Solar's Next Big Winner (ESLR)

Solar stocks have been on fire over the past few years, especially in China. Check out these returns over the past year:

• Trina Solar (NYSE:TSL) is up more than 190%.
• First Solar (Nasdaq: FSLR) is up more than 410%
• Ascent Solar (NYSE:ASTI) is up more than 530%.

Impressive, but there could be a dark cloud on the horizon. Read on as we explore a potential problem solar companies could face, and one company that might have the solution.

It's Not All Fun In The Sun
Solar stocks have been the "dotcomish" winners of 2007 for sure, but the run maybe coming to an end. One of the key ingredients that goes into making solar wafers is a substance called polysilicon... and because of new, elevated demand for solar products, the price of polysilicon is going through the roof.

In terms of simple economics, any time you raise the price of input materials for a product, corporate profits for the manufacturing company come under fire. That's exactly what's happening in the solar arena right now.

Solar enthusiasts received wake up call during the week of October 19 when China Sunergy's CEO Allen Wang mentioned that he was "cautious" on the remainder of the year, because of soaring polysilicon prices, according to the Associated Press. On the same day, Goldman Sachs (NYSE:GS) initiated coverage of Trina Solar with a 'neutral' rating.

Many solar companies were savvy enough to see the polysilicon issue coming and locked in prices before the massive run. Those contracts won't last forever, and when they start to run out, earnings could quickly suffer.

Light At The End of The Tunnel
I think jumping on the solar bandwagon here wouldn't be too smart - with rising polysilicon prices, there's just too much risk out there right now. When stocks have triple-digit returns in less than a year, it's clear that Wall Street is building in expectant premiums in the share price, based on future hopes. And what goes up, must eventually come down - if those expectations turn out to be too lofty.

The likely shakeout in the solar sector could easily go like this:
1) The stocks that have growth priced in take a hit in the coming quarters as rising polysilicon prices shave off some earnings and smack exuberant investors in the face.
2) Solar company executives ramp-up research on solar wafers that require less polysilicon, in an effort to cuts costs.
3) Eventually when solar wafers with less polysilicon begin to surface, the stock prices will probably begin to rally again.

For now though, even though many solar stocks could get another pop, as high-spirited investors continue the solar run, the risk level buying in here may be too much for most people. There's an old Wall Street cliché that applies here, "Missed money is better than lost money."


The Next Big Winner?
In the solar world, there's one company that could be just beginning its run, a company with solar products abating the silicon supply chain -Evergreen Solar (Nasdaq:ESLR). Evergreen is locking down contract after contract with its proprietary String Ribbon wafer technology, which uses less silicon than conventional wafers.

Evergreen Solar has a pretty solid current ratio of 6.3, with almost $160 million in cash. This means the company is unlikely to have any cash-crunch issues anytime soon, even if revenue falters. Really, what we have here is an innovative solar company that is well-positioned for large gains over the next few years, based on its aggressive attempt at side-stepping silicon supply issues. With the stock up about 40% for the year, it certainly looks much more attractive than its competitors, some of which have tacked on triple digit gains in 2007.

For related reading, see Clean Or Green Technology Investing and Go Green With Socially Responsible Investing.


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