Solar companies have seen a big bounce from recent lows and it seems as if something may be brewing if the underlying will cooperate.  The most significant event in the solar sector this week was probably the dip in shares of First Solar Inc. (NASDAQ: FSLR) to below $100/share. First Solar is the largest company in the industry and its fortunes have an equally large impact on expectations for the entire sector. And if First Solar truly is the bellwether for this sector, the company may reset expectations for the whole group, especially following a rating upgrade from Jefferies & Co.

Other solar stocks making news this week included SunPower Corp. (NASDAQ: SPWRA), Trina Solar Ltd. (NYSE: TSL), LDK Solar Co. Inc. (NYSE: LDK), JA Solar Holdings, Co., Ltd. (NASDAQ: JASO), ReneSola Ltd. (NYSE: SOL), MEMC Electronic Materials, Inc. (NYSE: WFR), and Yingli Green Energy Holdings (NYSE: YGE).

An analyst at Jefferies raised First Solar shares from ‘Hold’ to ‘Buy’ and raised the company’s target price from $115 to $132. That indicates that First Solar has finally managed to make investors understand that explosive growth is no longer in the cards, but that steadier growth is. The company’s project pipeline and its low-cost leadership in the sector position First Solar well for the relatively austere days ahead.

SunPower did not fare as well. The company lowered its profit forecast as a result of eroding prices for solar panels. JA Solar, Trina, and MEMC have given similar warnings.

ReneSola reported earnings on Wednesday and revenues fell more than -30% from the same period a week ago, again driven by falling gross margins. The company also shipped less product year-over-year by -10%. Even worse, the company’s forecast for gross margins in the third quarter are just 6%-8%, down dreadfully from second-quarter gross margins of 18.4%. In the first quarter the company’s gross margins were 28.2%.

Renesola had already announced the day before that it plans to grow production capacity by a factor of three next year and to cut its raw materials costs by producing some silicon wafers of its own. The overall effect of the two announcements lifted Renesola shares by about 30% between Monday’s opening price and Friday’s quote at around noon.

MEMC got a boost from a report of insider buying of the company’s stock. The CEO and five more company officers bought more than 450,000 shares on August 5th. The news hit the market on August 9th, and the shares jumped 19%.

If in fact First Solar has finally been able to manage investor expectations for the company’s shares, we should soon be able to see some firming up for the other solar players. SunPower shares are down about -5% for the week primarily on the company’s weaker outlook and the fact that it faces the most challenges to its margins. Until the company can show that it has its costs under control the shares are likely to continue to see-saw at best.

The Chinese solar makers face a similar margin compression problem, and Trina and LDK are also dealing with some questions about their accounting practices. It’s difficult to believe that anything but hope for these stocks is what is giving them a share-price boost. LDK’s shares are up nearly 20% on the week for no apparent reason, and JA Solar’s shares are also up about 12%. The only explanation for these increases in share price is that investors still treat the sector monolithicly, believing that good news or performance or expectations for one company washes through the whole sector. Once that belief is finally put to rest, the Chinese solar stocks will at last find a proper level of expectation. And that level is very likely going to be lower than it is now.

For the week ahead, First Solar could well continue gathering momentum. The company has received approval to begin construction on its Desert Sunlight project in southern California, and it is still waiting for a final decision on a $1.88 billion loan guarantee for the project. That approval, when it comes, will give the company another shot in the arm.

The two main ETFs that follow the solar sector are the Guggenheim Solar ETF (NYSE: TAN) and the Market Vectors Solar Energy ETF (NYSE: KWT). TAN has gained about 9% on the week and KWT is up about 11%. Both are thinly traded and are currently posting a negative return for the year to date. But both are up more than 2% today, with TAN at $5.73 in a 52-week range of $5.08-$9.34 and KWT at $8.29 in a 52-week range of $6.97-$14.33.

Paul Ausick

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