Struggles in Solar Sector Bleed Into 2013; Is There a Bright Spot?

January 17, 2013 10:32 AM EST
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Analysts at Jefferies released a report recently discussing alternative energy. The sector has been rattled by a number of difficulties including weakness in the global economy. Companies in the solar sector were especially hard hit as oversupply rocked a number of stocks in the sector, leading to huge gains on short positions, while buyers suffered. Looking forward, Jefferies thinks the supply demand imbalance is likely to continue.

"With decelerating European demand and an uncertain demand outlook in developing markets, we are likely entering a prolonged period of supply/demand imbalance, potentially worse than 2012, with declining pricing continuing while producers liquidate inventories," said analyst Scott Reynolds.

This could lead to another round of price cuts and more margin pressure, as supplier become increasingly desperate. On the bright side, despite the near-term pain, companies are adapting, and overall solar is becoming increasingly competitive relative to other forms of electricity, says Reynolds.

"Solar is now competitive in many electricity markets and we believe a demand inflection will be subject to improving demand for electricity, favorable policy and capital availability, and fewer new subsidy programs," he said.

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Reynolds thinks First Solar (Nasdaq: FSLR) and MEMC (NYSE: WFR) are trading well below intrinsic values. However, investors should exercise caution as most investors aren't ascribing much opportunity to the companies' long term prospects. Considering the level of short interest, these stock face upside risk from positive news. Reynolds thinks SunPower (Nasdaq: SPWR) remains the most exposed to spot pricing.

The inverter market is a bright spot in solar, thinks the analyst, and he is optimistic on inverter plays Power-One (Nasdaq: PWER) and Enphase (Nasdaq: ENPH). However caution might be warranted in this area as well. Power-One Inc. stock dropped 10 percent on Thursday morning after it cut its Q4 outlook, warning of weakness in Europe. The difficult marco environmental, it seems, has claimed another victim.

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