As Solar Heats Up, “Tier 1” Companies Continue to Draw Interest (LDK, TSL)

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02:45:23 pm on February 2, 2011

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The year of 2010 will be remembered for its uncertainty and bouts of risk aversion, but it also ended with a rise in values across the board, signaling a potential economic recovery on a global scale. The major benefactors appeared to be shareholders of portfolios heavy in commodities, as run ups in value there were steep and unsustainable. As 2011 dawned, interest appears to have returned to the green sector, especially solar stocks, as one industry leader reported better than expected performance for the previous quarter. The subsequent rise in solar share values hit over 40% for a few stocks, only to settle back to something more reasonable in the 25% range for January alone.

The solar industry has been going through “growing pains” over the past few years after witnessing a doubling of growth back in 2009. Spurred on by many government incentives across the globe, especially in Spain and Germany, the demand for all forms of solar technology ignited a flame under a host of public solar companies. Over capacity was the result, as well as numerous corrupt business practices in a variety of markets. Based on the recent earnings release of LDK Solar, the largest “Tier 1” company in the industry, the problems of the past are, hopefully, well behind us. LDK’s stock value has slumbered over the past two years, but it suddenly rose from the ashes in January posting near net-30% gains.

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Not all Tier 1 companies have had it as rough as LDK over the past two years, as evidenced by the comparative chart presented below:

Trina Solar, or TSL, the acknowledged low-cost provider in the industry, has faired well over the period depicted above, handily beating out the S&P 500 Index and LDK as well, although its rise in value was predominantly back in 2009 when all was perceived as “full speed ahead”. With over-capacity issues apparently dealt with, the industry outlook is for outstanding growth over 2011 and 2012, estimated at over 40% per annum. Since LDK and TSL are both Chinese companies, those familiar with currency trading will understand that a weakening Dollar could also lead to more appreciation in value as well.

Forecasts for the future do take into account a lessening of global incentives, but robust demand is returning as fuel prices are also expected to rise. An increase of sales in Germany, the world’s largest market for solar, is also projected. Analysts point to the dependence of Germany on Russia for its supply of natural gas energy as the driving factor. Memories have not faded of deprivation tactics deployed in World War II. Growth is also expected to ramp up in the United States due to incentives and demand. California is but one of twenty-nine states that have solar initiatives planned for the near term.

Investors have learned that the fate of Green Stocks and renewable energy efforts are tied to the price of oil. A weakening Dollar will also increase the price of gasoline at the pump and fuel the demand for alternative energy sources. However, the price of oil has barely budged in January, a fact that makes the run up in solar stocks that much more impressive. The earnings announcement for LDK was also impressive in its own right. Increases ahead of expectations were achieved in multiple areas, from revenue to shipments to operating margins, all very favorable.

If the industry leader is profitable, then other “Tier 1” companies, TSL included, will most likely post positive results. Many lesser known companies could also surprise us as well. As with any investment, seek professional advice before making any decisions as there is always a risk involved.

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