact LDK earnings.

    The Wells Fargo analyst does see the polysilicon market strength as a ballast for LDK, and raised his 2011 earnings forecast to $2.17 from $1.77. Piper Jaffray analyst Ahmar Zaman thinks that even if cell, module and wafer prices decline based on oversupply in 2011, a bottleneck in polysilicon remains.

    The polysilicon market pricing has held up better than expected, with the worst fears of a polysilicon market falling to $50/kg not materializing and many analysts expecting polysilicon pricing to hold in the range of $60 to $70/kg. LDK also upped the low-end of its in-house polysilicon production target by 200 metric tons in its revised guidance.

    LDK is also planning to pursue an initial public offering of its polysilicon business in 2011.

    In the end, the Wells Fargo analyst still likes low-cost leaders Trina Solar ( TSL) and Yingli Green Energy ( YGE) for module market bets, and as far as the wafer market, thinks ReneSola's ( SOL) lack of exposure to the spot market makes it a better bet than LDK at that point of the supply chain.

    With that said, here are some of the key debates reverberating in the markets as solar stocks finally feel a little love from the investors who, at least of late, seemed to have left the sector for dead....

    SOLAR DEBATE #1: Solar Stocks Can't Get Any Cheaper
    Inherent in the recent weakness in the solar sector and solar stocks, particularly the Chinese solar stocks, are trading multiples as low as five times earnings. Some of the tier 1 solar companies bailed water for all of 2010, such as Trina Solar ( TSL).

    The solar sector had its best demand year ever in 2010 and Trina Solar continued to prove its low-cost leadership among the vertically integrated Chinese module makers. Yet Trina Solar shares ended 2010 down by more than 20%.

    SOLAR DEBATE #2: Tier 1 vs. Tier 2
    One of the prevailing bullish calls for solar stocks in 2011 is to focus on the so-called tier 1 players, who are already the most vertically integrated and low-cost -- and, as such, are defensive plays in what may be an oversupplied market. As Collins Stewart analyst Dan Ries noted in a recent sector outlook, there's general sector overcapacity that has to be distinguished from the sold-out capacity of a few top players.

    If this "all capacity is not created equal" argument was inherent in the rallies in Trina Solar and Yingli Green Energy ( YGE) shares on Monday, it was far from the only bet being placed by solar investors. In fact, the gains made by Trina and Yingli of just a little more than 2% were among the smallest gains on a huge day for solar.

    Several of the so-called tier 2 players that are expected to feel the overcapacity squeeze skyrocketed on Monday while the tier-1 low-cost leaders made modest gains. Jinko Solar ( JKS) was up 8.7%, with only SunPower and LDK shares performing better on Monday. Solarfun Power ( SOLF) shares were up 7%.

    SOLAR DEBATE #3: There's No More Bad News to Price In

    Other Chinese solar players rallied simply based on recent underperformance. Suntech Power ( STP) is down 50% in the past year, but it rallied by more than 5% on Monday.

    It's typical that a rising tide lifts all boats in solar, just as a doomsday call can sink the entire sector.

    At least for a day then, Monday showed that all the bad news that has caused a hiccup for solar stocks may have reached its saturation point -- from a potential cap on solar in markets like Germany and Italy, to pricing declines, slower demand than expected, and a weak euro.

    In fact, one notable trading pattern last week that may have indicated a breaking point for solar negativity was the euro trade. Typically, as the euro declines, Chinese solar stocks decline along with the European currency. However, as the euro dipped as low as $1.29 last week, solar stocks did not suffer alongside the currency.

    Ahmar Zaman at Piper Jaffray says that the index of solar stocks is trading close to 5 times forward earnings now, and the only other time that the multiples have been so low across the sector was after Spain implemented a hard cap on solar and the global economy went into recession, cutting off debt financing. Currently, there is no such cap - though cap fears remain - and there is adequate debt financing and attractive investment return rates for solar projects supporting more debt financing.

    "All the bad news is in these stocks already. People are already discounting the potential for a worst-case scenario," the Piper Jaffray analyst says.

    Auriga's Bachman thinks for the bear thesis to come true there has to be a complete lack of debt financing, and that's just not the case in solar. The key for the Auriga analyst is the pricing elasticity arguments that runs counter to the bearish thesis about oversupply. Every time feed-in tariffs decline, there is a rush to install, and then prices fall and the return profile for solar investors improve. "Solar investors are yield chasers and every past period of feed-in tariff declines has led to lower prices and more investor appetite for solar in growing markets," Bachman says.

    SOLAR DEBATE #4: Pricing Decline Data is Noise

    Analysts contend that all the recent noise about pricing declines is a matter of bears in the sector cherry picking their data. While Digitimes can write that cell pricing from Taiwanese players is falling to $1.15, the Taiwanese cell players represent the tier 2 buffer solar capacity that will be squeezed without impact the tier 1 players.

    Piper Jaffray's Zaman says that the "all capacity is not created equal" theory applies to solar in another way, too. If the bearish thesis of as much as 30GW in cell capacity in 2011 is true, it doesn't mean that vertically integrated solar companies that make their own cells and whom may all told have 15 gigawatts to 18 gigawatts of capacity in 2011 won't sell out regardless of the pricing pain felt in the tier 2 marketplace.

    Mark Bachman of Auriga Securities thinks the first quarter will be strong and Trina and Yingli will beat and raise with shipments up quarter over quarter, defying the current consensus of shipments being down in the first quarter for many solar companies.

    Additionally, if the price of cells was down steeply across the board, there should also be a decline in polysilicon, says Bachman, but that's not occurring. Polysilicon pricing is trending down, but to a level that is stronger than all the noise about $50 polysilicon/kg. Wafer pricing has declined from 90 cents/watt to a range of 85 cents to 89 cents, but that is the type of small price decline expected and already built into models, as opposed to pricing going over a cliff.

    Piper Jaffray's Zaman says that wafer pricing will tick down to around 60 cents by the end of 2011, but it's not a freefall situation now.

    "I think the time to buy solar stocks is right now," the Auriga's Bachman says.

    Trading volume across solar stocks on Monday suggested that in the least, the optimist's side of all of these debate points was attracting some takers. Yet for a sector notorious for short-term trading, it's far from clear that Monday's action is anything more than the beginning of one more well-timed profit taking opportunity for investors who are not thinking about the long-term viability of solar.

    -- Written by Eric Rosenbaum from New York.


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