Solar stocks surged higher yesterday, led by the company that once led the industry: First Solar
Reading the tea leaves
First Solar first announced that it would close its Frankfurt, Germany, facility in April, causing the stock to go into a tailspin as investors fretted about the company's strategic position and overall solar demand. The news yesterday that higher-than-expected demand in Europe during the second quarter has caused the company to move the closing back by about six months has at least made investors pause for a moment.
The news shouldn't be a huge surprise to those following policy changes. Italy and Germany, the two biggest solar-demand sources in Europe, have both pushed back feed-in tariff cuts under pressure from the industry. Italy even announced a carbon tax that will be used to fund renewable energy production. Demand in Europe won't grow much, if at all, this year, but it isn't going to fall off a cliff the way some expected.
First Solar has always relied heavily on Europe, but it's players like Suntech Power
This doesn't save everyone
The market's reaction with low-tier stocks was overblown at best. LDK Solar jumped 17% yesterday, ReneSola
The delay of feed-in tariff reductions doesn't do anything to raise prices for these companies, which might by extension make them profitable; it will only keep demand elevated, and that demand will most likely go to top-tier suppliers.
A bridge to the future
The industry has been looking for a bridge to markets that are more sustainable over the long term. Those markets include India, China, Saudi Arabia, and the U.S., places where we're beginning to reach grid parity without subsidies. Solar has been given a footing in these locations and is growing, but it hasn't had nearly the base Germany and Italy have had, so overall demand of solar modules was expected to stay relatively flat this year. Even a slight boost in that forecast will help solar manufacturers at the top of the food chain.
I wouldn't expect this to change the overall picture for solar manufacturers, only put a bandage on short-term issues facing the industry. Efficiency will still need to improve, costs will need to come down, and low-tier players are going to have to exit the market for supply and demand to arrive at any sort of normalcy.
What to do now
As we've seen in the past, a short-term bridge to the future has opened just when the solar industry needs it. The impact will be positive for all manufacturers, but I would still stick with those who have industry-leading efficiency and margins if you're looking to buy solar stocks. SunPower is my top pick, with Trina Solar and Canadian Solar following as two top Chinese suppliers.
First Solar may indeed be a value play because of how far its stock has fallen, but I don't expect thin-film to be a leading technology unless efficiency improves dramatically.
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Fool contributor Travis Hoium owns shares of SunPower in a personal and a managed account and has sold puts on SunPower shares. 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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