NEW YORK ( TheStreet) - The market junk of 2011 have become the market jewels of 2012, whether it's Netflix ( NFLX), Bank of America ( BAC), or just about any stock in the solar sector. Is the rally merited in solar, a sector where supply is still running ahead of demand, and profitability -- even for the best-run manufacturing operations -- could be slim to none in 2012? The bullish trend in solar stocks is a recipe made of three primary ingredients:
1. Recent demand beating expectations. That's a trend expected to continue in the first quarter, predicated on an installation frenzy in Germany ahead of subsidy cuts.
This also implies the action in solar stocks is a subsidy-driven trade that may not be more than a quick profit opportunity in the sector. In other words, "The worst thing that could happen is that demand gets so hot in Germany that everybody thinks it's good times again," said Steve Simko, Morningstar analyst. The subsidy trade gives as good as it gets. As Aaron Chew, analyst at Maxim Group, noted on Monday morning, subsidy policy overhauls in solar's two largest markets of 2011 are yielding diverging outcomes with (1) German demand beginning to swell ahead of expected cuts in 2Q but (2) Italian demand restrained with both the 2012 subsidy spending cap for large projects already surpassed and financing markets closed. "Even as we foresee shipment upside in 2012, earnings leverage for the solar manufacturers is unlikely given the 15% gross margin and EPS losses implied for most of the sector with module ASPs of ~$1.00/W," Chew wrote.