The solar stocks used to be leveraged energy companies.  The sell-off after the energy bubble popped was as bad as it could get, and now many of these companies look like value stocks.  The problems of today are likely to only be magnified tomorrow.  We have highlighted this on many occasions.  Now comes research from Morningstar that sees weakness ahead in solar stocks.  More weakness that is, ouch.

The nine stocks in the review were First Solar Inc. (NYSE: FSLR), JA Solar Holdings Co., Ltd. (NASDAQ: JASO), Energy Conversion Devices, Inc. (NASDAQ: ENER), LDK Solar Co., Ltd. (NYSE: LDK), SunPower Corp. (NASDAQ: SPWRA), Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), Trina Solar Ltd. (NYSE: TSL), Suntech Power Holdings Co. Ltd. (NYSE: STP), and Norway’s Renewable Energy Corp. ASA (OTC: RNWEF).

As we’ve said for a long time, there is really no reason to believe that the second half of 2011 will be better than the first half. Morningstar agrees. Yes, the market for solar PV will improve, but not by enough to soak up all the new capacity that will be coming online.

Yes, the decision by Germany to shut down its nuclear generation by 2022 has helped, and so has Italy’s decision not to build more nukes. But in the near term, these decisions are likely to have only a slight impact.

Global manufacturing capacity for solar PV modules is estimated to hit more than 40,000 megawatts by the end of the year. Most forecasts, including Morningstar’s, predict a demand of around 18,000-21,000 megawatts. Morningstar sees demand for 2012 solar PV at 19,500 megawatts, still below a level that will support current pricing of around $1.40/watt. Prices are forecast to fall “at least below $1.25/watt by the end of the year.” There are even those who believe $1/watt is possible.

As price/watt falls, only those companies with strong balance sheets and low cost structures will survive the carnage. And Morningstar picks First Solar and Trina as the companies that stand the best chance of weathering the storm. We’ve agreed with those picks all along, and have even suggested that JA Solar might be included.

Over at The Street.com, there is a competing list of alt-energy stocks that offer upside potential as high as 138%.  The list includes First Solar and SunPower, but the other six are all either component makers or equipment manufacturers.

The top value pick is SatCon Technology Corp. (NASDAQ: SATC), a maker of inverters that convert the DC current produced by solar PV panels to AC current that can be transported or fed directly from a rooftop system into the house’s electrical system. SatCon’s 52-week range is $1.90-$5.51, and it’s trading today about an hour after opening at $2.00. If the stock hits its upside potential of 138%, the share price will be about $2.75, still about half what it was at its peak in January. The mean price target for the stock among 12 brokers is $4.75 according to Thomson/First Call.

What makes SatCon stand out is that its devices are believed to dodge the cost pressures of the solar PV modules themselves. That may not be what happens. The so-called “balance of costs” in a solar PV installation is the next place that costs have to fall. The pricing pressure will come from installers, including those owned by solar PV makers, to lower the costs for inverters, mounting brackets, and other items that go into a solar construction project.

The wreckage in the solar PV sector will continue for the rest of this year. Price targets for the entire sector have been lowered, and are likely to go lower still. It’s important to note that hurdling over a low bar is not the same as winning the high jump.

First Solar shares are down about -0.6% this morning, at $123.86, in a 52-week range of $111.40-$175.45. Trina shares are up about 1%, at $19.84, in a 52-week range of $17.00-$31.89. SunPower shares are down about -0.5%, to $17.19, in a 52-week range of $9.61-$22.60, mostly as a result of the final closing of the purchase of 60% of the company’s stock by Total SA (NYSE: TOT). The Guggenheim Solar ETF (NYSE: TAN) is up about 0.3%, at $6.89, in a 52-week range of $6.40-$9.34.

Paul Ausick

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