To whom much is given, much can be taken away. That's a fairly simple concept, but it's the perfect analogy for what is happening in the solar industry right now.
After years of rapid growth on the back of heavy government stimulation, the solar industry is being crushed under a wave of lower subsidies, as cash-strapped countries across the world look for ways to cut spending.
That list includes China, the world's No. 1 solar producer, which spends billions each year stimulating the industry. In May, the Asian country cut its solar subsidies by 21% to 5.5 yuan per watt from the previous 7 yuan per watt. This sharp cut will have a big effect on consumer affordability, and on new and pending installations.
The same trend is also appearing in Europe, as the region continues to battle its own financial demons. Solar installations in England fell by 90% in the weeks after the country cut its solar subsidies in half in April, according to U.K.'s Department of Energy and Climate Change.
Germany was also on the same path to solar austerity early in the year, with Chancellor Angela Merkel attempting to pass legislation that would introduce record cuts to solar subsidies. Local governors concerned about its negative effect on jobs and the economy have since blocked the measure, but it's another signal that solar subsidies are in the crosshairs of counties and politicians looking to cut spending.
Finally, the United States is also an important driving force, with the federal government and all 50 states carrying policies, rebates and tax credits to support the solar industry and stimulate demand for additional installations. But the United States has seen its deficit and total debt explode in the past few years, which represents another very big threat to the heavily subsidized solar industry. For the time being, the United States remains committed to stimulating its solar industry, but if the federal government has to implement spending cuts in the next few years, then peripheral areas such as solar subsidies will be one of the first places targeted.
Clearly, the solar industry is built upon a big mountain of government support. And now that the handouts are being threatened by austerity and financial weakness, the industry is suffering huge losses and cratering under a lack of sustainable demand.
The three stocks below have already seen big losses from the shift in government support, but it's still not too late to sell them and avoid more downside (or even short term, if you're feeling bold).
Here are the details...
1. Trina Solar Ltd (NYSE: TSL)
Trina is a photovoltaic module maker out of China with a market cap of just $314 million. This lower value has to do with shares falling 83% in the past two years and 34% so far in 2012, as sales and earnings have collapsed on lower subsidies.
In just the past 90 days, full-year earnings projections have fallen from $1.25 per share to a loss of $2.76 per share. This is a clear signal of a tectonic change in the solar landscape that spells big trouble for the solvency of a company that is heavily reliant on government subsidies.
A $4 share price might be tempting to a lot of investors looking to cash in on alternative energy, but longer-term, this company is completely worthless without a sustainable market. Take a look at the devastating losses in the past two years.
2. LDK Solar Co Ltd. (NYSE: LDK)
LDK is another Chinese solar company that has been rocked on falling subsidies, with shares down 80% on the year and 92% in the past two years. Once again, this is a reflection of what has happened to earnings. Analysts are looking for full-year loss of $5.37 per share in 2012 and a loss of $3.78 per share in 2013. That lower loss in 2013 might seem like a step in the right direction, but with the bearish trend in subsidies well in play, these estimates will most likely continue to fall as we move into the new year.
This stock also looks "cheap" at about 87 cents per share, but with no earnings and no prospect of earnings, this company is virtually worthless with a business model that relies on Chinese and international solar subsidies.
3. ReneSola Ltd. (NYSE: SOL)
ReneSola is a solar wafer maker based in China and another great example of solar subsidies gone horribly wrong. Shares are down 90% in the past two years and 18% this year. The company has missed earnings expectations by an average of 51% in the past four quarters with no sign of profitability any time soon. Analysts are calling for a loss of $1.38 per share in 2012 and 83 cents per share in 2013.
Risks to Consider: With many solar companies going out of business, the ones left standing will benefit from reduced competition if solar becomes more affordable in years to come.
Action to Take --> It might be tempting for investors to jump into these solar stocks after they have suffered such steep losses in the past two years. But the solar industry is struggling to stay afloat right now as cash-strapped governments cut back on spending. The trend lower is well in play, so stay away or sell these solar stocks to avoid further losses.