Play Solar Strength This Summer

What’s the story lately with alternative energy stocks in this ragged market? Is big growth making this group a good option for diversification these days? Zacks senior analyst Jon Kolb was on-hand to let us know.

Ahead of second-quarter earnings season, what sorts of alternative energy stocks would you recommend?

Just a couple weeks back I initiated coverage on ReneSola, Ltd. (SOL) as a Buy. The China-based company, incorporated in March 2006, is engaged in the manufacture and sale of solar wafers and related products. In April 2006, the company discontinued the sale of solar modules and concentrated on the production and sale of solar wafers.

Are you positive on the company mostly because you see strength in the solar energy industry?

Through its short history, ReneSola regularly adapted to changing market dynamics. The company is aggressively ramping up its polysilicon and solar wafer production capacities.

Going forward, increased captive generation of polysilicon will improve its cost structure and enable wafer capacity expansions. Globally, rising solar wafer sales, along with escalating crude and long-term supply agreements, should collectively generate significant earnings growth. That said, SOL is a play on growth in the solar industry. ReneSola’s customers include global manufacturers of solar cells and modules, such as JA Solar (JASO), Motech Industries, Solarfun Power (SOLF), Suntech Power (STP) and Topco Technologies.

Can you tell us about another solar panel company that you have covered a longer time?

Well, First Solar (FSLR) was upgraded to a Buy recommendation back in mid-April. And as I said in my latest research report, FSLR’s recent bullishness is buoyed due to the steep rise in the price of oil.

Earlier, after climbing as high as $280.91 a share in December 2007, FSLR plummeted to a low of $165.60 in February 2008. Subsequent to that, FSLR recovered greatly and is currently trading near its yearly high.

Sounds like these shares might be mighty risky.

FSLR’s reliance on low cost thin-film cells helped the company avert a silicon shortage which ravaged the bottom lines of other solar peers. As a result, the company was able to register consistent improvement in its bottom line in stark contrast to its silicon cell peers.

Accordingly, we maintain our Buy recommendation on FSLR with a six-month target price of $333. Price appreciation to our near-term valuation target represents 15.6% upside potential.

What would you call your biggest success story among your solar industry coverage this year?

We first put a Buy on Energy Conversion Devices (ENER) back when it was trading around $30 per share. Of course, this was before the latest “oil-shock,” or whatever one wants to call it.

Energy Conversion’s operating segment, United Solar Ovonics, has a total annual production capacity of 118MW [megawatts]. Ongoing expansion plans will increase United Solar’s manufacturing capacity to 178MW by the first half of 2009 and to over 300MW per annum by the end of fiscal 2010.

You don’t worry that the share price will level-off significantly?

We remain optimistic about the company’s long-term potential success in the high growth alternative energy industry, given increased activity in solar power projects, and progress toward sustainable profitability in ENER’s current fiscal year 2008.

Any final words on this sector at this time?

The investment outlook for the alternative energy industry is bullish, with significant growth potential over the next 5-10 years. As with any burgeoning industry segment, there will likely continue to be rapid changes within individual names as new technologies continue to evolve, although the longer-term trend is favorable for diversified long-term investors.

Those investors seeking to capitalize on the on-going efforts to reduce both domestic and global dependence upon the dominant oil and natural gas producing regions of the globe may wish to focus on emerging and established firms engaged in wind power, solar/photovoltaic, solar thermal, geo-thermal, hydro, marine and biomass-based energy sources. Dozens of such companies exist within the US and many more internationally, ranging from micro-cap ventures to large-cap multinationals.

Jon Kolb is a senior analyst covering the alternative energy and utilities industries for Zacks Equity Research.

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