Top Solar Stocks for 2010

November 17, 2009

In summer of 2008, when crude oil prices were cruising at record highs, it was easy to see the appeal of solar stocks. But now that oil is off nearly 50% from its highest point last year, it appears alternative energy stocks have lost their appeal. Solar stocks in particular have been battered and fallen out of favor.

But don't be fooled–there are a few really good solar plays right now if you know where to look. Though these companies are down compared to last year, they have tremendous future potential in 2010.

Why Solar Was Hot in 2008

It's easy to see why 2008 was a banner year for solar companies. Environmentalists were talking about "peak oil" and the end of fossil fuels. Investors were falling all over each other to find green companies capitalizing on wind, hydro and geothermal power. Even politicians had started openly talking about capping carbon emissions to favor clean energy companies.

Coupled with the buzz that surrounded energy stocks was relative prosperity for many nations. This provided plenty of funding for fashionable green energy projects. It seems ages ago, but if you think back to the first half of 2008 you'll remember that the worst of the recession had yet to take its toll and people were spending much more freely. That meant government subsidies for solar and wind were plentiful and helped make these technologies popular and cost-competitive.

Take Germany, where The Renewable Energy Sources Act at the time forced power companies to buy all the alternative energy created by regular citizens at greater than market prices! That means if John Q. Public installed a solar cell on his house that created more energy than he consumed, the utility companies (and the German government) wrote him a check. What's more, the plush government subsidy ensured this homeowner was paid a better rate than what the utility itself charges customers on the open market! It was expensive, but this plan was certainly an effective way to spur alternative energy use and resulted in booming sales across Germany in 2008.

Why Solar Was Not in 2009

Unfortunately, when a government falls on hard times, it's harder to justify such subsidies with a long term goal. That goes for big spending in Germany but also for smaller items in the U.S. such as solar panels on municipal buildings or county courthouses. It's hard enough to make ends meet with the tax revenue most countries have right now without adding expensive programs like solar incentives. After oil prices fell back to earth, it simply was cheaper to pass on solar power and use conventional energy sources.

Worst of all, solar companies that had ramped up production to meet demand in 2008 were now seeing sales dry up. Solar cells are expensive, and consumers have been really tightening their purse strings. The result was a brutal one-two punch for solar–no more subsidies, and a glut of supply that drove prices down dramatically. Margins shrank to razor thin levels at almost every solar stock as a result, and many alternative energy companies fell into the red in 2009.

As earnings and sales plummeted in the sector, solar shares tumbled and companies continued to slash guidance. For those investors left holding the bag, it was an expensive race to the bottom.

The Best Solar Stocks to Buy for 2010

Across the industry, solar stocks continue to turn around. Though 2009 numbers may not be near 2008 levels, it looks like a bottom has been established and companies are improving.

There are still some dogs with fleas, of course. Take First Solar (FSLR), which reported a huge revenue miss at the beginning of October and saw shares pushed down 15% in one day as a result. My Portfolio Grader stock ranking tool gives FSLR a D-grade due to weak sales and earnings performance, and you should definitely avoid this stock.

However, Portfolio Grader also identifies some really great solar companies right now. Here are my three favorites:

Canadian Solar (CSIQ) recently announced very strong third quarter results. Though net revenue was down compared to last year, Canadian Solar's net income was nearly double that of 2008. That's because the company's shipments on the quarter totaled 103 MW of solar cells compared to 60 MW last year. The company topped expectations on the quarter, making it an excellent buy right now.

Get my free report on Canadian Solar (CSIQ)

Trina Solar (TSL) is a standout stock based in China. The cost base is much more competitive for Asian solar companies, and this allows for bigger margins. TSL has recently raised shipment guidance for Q3 a few weeks back, and has seen a number of upwards revisions to earnings estimates in the last 30 days. Typically this means a big surprise is in order. This company reports earnings on Thursday, November 19, and I expect a great performance.

Get my free report on Trina Solar (TSL)

GT Solar (SOLR) is a very small operation, with a market cap of just 600 million. However, this allows the company to be innovative and flexible, keeping it ahead of some of the big players that have suffered from the industry's volatility. Insiders are saying that inventory depletion is across the whole solar sector has peaked, and that sales are about to pickup for solar stocks soon. This makes GT Solar a great buy since it can ramp up productions fast and capitalize on the conditions as soon as they become favorable. Invest very cautiously in this pick because it's an aggressive stock, but know that it has true breakout potential and could deliver big gains overnight.

Get my free report on GT Solar (SOLR)

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