Avoid Solar's Next Failure

It's no secret that we are in the midst of a solar shakeout right now. Solyndra, Evergreen Solar, Solar Millennium, and Solon have already closed up shop, and a number of small competitors are on the ropes right now.

So how can you avoid making the mistake of buying into the next solar failure? Here are a few tips.

Don't buy into "cool" technology
Last year when I said anything bad about Energy Conversion Devices, readers would question my sanity, as you can see here or here. Now the stock is trading for $0.30 and the company seems destined for the trash heap.

The reason is simple: Energy Conversion Devices made "cool" technology that wasn't cost-effective. The company's solar shingles never caught on and its thin film product was very inefficient. With traditional polycrystalline modules falling in price, the flaws in that investment thesis became gaping holes by the end of the year.

The same can be said for Solyndra, which made modules out of CIGS that looked really cool when they were shown on TV. We all know how that ended up.

Don't buy a bad balance sheet
Chinese manufacturers have built themselves on short-term borrowings from Chinese banks. That poses all kinds of risks including the possibility that funding will be pulled out from under them, a risk I don't want to take. LDK Solar (NYSE: LDK  ) and Suntech Power (NYSE: STP  ) are two of the biggest borrowers, and this leaves their balance sheet highly leveraged.

Keep a close eye on where a company gets its funding from -- and the less debt it has, the better.

Have a backup plan
Many manufacturers are counting on someone else for demand. Suppliers like LDK Solar and Renesola (NYSE: SOL  ) , for instance, count on other manufacturers for demand for polysilicon and solar cells. As manufacturers vertically integrate and supply outpaces demand, they're left holding the bag if demand falls short.

On the other hand, First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) are not only vertically integrated in manufacturing, they own power-plant development units that provide a backstop when times are tough.

That backup plan is key for companies in tough times.

Buy proven technology and a big balance sheet
I own two solar stocks, First Solar and SunPower, because both produce proven technology, have a competitive advantage in both cost and efficiency, and have strong balance sheets. SunPower even has a multinational oil company, Total, backing it for when times get rough.

If you follow my advice above and don't fall in love with "cool" technology, stay away from bad balance sheets, and always have a backup plan, solar can be a great investment in coming years as weak competitors fall from the race.

I think SunPower and First Solar are great picks for the future, but our analysts have selected a different stock that they believe is poised for tremendous growth in 2012. Find out which company in our new free report: "The Motley Fool's Top Stock for 2012." Thousands have already requested access, and it'll only be available for a limited time. Simply click here -- it's free.

Fool contributor Travis Hoium owns shares of First Solar and SunPower and has sold puts in SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of Total and First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2012, at 3:15 PM, ydzhou11 wrote:

    Your point is buy USA , but not China. Bad article

  • Report this Comment On January 06, 2012, at 4:18 PM, zhuubaajie wrote:

    Two viewpoints in the article are grossly erroneous.

    Chinese banks, especially the policy banks, do not lend lightly. But once they lend, they act as business partners (unlike American banks, which only lends you money when you don't need it, and would pull the rug faster than anyone else if it rains). It is a truism, but also happens to be true, that major Chinese companies treat bank loans like equity. The stability allows the borrowers to weather all sorts of inclement economic downturns.

    LDK, for example, is a favored recipient of policy loans.

    Moreover, the game has completely changed - with the recent announcement of the US$64 million in China bank project financing for LDK (actually for its 70% owned subsidiary), to build 2 utility scale projects in California. What has been holding back U.S. expansion plans was the lack of project funding. Now that the floodgate is open, expect to see at least $5 - 10 billion of Chinese project financing deployed in the next decade, and all of that going to the Chinese solars, LDK being one of the biggest beneficiary.

    WHY do you think the big boys were buying up LDK in recent months?

  • Report this Comment On January 06, 2012, at 4:33 PM, foop200 wrote:

    How do you get away with trying to persuade people to buy the stocks you own and to sell the one's you don't own or want to buy? There should be some type of a law...or maybe there is one. This is absolutely ridiculous.

  • Report this Comment On January 07, 2012, at 9:28 PM, TMFFlushDraw wrote:

    @zhuubaajie

    Who are the "big boys" you speak of?

    @foop200

    I put my money where my mouth is.

    I've also written negatively about FSLR for the past few months even though I've owned shares. My writing is my honest analysis of a stock or situation regardless of my position.

    My positions are always disclosed, per the law and our disclosure policy. You can take that into account when deciding whether you agree with my judgement or not.

    Travis Hoium

  • Report this Comment On January 08, 2012, at 5:56 AM, zhuubaajie wrote:

    @TMFFlushDraw:

    http://www.dailyfinance.com/2011/12/19/ldk-solars-shares-jum...

    "Now what: Morgan Stanley (NYS: MS) and Goldman Sachs (NYS: GS) would be the most likely big-volume buyers. They are the two largest LDK shareholders outside CEO Xiaofeng Peng, who holds 51% of the company in his own pocket. Both have also increased their stakes in 2011 -- in Goldman's case, tripling its holdings between March and September. Fellow Fool Travis Hoium sees LDK in the lower echelons of the solar industry, but someone out there with deep pockets disagrees today."

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