It was a busy week in the solar industry. Stocks have stabilized somewhat after an up-and-down start to the year. Germany put off a feed-in tariff reduction, and bullish statements have come out of China, so we could see flat demand from last year, which is better than falling demand.
Here is what else caught my eye this week.
The market has lost its mind
I have no idea what investors were thinking about Renesola
Renesola, like other Chinese manufacturers, appears to be taking the "we'll make it up in volume" approach. New flash: More volume in a money-losing product has never led to a profit.
In the fourth quarter, the company had a gross margin of negative 23.1%, even after adding back an inventory writedown. Let me repeat: The company lost 23.1% of the sale price of everything it sold, and that's before paying operating or financing expenses. And the stock is up by double-digit percentages?
Renesola is one of the worst positioned companies in solar, with $571 million of short-term borrowings, horrible margins, and a terrible strategic position as a supplier in an oversupplied solar market.
At least Trina Solar and Yingli Green Energy have posted positive gross margins of 7.1% and 3%, respectively. They aren't all in exceptional shape, but at least they aren't losing money even early in the production process. Sorry, but Renesola just isn't keeping up with the Joneses, and the market has the stock headed in the wrong direction, in my opinion.
First Solar tries to reverse course
The industry hasn't been kind to First Solar
The company also announced a number of sizable projects that align with the company's focus on utility-scale projects.
- First Solar will build a 26 MW project near Tucson, Ariz., that will be owned by NRG Energy
. This continues the relationship between the two companies, indicating that NRG must be happy with the company's performance so far. (NYSE: NRG)
- The company also announced a 20 MW project in Maryland. First Solar will be the solar owner, and construction should be completed before the end of 2012.
- On a smaller scale, the company will build a 250 kW system at the Frank Lloyd Wright Foundation's Taliesin West campus.
Even with First Solar's stock in the dumps, the company marches on with its new strategy.
The only real separator for solar companies in the current environment is module efficiency. SunPower has proved that a more efficient module can lead to decent margins, even if it has to charge higher prices.
Meanwhile, Suntech Power
This doesn't catch the company up with SunPower, but every step Chinese manufacturers can take toward efficiency will be an advantage for them. After all, it's the only real differentiator they have over other Chinese manufacturers.
Foolish bottom line
Solar stocks have been all over the place this year, and that trend will more than likely continue. Germany's move to push off feed-in tariff cuts will help demand, and if new predictions are right, the year might not be as bad as originally thought.
Investors should still stick with high-quality names, putting a premium on gross margins and module efficiency. That's the best way to avoid the next solar failure.
Interested in reading more about solar stocks? Add your favorites to My Watchlist, and My Watchlist will find all of our Foolish analysis on all of your favorite stocks.