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Don't Be Burned by Solar Stocks

It seems the sun was shining on solar stocks last week, as the group posted a 6.6 percent gain while the Standard & Poor's 500 Index saw a mere 3.9 percent increase. News that China could spend up to $750 billion over the next 10 years to develop cleaner sources of energy helped push the group higher as well, and Wall Street analysts started giving out the buy ratings. But Cramer on Friday said that holding onto solar stocks is not a bright idea.

These stocks are too risky, he said, because the solar business is "one of the most heavily subsidized industries on earth," meaning they're dependent upon government largesse. When those subsidies get taken away or are reduced, he thinks solar companies' earnings estimates will fall sharply and their stocks will sell-off. And in this uncertain global economy, Cramer thinks subsidy cuts are inevitable and called the risk "simply enormous."

Germany, for example, has accounted for nearly 60 percent of all photovoltaic installations in 2010, Cramer said. Earlier this year, the country announced it may make three subsidy cuts. In August, France said it would cut its subsidies by 12 percent. Italy also plans to reduce subsidies, Cramer noted, and Spain announced cuts last year.

Solar's other turnoff, Cramer said, is that it's an "increasingly commoditized industry." He said there are low barriers to entry, and it's hard to differentiate one company's product from another's. As a result, the businesses engage in a price war, which is why most solar companies gave guidance forecasting lower average selling prices. He thinks there will be additional downward pressure on prices, as supply starts to exceed demand because companies continue to add capacity in what's thought of as a "hot industry."

Cramer also thinks investors are overly bullish on this space.

"The market’s looking at the glass like it’s half full when it’s actually two-thirds empty," he said, noting that several solar companies recently reported big earnings misses.

"I know you homegamers are enamored of the solar stocks, but I think they are unsafe at any speed in an environment where solar’s biggest backers are slashing subsidies left and right," Cramer said. "Use the strength that we just got from last week’s rally to sell all things solar."

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