It seems like we can't go a day without hearing about a new plant in solar, whether from First Solar (Nasdaq: FSLR) yesterday, or Yingli Green Energy (NYSE: YGE), which announced another 700 MW today. But what about our smaller, more underappreciated solar competitors? We can't forget them in the booming solar business.

One of my personal favorites, Evergreen Solar (Nasdaq: ESLR), has gone on a tear lately, showing the market that it thinks the company can survive. But is this the move of a crazy market, or something more?

Yes and no
Evergreen is benefiting from increased confidence that the solar sector will grow more than originally expected in 2011. In general these smaller companies are playing cost catch-up to the bigger players in the market. Therefore they're not the lowest cost and have to rely on overall solar demand increasing to capture sales. As the market gets more confidence in 2011's prospects, the entire sector has moved up.

What I'm looking for in solar is an improving margin, indicating that costs are falling faster than module prices, and an attractive price/sales ratio, which eliminates gross margin differences across companies.

Company

Price/Sales

Q2 2009 Gross Margin

Q2 2010 Gross Margin

Change

Evergreen Solar 0.69 1.9% 8.6% 6.7%
Canadian Solar (Nasdaq: CSIQ) 0.63 20.2% 13.6% (6.6%)
Solarfun (Nasdaq: SOLF) 0.59 (6.2%) 21% 27.2%

Price/sales is pretty even across the board, but it compares favorably to Yingli's price/sales of 0.94 and First Solar's 5.34. If we look at the upside of each of these companies, Solarfun is nearly at the same cost per watt as its larger competitors, while Canadian Solar just isn't keeping up. Evergreen Solar, on the other hand, had a nice improvement in margins, and it's still cutting costs at a rapid pace by outsourcing module production and moving some operations to China.

As exciting new technologies move into the industry, we will have to watch for strategic changes. But for now, I think Evergreen Solar still provides the best upside potential for investors. Of course, that's dependent on strong solar demand until costs fall in line with competitors.

Who is your favorite solar company? Leave your pick in the comments section below.

Interested in reading more about Evergreen Solar? Click here to add it to My Watchlist, where we'll aggregate all our Foolish analysis on this stock.

Fool contributor Travis Hoium is long shares of First Solar. 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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