It was a rough day for solar stocks yesterday. Trina Solar (NYSE: TSL) and GT Solar (NYSE: SOL) both hit our 10% Promise list on the downside, and most of the sector was down. But no one had it worse than Evergreen Solar (Nasdaq: ESLR), which announced that equity holders would likely be wiped out in restructuring.
Even though the sector is recovering today, we should still cover what happened yesterday and what it means for solar stocks. The moves may have happened all on the same day, but there were very different causes.
The curse of China strikes
In an article last week I said that the woes of Chinese small-cap stocks weigh heavy on my mind when looking at Chinese solar stocks. And when Trina Solar's audit committee chairman resigned, alarm bells rang in investors' heads.
But Trina Solar has little in common with most of the companies accused of accounting scandals in China. The company has a worldwide distribution network, an actual product you can purchase in places like eBay, and a history of being one of the most transparent solar manufacturers. At the very least, we know the company actually exists (unlike some Chinese small caps accused of fraud).
When Chinese leaders such as Trina Solar, Yingli Green Energy (NYSE: YGE), and Suntech Power (NYSE: STP) react like this to a usually mundane news story, I see it as a buying opportunity.
That doesn't mean Trina is immune to possible problems. It just means I have confidence the stock won't be delisted within months like other stocks. The risks aren't as high as other stocks, and yesterday's response looks like an overreaction on the downside.
Oversupply hits suppliers
GT Solar, on the other hand, fell because research firm Solarbuzz thinks demand for solar manufacturing equipment will fall off in 2012. Considering the oversupply of everything solar right now and falling prices for panels in the first half of 2011, that's very well possible. Manufacturers will probably wait to make capital expenditures until demand catches up to supply.
But GT Solar is now more than just a polysilicon equipment maker. It is now signing big deals for sapphire crystallization furnaces for the LED business, which diversify the business. So GT Solar isn't nearly as reliant on solar manufacturers as it used to be.
Another one bites the dust
The end has been near for Evergreen Solar for quite some time, but it now appears management is admitting that the company's move to China wasn't enough. In an SEC filing, the company said in part:
The Company can make no assurances that it will be able to successfully restructure its debt, but its current expectation is that, in order to significantly deleverage its balance sheet, any restructuring will involve very significant or complete dilution to the Company's existing stockholders, leaving them with a very small percentage of the Company's outstanding common stock, if any.
In other words, if you haven't sold your stock by now you should do so to get at least a few cents out. Management is telling you to waive the white flag.
What it means now
As bad as the week started for Trina Solar and GT Solar, I still like their long-term prospects. I wrote yesterday that it might be time to take some profits from GT Solar, but that doesn't mean I am giving up on the company. The stock has had a long run higher, and as investors re-evaluate what demand for silicon equipment will look like in 2012 there could be better buying opportunities in the future.
As for solar panel manufacturers, I still think First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWRA) provide investors with lower risks than Chinese manufacturers. But if you're building a portfolio of Chinese solar manufacturers, Trina Solar and Yingli Green Energy would top my list. The drop this week could be just the buying opportunity investors were looking for.
