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Solar Emerges From A Dark Period 

Jessica Rao|Special to CNBC.com
Sunday, 15 Nov 2009 | 6:19 PM ET

The outlook for the solar industry might not be glowing, but its a lot brighter than it was a year ago when financing and demand dried up, abruptly ending what some might consider a golden age.

So, if you want a little exposure to the sun, here’s a snapshot of the sector and what’s hot.

A worker cleans solar panels at a solar photovoltaic power station under construction in Xining of Qinghai Province, China.
Getty Images
A worker cleans solar panels at a solar photovoltaic power station under construction in Xining of Qinghai Province, China.

Supply-Demand Dynamic

The good news, says Collins Stewart analyst Dan Reis, is that the demand for solar modules, a unit of interconnected solar cells, right now is very high.

“Most of the industry is sold out,” he says. That's particularly true of Germany, which represents about 36 percent of worldwide demand. Demand is also up in France, Italy and the U.S., while the new Japanese government is expected to increase subsidies.

In that context, Reis rates Trina Solar, Yingli Green Energy and Canadian Solar as buys.

On the supply side, the shortage of polysilicon, the building block for solar panels, is a thing of the past.

“Large polysilicon makers have been expanding capacity and it all came on line in the middle of last year,” says Kaufman Bros. green tech analyst Theo O'Neill.

So much so that massive oversupply is expected over the next three years. At the same time, however, the dramatic drop in the cost of producing solar panels will make it more competitive with other forms of energy.

Ultimately, this will be good for industry growth because more people will be able to afford solar, but will likely hurt some module companies in the near term.

Sectors And Players

As panel prices fall, consumers will eventually start to buy and it will be good for the companies that install solar panels like Akeena Solar , Real Goods Solar , Premier Power and Phoenix Solar.

“There is no reduction in how much it costs to install solar on your roof, says O’Neill.

Gordon Johnson, who heads alternative energy research at Hapoalim Securities, says the price collapse in modules will help another part of the solar food chain.

“You want to buy the guys who benefit from lower pricing like the guys selling equipment to the Asian module manufacturers who are aggressively expanding capacity. Those guys are set for massive gains,” he says.

He says equipment from companies like Centrotherm and Amtech Systems iscurrently in high demand.

Another indication that solar is an industry that will grow, is the big name players who are getting involved.

General Electric (the parent company of CNBC) has a noteworthy start-up in Colorado called PrimeStar Solar.

“They have ordered production equipment so I am expecting that they are going to become a force in the industry at some point,” says O’Neill.

At the same time, analysts expect consolidation as some of the smaller inefficient players are absorbed or exit their business.

Investing Options

The solar industry may be young, but it's diverse, dynamic and competitve enough to make stock picking a perilous exercide. For that reason, some experts suggest ETFs as an entry point for retail investors because of their broad diversification.

Solar Market Heating Back Up?
Insight on the solar energy market, with Dennis Jilot, STR Holdings CEO and CNBC's Erin Burnett.

“I would surely use an ETF because sometimes it doesn’t matter how good the numbers look or how you think the company is managed," says the editor of ETF Trends, Tom Lydon. "It doesn’t always translate into company A outperforming company B.”

Lydon suggests using a trend-following strategy.

“By having a buy and sell discipline, I use the 200-day moving average, it can help keep you during potential long-term up trends and have you out before you lose too much,” he explains.

He cites Claymore MAC Global Solar Energy Index ETF and Van Eck's Market Vectors - Solar Energy ETF as two choices.

Reis, on the other hand, doesn’t like solar ETFs because they tend to be weighted toward large companies.

Continental Drift

Though there's a lot of talk about developing nations struggling to implement sustainability practices, they seem to be doing fine in embracing the alternative energy business model.

One of the most interesting things that is going right now, says O’Neill, is happening at panel manufacturer Evergreen Solar .

The company just announced that it is disassembling a relatively new Boston-based factory and relocating it to China because it will be a lot cheaper to operate there.

“It’s emblematic of what’s happening in the solar space,” he says, with many companies, such as First Solar , having operations in Asia.

China, in particular, is putting its money where its mouth is by having a coherent energy policy in place. The U.S., however, doesn't have one, so business is being dismantled and sent to China, says O’Neill.

“I don’t blame Obama for it," he says. "But the longer this goes on without having any kind of climate bill, the more likely it is that the Chinese will continue to eat our lunch.”

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