By Jerilyn Klein Bier

Wall Street hates solar stocks. The equities of industry leaders such as First Solar, SunTech Power Holdings, Trina Solar Ltd. and Yingli Green Energy have plummeted roughly 55% to 70% this year. The Guggenheim Solar ETF, which uses the MAC Solar Index as its tracking index, is down nearly 50% year-to-date. In comparison, the roughly 20% decline this year at SunPower Corp. seems almost respectable.

And those numbers are tame compared to the industry's astounding descent into hell since they peaked in the late-2007/early-2008 period. SunTech, for example, went from $88 in December 2007 to a recent $2.75. SunPower went from a November 2007 high of $152 to a recent $10, while First Solar--cited by many analysts as the best solar company--crashed from $317 in May 2008 to a recent sub-$50 price. And so it goes throughout the industry.

Factors behind the plunge include overcapacity, strong pricing pressures, compressed margins, and subsidy cuts by many countries. And U.S. companies continue to face intense pressure from low-cost Chinese rivals. In addition, the recent failures of scandal-ridden solar-panel maker Solyndra LLC and two other U.S. companies, which cast a negative spotlight on solar woes, have added to investor skittishness toward the sector.

Still, the solar industry remains well-liked by some investors who see it as a key player in the global quest for renewable energy sources.

"Solar has had its hiccups but it's also poised for impressive growth," says Lily Donge, senior analyst for environment and climate change issues at Calvert Investments. "We're in it as a long-term investment." Solar investments comprised the largest sub-sector holding (22% of assets) of the Calvert Global Alternative Energy Fund (CGAEX) as of August 31.

"In the short term there may be volatility and some weakness in the U.S. market, although the regulatory easing out of subsidies in the U.S. should already be factored into the market and revenue outlooks for these companies," Donge says. "In the long term, solar is an incredibly viable technology and is already moving towards cost competitiveness."

She notes the general market price for solar photovoltaic (PV) power has fallen roughly 70% since 2008 because the Chinese have greatly boosted supply. Greater efficiencies and less volatility in the supply chain, which are signs of a maturing sector, are other reasons she expects solar to become more of a go-to energy source.

Looking For Catalysts
Donge believes catalysts for the sector will come from strong regulatory signals across different countries, continued demand for renewables, and increased liquidity and financing to make large projects viable. The industry in the U.S. could also get a boost from a national renewable or clean energy standard, or from stronger state standards requiring a certain percentage of renewables be produced. Half the states already have Renewable Portfolio Standards (RPS), says Donge, who is working through the Investor Network on Climate Risk to get policy makers to consider a national standard.

And the increasing adaptability of solar cell use bodes well going forward. "It's not just your rooftop anymore," says Donge, adding that the promise of flexibility and maneuverability could make it very accessible for emerging markets where demand for renewables is expected to grow fastest.

Calvert's largest solar holding is solar-power module maker First Solar (FLSR), which Donge says has the lowest production costs in the industry thanks to its proprietary thin-film semiconductor technology. But she cautions it may have to scale up or find new growth channels--such as emerging markets--if European demand shrinks further.

"First Solar is a rock star on environmental issues," adds Donge. More than 90% of its PV modules can be returned free of charge and recycled into new equipment. It also has a strong commitment to social, health and safety issues.

MEMC Electronic Materials (WFR), a global leader in semiconductor and solar technology, is another top holding in CGAEX. It gets technology efficiencies from its semiconductor business and also has a history of strong ESG and EHS (environmental, health and safety) practices, Donge says.

Solar manufacturers that ignore the risks of the highly-toxic hard metals they use could face long-term consequences, she notes. In September, a major protest was held outside a Jinko Solar Holdings factory in China that polluted a nearby body of water.

Ridiculous Valuations
The folks at the Guinness Atkinson Alternative Energy fund believe that alternative energy companies across the board have been unfairly punished during the recent sell-off in global equities. And none more so than solar stocks.

They note that, at least among certain solar companies they follow, the dynamics are different from 2008 when solar stocks went down the tubes. They say the better companies have stronger balance sheets with more cash and less debt than in 2008, coupled with larger manufacturing capacity at lower cost, improved inventory management, better brand management, and stronger distribution relationships.  

"We therefore believe that recent market volatility has led to a select number of solar companies becoming significantly undervalued," the fund's managers said in a September report.

"We are referring here to lowest cost Chinese solar manufacturers which are taking market share from Western peers," co-portfolio manager Matthew Page said in a follow-up email.

He cites Trina Solar as an example. It trades at a price-to-book ratio of 0.5, has $630 million on the balance sheet and trades at a P/E multiple of 9 times expected 2012 earnings. "They make very high quality modules and have established sales channels into key markets," Page said.

Yingli is another example. It trades on a price-to-book ratio of 0.4, has $887 million in cash and trades on a P/E of 13 times 2012 earnings expectations. "It is integrated across the manufacturing value chain," Page noted.
"Given their low costs structure and market share we believe they will weather the current turbulence and should be trading on more reasonable valuation metrics when sentiment turns," Page said.

Cautious Optimism
London-based Climate Change Capital Ltd. (CCC), an investment manager and advisory group specializing in opportunities created by transition to a low-carbon economy, also remains enthusiastic about solar.

"As costs continue to fall, the size of markets where solar is cost competitive with fossil fuels will grow larger and larger," says Ben Caldecott, head of policy at CCC. "This is very exciting, especially in least-developed countries, where decentralized energy is essential for development."

He adds that a significant attraction of solar--whether PV or thermal--is that it's a scalable technology that can be deployed in a range of ways to suit local needs; whereas wind is not nearly as flexible, especially at a smaller scale.

Nonetheless, Caldecott says investors need to consider several factors. For starters, solar needs continued and significant real cost reductions from technological improvements, not structural oversupply. And comparative advantages between solar producers arise--and then vanish--faster than in many other industries. Additionally, Chinese state-owned banks are providing ample sources of cheap capital for that country's domestic solar industry.

"Will the U.S. or European governments step up in the same way?," he asks. "I doubt it."

These are dark days for solar. But if solar proponents are correct, the long-term forecast could be sunnier. And that could make some of these stocks enticing at current valuations.