Desperately Seeking Solar’s Safe Haven

J.P. Morgan analyst Christopher Blansett created some buzz in the solar sector Monday with a note urging investors to make a “flight to safety” — noting that companies will have to weather “reduced solar subsidies next year, higher solar system borrowing costs and increasing competition at all levels of the solar PV food chain.”
Those factors, combined together, could damage the weaker players in the industry.
And investors, having stomached several months of volatility — most of it downward — are surely craving some safety. Just this week, MEMC cut its own forecast for this quarter. The solar-wafer manufacturer expects $500 million in revenue (down from $570 million) and its gross profit to be 48 percent of profit (down from 50 percent).
MEMC’s darker forecast follows another one that made even bigger waves last week: JA Solar (JASO), whose executives weren’t content with slashing its own guidance but went a big step further and used a word that can trigger a cascade of sell orders: “At this moment the market reaction has been panic,” JA’s CEO Samuel Yang said.

Yang meant to say solar manufacturers had ramped up spending right before the global economic turmoil, causing a solar goods glut. But all people heard was that word “panic.”
Hence the deeper appetite for safety in a sector once beloved for its high-risk/high-return potential.
Morgan’s Blansett recommends companies like First Solar (s FSLR) and SunPower (s SPWRA) for their strong balance sheets and ability to stay cash flow positive in a tough market. He suggests avoiding companies like Evergreen Solar (s ESLR) and Ascent Solar (s ASTI), both of which he downgraded.
Evergreen tumbled 9 percent to $2.91 Monday and Ascent descended 4 percent to $3.69. But oddly, First Solar and SunPower also declined, respectively, 4 percent to $110.56 and 3 percent to $27, respectively.
That might have something to do with Blansett. As Eric Savitz at Barron’s noticed, Blansett is recommending First Solar and SunPower, but at much lower prices.

One slightly odd aspect to Blansett’s call is that he has price targets on the stocks he likes that are near or below current levels: for FSLR, his target is $102, while for SPWRA, his target is $28.50. By way of explanation, he writes in his research note that “we do not see First Solar shares as completely immune” from the issues facing the industry, and that he remains cautious on overall sector fundamentals, but that FSLR should be a relative outperformer.