The swing from exuberance to panic can be a fast one for the solar sector. Another switch in sentiment happened this week when news came out that Italy was considering a cap on solar installations at 8 GW. Right now it's just in draft form, but it spooked investors nonetheless.
A few weeks ago, we warned that solar investors may have worn their rose-colored glasses a little too long, and this week the hammer fell. But before we panic, let's put this move into a little perspective.
Across the board, manufacturers have done a good job diversifying their customer base over the past two years. The industry's reliance on Germany is still high, but the expected impact of Italy has been built into many manufacturers' projections. Trina Solar
There's also the fact that we don't have a final ruling in Italy yet. We've gone through scares like this in Germany, and we've seen the blow to solar is softened a bit before a final law passes. Time will tell if that happens in Italy, but writing the country off now is a bit premature.
The shock Italy gave us this week is another reason to stick with manufacturers that have project development divisions. First Solar
JinkoSolar continues solar's hot earnings streak
Chinese solar manufacturers continued to hit it out of the park this week when JinkoSolar
We've seen strong earnings across the board in the fourth quarter with Yingli Green Energy and Trina Solar leading Chinese Manufacturers. LDK Solar
If demand falls in Italy and capacity expands faster than other markets come online, we could be in for a price war. That's one of the reasons stocks like JinkoSolar trade for just more than five times 2011 estimates, and the largest manufacturer Suntech Power
What to do now
This isn't the first time solar stocks have gone from an investor favorite to the trash heap overnight, and it probably won't be the last. But outside of Italy the wind looks to be at the back of solar manufacturers. Oil prices are rising as uncertainty spreads in the Middle East. Political will in the U.S. hasn't changed enough to back solar domestically, but eventually it will.
I prefer power companies with big project development groups like First Solar and SunPower. But at today's low multiples, Chinese manufacturers are starting to look awfully tempting.