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A Foolish Take on Solar: First Solar, Inc. (FSLR), SolarCity Corp (SCTY)

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First Solar (FSLR)This should be a good time to hold some solar, but most stocks in the sector are down, and the major ETFs covering the space, Claymore/MAC Global Solar Index (ETF) (NYSEARCA:TAN) and KWT, are both down 35% year-over-year.

What’s wrong with solar stocks? Nothing, per se. The sector continues to grow, costs continue dropping across the board, and more locations are passing through grid parity or convergence, the point at which the price of solar electricity falls below that of energy from your local power company.

Still, it’s still easy to get burned here, so let’s take a look at what’s happening.

Big Trouble, Big China

The chief problem with the sector is China.

China is the dominant supplier, and most of the big solar players are Chinese. But these companies have been hammering one another in their struggle for dominance, and as a result they’re losing money. Companies like LDK Solar Co., Ltd (ADR) (NYSE:LDK) and Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) are short-term losers, even if they’re long-term winners. They’re focused on driving under companies like Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP), which is fighting to pay back its debt and may well fail.

Suntech, by the way, is at the heart of one of the most misleading stories I’ve seen in some time. They are closing a factory near Phoenix as part of their survival effort. This is natural because costs remain higher here for a variety of reasons. That, and a continuing trade war over panels between subsidized Chinese companies and unsubsidized western countries, has reporters questioning the future of the whole solar sector.

Be assured — that sector is bright.

Buy Those Who Can Sell

The size of the Chinese players — nearly all of whom use the same polysilicon technology, combined with their dog-eat-dog competition — have driven down the industry’s indexes and its ETFs. China’s problems will work themselves out as that country scales up its own demand. But you don’t have to wait for demand to equal supply in order to make money.

The best places to play are among companies that can generate their own demand, that control their sales channel, either through inexpensive financing of small projects or an ability to sell utility-sized projects.

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