Bookkeeping: Cutting LDK Solar (LDK) and Trina Solar (TSL) on 3 Day Rally

The solar sector has been moribund for months... I've mentioned in the past it will simply take some match to light the fire and these stocks can explode in huge fashion in a very short time. The past 3 days have been very good and today's earning report from Solarfun Power (SOLF) is helping to keep the party going. I am going to sell into this rally and will look to re-up at lower prices. If this were a bull market I'd treat it differently as these stocks can move 50% in 2 weeks when the mood is right, but in a bear market I assume today's gold is tomorrow's trash. Further, many of these stocks are approaching some resistance levels. With that said, when speculation reaches a fever pitch in solar technicals mean nothing. But I am taking a conservative appraoch and selling into these gains.

I am selling much of my Trina Solar (TSL) around $33, and much of my LDK Solar (LDK) north of $29. There still remains a lot of headwinds in this sector but again, speculators don't care about fundamentals - as long as momentum is there, they drive these stocks. I do believe they should enjoy a better 2nd half of 2008 as any candidate will look like a tree hugger compared to the current holder of the White House.

Specific to the Solarfun Power earnings - they did beat estimates by $0.01 but it took $20M more revenue than analysts expected to earn that 1 extra penny - highlighting continued margin pressures. In a situation like that, you need more revenue simply to stay in the same place in earnings - which is the affliction across much of the industry right now. On the positive side Average Selling Prices (ASPs) remain strong; it's simply the cost side that provides the angst. Polysilicon issues remain as a dark cloud over most of the sector, not just now but for the foreseeable future - which makes it hard to be as bullish as I was say 12 months ago on the group. But again, when people get happy in this sector they cannot be bothered with details like that ;) I mean, they are having fun! Solarfun!

That said as I've been saying lately the stocks for the first time in a long time reflect some "value", as they've been beaten to pulp for months on end.

• Solarfun Power Holdings Co Ltd (SOLF), which makes photovoltaic cells and modules that convert sunlight into electricity, reported fourth-quarter results above expectations on increased shipments and selling price, sending its shares up 11 percent.
• For the fourth quarter, the company reported net income of $9.1 million, or 19 cents a basic American depository share. The one analyst who covered the company's earnings had forecast a profit of 18 cents a share, before special items, according to Reuters Estimates.
• Net revenue for the quarter was $135.4 million. Three analysts on average were expecting revenue of $115.3 million.
• Average selling price rose more than 5 percent sequentially to $3.85 per watt.
• The company said it was affected by winter in China in February and continues to be affected by the relatively tight supply and increasing costs of polysilicon, a key raw material used in making solar cells. Solarfun expects these factors to pressure gross margins for the first quarter of 2008
• It expects volumes in first quarter to be at least 35 MW, and average selling prices to remain strong and relatively constant.

Polysilicon appears to remain an issue for the rest of 2008.... but MW shipments really will be taking off - again the same quandry - a lot more revenue but at decreasing profitability as polysilicon eats away at the cost structure. Spot polysilicon surprised us last quarter at $400/kg - yesterday I read a piece where it was up to $475/kg. Ouch. I thought last year at this time, we'd see flat lining or even decreases in polysilicon pricing but that was before an army of panel makers was created in China, creating too much demand.... eventually we will have a glut of polysilicon but eventually keeps getting pushed out a few quarters.

• Solarfun Power Holdings Co. said Thursday it expects improving shipments and strong pricing through the first quarter, but noted that high polysilicon costs will pressure profit margins throughout the year.
• The Chinese solar-power company expects to ship at least 35 megawatts worth of solar products in the first quarter. It noted, however, that severe winter weather in China hindered operations last month and that it "continues to be affected by the relatively tight supply and increasing costs of polysilicon."
• Spot prices for polysilicon have been escalating, Solarfun said, and it expects those trends to continue throughout the year. The company forecast lower gross margins for the first quarter and full year as a result. Chief Executive Harold Hoskens called 2008 "a mix of opportunities and challenges."

Long Trina Solar, LDK Solar in fund; long Trina Solar in personal account