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• New Hampshire-based GT Solar(NASDAQ: SOLR), an industry leader in photovoltaics manufacturing processes, saw its shares spike sharply yesterday, and did huge volume, trading almost eight times more shares than usual. But all was not sunshine and roses: The Street reported that while the spike was a result of GT’s market guidance announcements that revenue and earnings per share would be overall higher than expected for 2010, investors weren’t being careful enough in assessing new versus already reported or cancelled orders from the manufacturer.
• Solar wafer manufacturer MEMC Electronic Materials, Inc. (WFR) was upbeat about its 2010 outlook. Last year’s solar panel oversupply seemed to be slowing and PV Tech reported that in a conference call, MEMC execs said “the company was now shipping wafers to 10 of the top 25 PV manufacturers, compared to having made shipments to only 2 solar customers at the beginning of 2009″. Which you’d think would drive stocks up, right? Um….right, stock market? No.
• For analysts, MEMC’s sunny predictions are countered by the company’s acquisition of solar developer SunEdison, which had a $10 million operating loss last quarter, according to The Street. Plus, there’s a lot of skepticism over SunEdison’s past revenues, and no one’s sure if a solar wafer manufacturer and a solar developer are such good bedmates. They operate on two very different ends of the solar spectrum.
• MEMC’s lack of confidence vote from analysts pulled other solar stocks down with it, like GT Solar (SOLR; remember them from a couple paragraphs ago?), LDK Solar (NYSE: LDK), and JA Solar Holdings (NASDAQ: JASO).
• And then, as if this whole thing weren’t already way out of hand, Chinese solar panel manufacturer Suntech (NYSE: STP) announced that the proposed cuts to Germany’s solar feed in tariff rates would likely push excess solar panel supply State-side, driving prices down just when we thought–again, remember from a paragraph ago?–that the oversupply bust was stabilizing.

Armchair analysts, weigh in here. What are we going to see over the next year, as solar panel prices continue to drop, simultaneously encouraging a boom in the industry while slamming profit margins across all pieces of the supply chain?

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We’ve all been feeling better about solar stocks of late, and why not? They have indeed been on the upswing. But the larger picture, while encouraging with respect to the market crash last year, is still sobering:

The average solar stock year to date has increased 25%, so on the surface it appears that 2009 has been a very good year for solar stocks. However, if you look a bit deeper you will see that while 25% is not bad it is lagging far behind the 36% gain that the NASDAQ has posted…[And if] you take out the two solar stocks with the biggest gains for 2009 – Canadian Solar (CSIQ) + 225% and Trina Solar (TSL) + 378% the average remaining 19 solar stocks actually dropped close to -5% year to date. As a result, while the market in general, and the smaller stocks in particular, have had outstanding years, the average solar stock has done poorly.

Lynch believes that the solar industry will soon go through a consolidation phase in which Darwinian economics will be in full swing. While every industry must go through this at some stage–at least once–and it can be a great time for innovations, he cautions that “it will also be a very dangerous time for investors who are not attentive and very nimble [his emphasis]. This is no place for the age old ‘buy and hold’ investment philosophy.”

Keeping in mind that solar will continue to be a viable, vibrant market with a lot of earning potential, what should investors look for? Lynch says there are three main criteria to look for when choosing companies in which to invest:

1. Cash reserves to last through 2010 without further financing;
2. Good relative market strength; and
3. Product differentiation.

The overall tone is one of optimism, seasoned with the necessity for extra caution in what will continue to be a turbulent era for the solar market. Staying grounded with respect to expectations is healthier than Pollyanna-ism. But compared to this time last year, solar is in a great place, and has a bright future ahead. We shouldn’t lose sight of that.

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This news coincides with a new report from Greentech Media Research that says venture capitalist funding in the clean energy sector is recovering in fine style. Partly this is due to the funds being driven into solar and other renewable energies by federal ARRA funds: 2009 is already the second-largest year for VC funding in the sector, right behind 2008. And we’ve still got months to go.

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