Bank of America Starts Solar Sector

I am not sure how (on valuation) you could give a buy to anything but Trina Solar (TSL), but Bank of America is out this morning with a sector call. Of interest, they say stocks of polysilicon will remain a challenge through 2008 and beyond; hmmm... part of the reason these stocks started rallying so hard was Suntech Power's (STP) contention it could not only access polysilicon, but at very low prices. Interesting dichotomy. The market will have none of this logic - stocks continue to rally unabated. I also agree with the limited differentiation thesis the analyst says (as I wrote yesterday, at it's heart this is a commodity business) but again speculators will have none of this - everything must go up. Everything. (again I am a bull on this sector, just not anywhere near these valuations)

LDK Solar (LDK) was not mentioned but on its rally back to $40 I am cutting some of this position - I continue my "rather safe than sorry" in this market; with these companies reporting soon I'd like to see more numbers before assessing how to approach this sector. As I stated yesterday when I sold off Suntech Power; this sector is in full frenzy and with earnings coming up, I expect some of the smaller companies in the sector to really struggle - right now no one cares, and no one might care after they report - but there is a reality behind this story and the market is now ignoring reality. That makes it dangerous to me.

• Banc of America Securities started coverage of six China-based makers of solar power product and said the availability and pricing of polysilicon, the primary feedstock for over 90 percent of solar modules, will remain a challenge in 2008 and beyond.
• Lower cell and module prices versus comparative product from outside of China, substantially higher module supply and limited differentiation among Chinese manufacturers over a longer-term period could also pressure margins, it added.
• BofA started China Sunergy Co Ltd (CSUN) with a "sell" rating, saying the company's 2008 silicon supply and pricing exhibits the greatest risk of all the U.S.-listed solar cell manufacturers.
• The brokerage started Canadian Solar Inc (CSIQ), Solarfun Power Holdings Co Ltd (SOLF) and Yingli Green Energy Holding Co Ltd (YGE) with a "neutral" rating.
• It started JA Solar Holdings Co (JASO) with a "buy" rating, saying it expects JA Solar to stack up well due to relatively strong visibility on silicon supply, scale advantage and low fixed costs.
• It also started Trina Solar Ltd (TSL) with "buy" rating, saying it expects Trina to solidly compete with its solar peers due to its strategy of vertical integration, gross margin improvement in fourth quarter of 2007, and valuation.
• The brokerage raised its price target on Suntech Power Holdings Co Ltd (STP) to $55 from $40. It said based on scale advantages, the company expects to lower its fixed costs from an industry low.

Once again, take everything analysts say with a grain of salt, but I have to say in this case I agree with the comments in general and about the specific commentary on each company. You can see my bearish take on China Sunergy (CSUN) back in August (Pain for Smaller Players in the Solar Sector), but the market ignores fundamentals in this sector right now and takes the bad companies up with the good - this is classic sign of mania/bubble within the sector. I would also urge extreme caution on Canadian Solar (CSIQ) as it's been nothing but a disappointment since going public as has Solarfun Power (SOLF), although the latter actually has some positive developments if their management could ever get it together.

But in manias - everything goes up - bad, good, ugly, pretty, big, small. Reality will hit this sector eventually, and the smaller you are the tougher it will be to compete in a commodity business no matter the winds you have behind your back from the sector as a whole. I've cut all personal positions in this sector as well, since it's all momentum trading at this time.

Long LDK Solar in fund; no personal positions