Since legendary investor Warren Buffett took a liking to solar this year, investors have been wondering if it's time to revisit this beleaguered industry when looking for stocks to buy in 2013.
The solar sector has endured a beatdown for about two years, with massive oversupply of solar panels and unfavorable publicity combining to keep solar stocks down.
But two recent purchases by MidAmerican Energy Holdings Co., a subsidiary of Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), have brightened the solar stocks outlook.
MidAmerican announced a $2 billion to $2.5 billion deal to buy two California solar power projects from SunPower Corp. (Nasdaq: SPWR). MidAmerican also agreed in January to invest in what will be the world's largest solar photovoltaic operation, which is partly owned by First Solar Inc. (Nasdaq: FSLR).
Many solar stocks and solar ETFs, including Market Vectors Solar Energy (NYSE: KWT) and Claymore/MAC Global Solar Index (NYSE: TAN), have soared on the MidAmerican news. They're both up about 17% this year.
Does this mean investors should follow Buffett into solar stocks? Here's a look at the sector.
A positive development for the solar sector is cutbacks in production of polysilicon, which is one of the basic materials used to build solar panel modules.
Credit Suisse's Satya Kumar says prices for polysilicon "have bottomed for the solar industry."
Major producers such as Germany's Wacker Chemie and Hemlock Semiconductor, a division of Corning Inc. (NYSE: GLW), lowered their polysilicon output last quarter and plan to do so again this quarter.
That would remove a major oversupply issue for the sector, which was kept prices falling.
Another bright spot for the solar sector is rising demand from China, whose government set a target that will make the country the world's largest installer of solar panels.
China is to double its rate of installations to a targeted rate of 10 gigawatts of solar power capacity this year, accounting for roughly a quarter of this year's global demand.
China also is increasing its goal for solar power installations by 2015 to 35 gigawatts from the previous target of only 21 gigawatts.
China's overproduction issues will also become less of a problem for the solar industry.
Chinese overproduction figures to fall this year because Beijing is growing weary of pouring money into its struggling solar industry. At the end of 2012, the State Council, China's cabinet, said it would encourage mergers and acquisitions among its solar companies by using "market pressure mechanisms."
This news from China and elsewhere led analysts Aaron Chew and Francesco Citro of Maxim Group to issue an optimistic forecast for solar demand. The analysts said demand for solar photovoltaic panels could rise 18% this year to 38.2 gigawatts.
The Maxim Group analysts told Bloomberg News the increased demand continues to be driven by "the severe collapse in module prices since 2011" due to overcapacity.
The overcapacity issues are nearing a bottom, but will still weigh on solar panel prices and hurt companies that haven't prepared.
Renewable power consultancy GTM Research says solar panel manufacturers still have a few years before the excess production capacity is completely eliminated. GTM believes roughly 21 gigawatts of production will be retired by 2015.
What does all this mean for investors in solar stocks?
It means now there are some solar stocks to buy - the better-run survivors that finally will begin to see some benefit from their endless efforts to cut costs and improve efficiencies. As their competitors struggle, these well-positioned companies will be able to service more of the growing demand for solar.
But you had better be choosy about which solar stocks you pick.
Here are three worth considering:
Want more on energy stocks to add to your portfolio? Check out Money Morning's report on The Best Energy Stocks to Buy, According to Industry Insiders
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