Solar stocks in for a dose of reality after runup

By Nichola Groom - Analysis

LOS ANGELES (Reuters) - Solar stocks have skyrocketed since March on optimism about government efforts to stimulate demand for the clean energy source, but analysts warn that with earnings season beginning, investors in the high-flying sector are in for a strong dose of reality.

Makers of solar panels were virtually unscathed by the economic downturn until late last year, when funding for all types of projects dried up, green ones included.

Solar companies' shares, however, were battered throughout 2008 by concerns that a pullback in solar tax breaks in Spain would lead to a flood of solar panels in the market, driving prices and profits downward.

This year, that very scenario has played out, with a global recession and credit crunch making matters worse. Until March, solar stocks continued their sell-off, with many hitting 52-week lows early that month.

Since then, however, investors have snapped up solar stocks, driving share values to double in some cases, in the hopes that government efforts to boost solar power in both the United States and China would help restore the industry's booming double-digit growth.

Such a sharp and sustained rally, however, has left "many specialist investors scratching their heads," Commerzbank analyst Robert Schramm said in a note to clients. "The negative fundamentals have not begun to change."

Shares of Chinese solar companies have been among the biggest gainers since China said in late March that it would launch a generous subsidy for solar power systems. That nation's top solar panel maker, Suntech Power Holdings Co Ltd, more than doubled to close at $12.89 on Monday after hitting a lifetime low of $5.09 on March 2.

Trina Solar Ltd's stock has also more than doubled since early March, while shares of LDK Solar Co Ltd and Canadian Solar Inc have soared over 90 percent from lifetime lows hit last month.