A Solar Hatchet Job

I don't consider myself a big Billy Joel fan, but I've had some classic lyrics stuck in my head at the office lately. . .

You may be right.

I may be crazy.

That's what I wanted to say to solar power market analysts at investment bank Jefferies & Company, who took a machete to their estimates in the same clean energy sector on August 21.

As a listed firm, Jefferies Group (NYSE:JEF) has enjoyed an impressive share-price appreciation of 184% in the six months from March to September. I won't doubt that investors assigned that premium for a reason.

Yet, the logic behind their downgrades of no fewer than eight solar power stocks seemed rash.

PV sector observers at Jefferies cited a downward pricing spiral and overproduction in China as reason enough for pessimism across the board. They said they even factored in lower production costs at solar module manufacturers around the world that could pad margins, and that the forecast looked bleak. That mass downgrade spooked investors, and many fled their positions.

My colleagues and I here at GCR thought the hatchet approach to solar power stocks that Jefferies took was short-sighted.

"They may be right. . . for now," we said. "But what about in 2010?"

It's true that solar panel prices have dropped by 50% this year, as economies around the world wobbled. And capacity utilization has been estimated at as low as 25%, with manufacturers holding over 100 days' worth of inventory they would rather move from shelves to rooftops.

Still, billions of stimulus dollars are ready to be doled out well into 2010 in Germany, China, the United States, and other countries among the world's top current and developing solar markets.

Nevertheless, to paraphrase the piano man, Jefferies & Co. may have been right ― and solar bulls may all have been crazy.

On Tuesday, September 8, we saw who had all their marbles when Arizona's First Solar (NASDAQ:FSLR) announced a deal with the Chinese government to build a 2,000 MW solar power plant in Inner Mongolia. Jefferies & Co.'s oversupply scenario now looks more like an overreaction.

First Solar Proves Big Project Power

I've seen Inner Mongolia for myself. The capital city of Hohhot is made up of rows of huge identical housing blocks, stretching across the barren landscape like a Las Vegas made of Legos.

Its remoteness isn't an issue as far as the Chinese government is concerned: for decades, they've been moving people from the crowded east to the area where First Solar will operate a 2 GW operation.

And just as migration is a process, First Solar's plan to provide power to some three million homes in the autonomous region of Inner Mongolia won't play out right away. . . but instead over the ten years leading up to 2019.

You might see that as painfully slow. . . or as sustained business that will keep revenue flowing. First Solar will provide thin-film PV products and also kick-start local production to give the American company a low-cost manufacturing base for Asian endeavors.

At least in the case of First Solar, Jefferies only dropped it to a "hold." So if you stayed put, you didn't miss the nearly 16% upside FSLR has delivered in just the first two trading days of this week.

What about Trina Solar (NYSE:TSL), a Chinese solar ADR that Jefferies didn't touch? They didn't get the 2 GW go-ahead in their own backyard, so do they see clouds covering their profit prospects a year from now?

Trina CFO Terry Wang says no.

"The Worst is Already Over"

"The worst is already over," Wang said this week in Beijing, referring to the PV market. He even gave a tempered time frame to allow for inventories to dust off the cobwebs for more big deals to come through. The U.S. and Chinese solar power sectors "can wake up in the fourth quarter" of this year, "but a full recovery is likely to have to wait until the second quarter of next year."

That's just around the corner, and any investor's periscope should be peering into Q2 2010 right now.

Suntech Power (NYSE:STP), another China-based solar player, isn't even waiting that long. STP has restored its 2009 shipment goal after lowering it not long ago. "Maybe about a month ago the markets were still slower than we would have liked, but as of the past month ― and this has been led principally by Germany ― we have seen the market pick up," Chief Strategy Officer Steven Chan said in early September.

Germany is a key market where Jefferies pointed to uncertainty in government incentive packages as a potential major drag on global PV company profits.

Suntech's Chan echoes Piper Jaffray's PV sector analysis. Jaffray, unlike Jefferies, is saying fears about Germany's feed-in tariff are overblown. Household installations are now cheaper than ever ― meaning more business will come with recovery ― and India's 20- GW solar power goal brings another major developing market in with China as a driver of PV market growth.

Again, I may be a card short of a full deck, but I'm not going around spooking investors out of winning positions just because the current numbers look sour. Analysts ignore the power of stimulus-fed megadeals at your risk, not just their own.

We will continue to do our best to give you the long view of what you can expect and where you should invest best stocks for 2010.