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First Solar's Japanese-Fueled Rally is Misguided

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The solar stocks have been rallying today following a Bloomberg article about Japanese solar power incentives.

According to the article, Japan will overtake Germany and Italy as the second biggest solar power market in the world. The incentives might be a catalyst for more than $9.6 billion in new solar power investments.

A US-based solar power manufacturer, First Solar (NASDAQ: FSLR) traded up nearly 5% during Monday's session, while SunPower Corporation (NASDAQ: SPWR) has seen only modest gains. The Chinese solar manufacturers also gained on Monday. Suntech Power (NYSE: STP) was up over 9% and Trina Solar (NYSE: TSL) was higher earlier in the session but has since pulled back.

However, investors who are betting that these companies will benefit from Japanese solar power incentives could be wrong. The Axiom Capital Management analyst, Gordon Johnson, told Benzinga that the Japanese government has very strict regulations on the use of cadmium in any building materials, which could prove problematic for the companies. For example, First Solar uses cadmium telluride technology in its solar modules. This cadmium prohibition makes it virtually impossible for the companies that utilize the technology to enter the Japanese market. Johnson stated that Monday's rally in First Solar on the Japanese solar power news is “misguided.”

Additionally, Johnson pointed out that the Japanese solar power market is mostly closed for foreign firms and any incentives will mainly benefit the Japanese manufacturers. In Johnson's visit to a number of solar conferences in Tokyo, he has noticed a lack of participation from non-Japanese solar makers. Hence, the foreign competitors will likely miss out on any incentive money provided by the Japanese government regardless of what kind of technology they use.

Despite the closed market, U.S. investors have a chance to get exposure to the Japanese solar power investments. Kyocera (NYSE: KYO) is a Japanese manufacturer of products for the global information and communications market and environment and energy market. The company's solar power products are likely to see an increase in demand starting July 1, when the incentives kick in. Its ADRs traded in the NYSE are up only 1% on the session in spite of the possibility that it will see significant gains due to the Japanese solar investments.

Another way to play the Japanese solar incentives is to go long the iShares MSCI Japan Index ETF (NYSE: EWJ). This ETF gives exposure to the companies, such as Mitsubishi Electric, Panasonic (NYSE: PC), and Hitachi, which are developing various solar power solutions.

Lastly, traders could also profit from today's rally in the US and Chinese solar stocks by shorting them. If the rally in fact is misguided, these stocks are poised to fall back to the previous level or even lower, if the Japanese companies are expected to gain a significant advantage over their foreign competitors.

You can follow me on Twitter @TuomoKallio.

Latest Ratings for FSLR

DateFirmActionFromTo
Feb 2021JMP SecuritiesMaintainsOutperform
Jan 2021Morgan StanleyMaintainsUnderweight
Jan 2021CitigroupInitiates Coverage OnNeutral

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