Solar Losers: Declines and German Noise Continue

NEW YORK ( TheStreet) -- "Shocking" developments out of Germany in relation to its support of the solar industry: sources in the German government tell Reuters on Friday that the country's economic ministry doesn't think the plan recently unveiled by the country's environmental ministry to cut solar feed-in tariffs by as much as 15% in July goes far enough. Reuters reports on Friday that the economic ministry in Germany wants feed-in tariff cuts of up to 25%, citing unnamed sources.

For any investor who lived through solar 2010 and the political debate in Germany, in 2011 the solar noise is playing out just as it played out last year. First, a plan to reduce subsidies is introduced, then competing political interests say the plan doesn't go far enough, and as it all plays out in the press, a period of typical uncertainty for solar stocks is part of the resulting confusion.

Reuters quotes an unnamed source in the economics ministry of Germany as saying that the ministry, "wants to have solar power production switched off when the grid is overloaded on sunny days," and would also like to see a greater July 1, 2011 reduction in incentives.

Also this week, an independent commission put together by German Chancellor Angela Merkel's government released a huge environment review document that argues in favor of an annual cap on solar installations in Germany. On top of this, some members of the CDU/CSU parliamentary coalition have been grumbling to the press about the deal hashed out between the solar industry and the environmental ministry, too.

The prevailing view on the Street is that the feed-in tariff cuts will go through as planned by the government in its draft document, with a high-end cut of 15% in July if normalized annual installations are on pace to exceed 7.5 gigawatts.

Several analysts consulted by the Street, even those on the bearish side of the solar outlook, don't expect the talk about an annual cap to figure in 2011, but to be back on the political radar in Germany for 2012.

Yet for any investor familiar with Germany and its debate on solar support, a good rule of thumb is that all bets are off until the vote is taken in parliament and the legislation signed on the dotted line.

Solar stocks were down across the board on Friday, though it was a losing day for the markets, with U.S. GDP data for the fourth quarter failing to live up to expectations, political unrest in Egypt providing the latest television image panic point for the markets, Ford earnings disappointing investors, and general negativity running throughout trading action after what had been a week that started with a high level of bullishness.

The level of losses in solar stocks, anywhere from 2% to 4%, was nothing out of the ordinary for a sector that reacts with exaggerated swings to big market losing days, and clean energy stocks were all taking a hit on Friday. In particular, with the Nasdaq down 2.5%, solar stocks could have been down much more than that based on historical trading patterns.

It's been a noisy week for solar, with data out of Italy setting off the worst fears of a cap in the most important market outside of Germany, and Germany itself showing signs of the typical division over the level of upcoming cuts to solar subsidies.

In light of the latest noise, one could argue that solar stocks have held up reasonably well, and some have even been able to attract significant additional investment, like LDK Solar ( LDK) which raised $149 million in a secondary offering this week.

LDK shares only slipped by 1% on Thursday when it prices shares at a 5% discount to its Wednesday close, however, LDK shares were down another 4% on Friday.

The major Chinese solar module makers were continuing to give up more ground after the sector collectively peaked right before the release of the Italian data. Trina Solar ( TSL) and JA Solar ( JASO) were down roughly 8% for the week, as of mid-day Friday, while Jinko Solar ( JKS) was down 10%.

The noise of of Italy caused Collins Stewart to strip JA Solar of its buy rating this week.

First Solar ( FSLR), which recently reached a new 52-week high level that typically precedes a sell off in the solar sector, or at least in First Solar shares, has lost $10 from its shares since Goldman Sachs added the solar stock to its conviction buy list with a $165 price target - and said the stock could go 23% higher from there - at the beginning of the week.

If there is one good rule of thumb for solar investors, on top of being hesitant to invest in First Solar at a peak, and awaiting German parliament to actually take its vote before assuming things will go as predicted, it's that any time there is uncertainty about the political support for solar, multiples in the sector will remain compressed, regardless of the short-term earnings outlook.

-- Written by Eric Rosenbaum from New York.

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