I almost can't believe my eyes when I look at solar stocks every day. Across the board they've posted solid stock gains since 2012 began, a stark contrast to a dismal 2011.
But sometimes beaten down stocks bounce for no particular reason. This time, that isn't the case for solar stocks, and the drivers of the bounce may be leading to a healthier industry for the long-term.
Germany talks, but doesn't cut rates
The short-term driver for solar stocks is a feed-in tariff (FIT) rate in Germany that still has installers rushing to install solar before the rules change. A one-time cut along with a cap on installations was proposed to lawmakers this week, but a deal was never reached. According to analysts, that means capacity of 4 GW can probably be expected in the first four months of this year.
That's a relief for manufacturers like Yingli Green Energy
But the leveraged returns in the fourth quarter of 2011 and the first quarter of this year will come further down the supply chain. LDK Solar
China becoming a big player
The hope for Chinese solar demand has been building for months as the country institutes a new FIT and tries to find demand for its oversupply of modules. Recently, industry executives have confirmed what we've been projecting, saying they expect 2012 to be a turning point for the country.
Suntech CEO Zhengrong Shi said the country would add 4 GW of solar this year, while Trina Solar CEO Jifan Gao upped the ante and said 5 GW would be installed.
Grid parity within reach
The major turning point for solar companies has always been projected to be when they reach grid parity. Well, that far off goal seems to be coming closer to reality.
Suntech thinks it will reach grid parity with fossil fuels by 2015, and by some accounts solar energy has already passed parity in some places.
Ironically, it's strong demand in China and Germany this year that may keep us from grid parity. Last year, the cost to install solar fell dramatically, driven by low demand and falling prices. Those prices need to fall further for grid parity to be reached, something that won't happen if manufacturers are sensing strong demand from the world's biggest markets.
Consolidation is coming
A strong start to the year will not only tell us who is able to capture market share, but also who is last in line among solar manufacturers. When demand was weak in the third quarter last year installers flocked to quality, leaving lower tier manufacturers behind. If some of these manufacturers can pick up sales in a strong market they'll have to start looking for alternatives.
Even the Chinese government is starting to push for consolidation in the industry. Trina Solar CEO Jifan Gao thinks that the 10 biggest manufacturers will own 80% of the market by 2015, up from 55% today. That will require not only consolidation, but some failures in the industry as well.
No matter how it happens, the industry will likely be dominated by a few big names in years to come.
What to do now
I think fourth-quarter results will be strong and early indications are that 2012 will start off with a bang as well. While that may mean the biggest boost for low-tier manufacturers in the short-term, I still see them as the highest risk in the long-term. For investors looking to make long-term bets, I think large manufacturers with strong balance sheets are the stocks to buy. In China, that means Yingli Green Energy and Trina Solar. In the U.S., SunPower is the top company because of its wide lead in efficiency.
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Fool contributor Travis Hoium owns shares of SunPower and manages an account that owns shares of SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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