Solar Industry Snapshot: A Record Third Quarter

CHEAT SHEET Analysis: It’s Not All Good News

The idea of over-capacity keeps rearing its ugly head in the solar industry. Currently, it’s estimated that production capacity outpaces demand by as much as two to one, while global demand grows at 14 percent annually.

A core component of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” In this case, a flood of solar panels drowned the market and washed many companies out to sea.

Chinese manufacturers have been blamed by many U.S. companies for the glut of capacity, and those stocks have both suffered and profited from their situation. Trina Solar Limited (NYSE:TSL), a Chinese solar company, is down over 56 percent this year to date because of the capacity problems and mounting trade regulation in the U.S. It’s worth pointing out that Chinese solar companies tend to have a very high beta, in this case 2.7, and the company is currently enjoying a five-day run with nearly 15 percent gains.

LDK Solar Co., Ltd. (NYSE:LDK) and Suntech Power Holdings Co. Ltd. (NYSE:STP), also Chinese solar companies, are both struggling to keep their share price above $1.

While the trends indicate strong growth prospects for the industry, it is also critical to pick the right company…