The Sun Will Come Out Tomorrow!

01/05/2009 11:03 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Paul Goodwin, editor of Cabot China & Emerging Markets Report, says solar energy stocks will come back, and he names a favorite.

Back when crude oil was sailing along at $140 a barrel (and higher), everyone knew that solar cells were the wave of the future. Silicon was in short supply and companies like First Solar (NASDAQ: FSLR) made heroic runs. FSLR began 2007 trading under $30 and peaked in May 2008 at over $300. 

Now, with crude trading around $40, the wheels have come off solar stocks. FSLR dipped back below $100 in November and the stock looks like it will have to fight its way back up through an army of investors who hold it at higher prices. 

I don't do predictions often, but I'm quite confident that we haven't heard the last of solar energy. The market, which is always in the business of looking ahead, is telling us that the beginning of a recovery in the global economy within a year is a pretty safe bet. 

Economic recovery will bring increased use of all commodities, especially oil, which will begin experiencing upward price pressure as soon as people begin driving more and industries rev up again. Demand in China will increase as more cars are sold and stabilizing employment around the world will increase consumer confidence and put people behind the wheel again.

When that happens, the solar industry, which now has dramatically higher silicon production capacity, will start to come back into its own. The twin influences of increases in the price of oil and decreases in the price of solar power will bring the parity point closer in short order.

After six quarters with year-over-year quarterly revenue growth that averaged over 350% and earnings growth that averaged over 650% (latest quarter showed revenue up 241% and earnings up 108%), a small Chinese silicon refiner and wafer manufacturer called LDK Solar (NYSE: LDK) is trading at [under five times earnings].

This is a well-run company with ambitious management that has increased production capacity both internally and through acquisition. 

But it's not time to buy LDK ... yet. 

You need to put this stock on your watch list and pay special attention to the price and the volume action. The stock will have lots of overhead resistance from investors who bought during the solar stampede and who will want to get some of their losses back when the stock starts to rally. A breakout above $20 on good volume will be the signal.

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