Solar rally seen far off as subsidy fears mount

LOS ANGELES (Reuters) - So much for the sun rising on solar stocks.

Investors in solar energy companies have dumped those shares in recent weeks, nearly wiping out three months of gains, due to a murky outlook for government subsidies in the United States and Spain and a weakening global economy that could hamper demand for renewable energy sources.

The sell-off has provided good buying opportunities for shares of SunPower Corp SPWR.O Evergreen Solar Inc (ESLR.O) and Suntech Power Holdings Co Ltd (STP.N), experts said. They warned, however, that the fast-growing sector is likely to see more pain in the stock market before an extended rally like the one in 2007.

"I don't think they've got a lot further to fall, but there is going to be a lot of volatility that will continue," said Carey Callaghan, portfolio manager of the Lebanon, New Hampshire-based American Trust Energy Alternatives Fund.

At issue for investors is a proposal by Spain to cap subsidized solar installations at about one-third of this year's level. Such a cap could hamper solar demand in that nation, which generous subsidies have made one of the biggest solar markets.

Unfortunately for investors, a decision on the Spanish subsidies is still months away, and many expect U.S. tax credits for solar projects will be left to expire until a new president takes office next year.

That leaves several months in which rumors and uncertainty -- not company performance -- are expected to drive trading in solar stocks.

"Investors are very, very nervous and shying at every gunshot," said Edward Guinness, co-manager of the Guinness Atkinson Alternative Energy Fund in London. "But at the same time the growth of the industry and the prices that people are achieving in the market are very, very strong. The big picture fundamentals are about as good as they have ever been."

Indeed, Wall Street analysts have warned clients that upcoming quarterly earnings reports, expected to be uniformly rosy, are unlikely to assuage investor jitters.

"We expect most solar companies to meet or exceed second-quarter estimates and provide above consensus third-quarter guidance," Friedman Billings Ramsey analyst Mehdi Hosseini said in a client note this week. "However... we do not believe such upsides are enough to stabilize solar stocks."

NEARING MARCH LOWS

The cloudy subsidy outlook has helped send SunPower shares down 16 percent, Evergreen Solar's stock down 23 percent and Suntech shares down 19 percent in the last three weeks. All three received a boost on Thursday after SunPower said it would build the largest U.S. photovoltaic solar power plant for Florida utility FPL Group Inc (FPL.N). But as of Tuesday they had been nearing lows they hit in March following a sharp sell-off in solar stocks earlier this year.

First Solar Inc (FSLR.O) has been a relative bright spot in the industry. Shares of the thin film solar maker, which were trading at $275.25 on Thursday, were up 92 percent from their 2008 low of $143.31, hit in January, and had declined less than 1 percent in the last three weeks.

Many say SunPower, Suntech and others now look positively cheap. As of Wednesday's close, SunPower was trading at about 28 times projected 2008 earnings, while Suntech had a multiple of about 10. At the beginning of 2008, SunPower's valuation was about 60 times 2008 earnings, while Suntech's was 38.

Chinese manufacturers such as Suntech and wafer maker LDK Solar Co Ltd (LDK.N) are becoming increasingly attractive, said Guinness.

Battered share prices aside, however, the enthusiasm that had led many investors to pile into solar stocks in 2007 is nowhere to be found. Broader market turmoil is at least partly to blame, analysts said, as investors have shied away from risk.

"The stocks look terribly cheap right now, but who's to say that they don't get any cheaper?" said Signal Hill analyst Michael Carboy. "The market is looking for a reason to not own these stocks."

American Trust's Callaghan is one investor who is holding out for more.

Looking for cheaper ways to invest in solar than through cell and panel makers with lofty valuations, Callaghan has turned to Swiss solar equipment maker Meyer Burger Technology AG (MBTN.S), which trades at about 18 times 2008 earnings, and its U.S. rival, Applied Materials Inc. (AMAT.O).

Still, Callaghan said he'd like to see Applied Materials, which closed at $17.85 on Wednesday, come down to $16 before he takes a bigger stake.

"It's a little expensive for us," he said. "Maybe we're being a little greedy."

(Reporting by Nichola Groom, editing by Gerald E. McCormick)