This Week in Solar

U.S. solar stocks have had a good week, highlighted by the hot run that First Solar (NAS: FSLR) has been on since announcing earnings. But Chinese solar stocks haven't seen the same pop, for a variety of factors. This week in solar, a few of those factors came out front and center.

The Suntech saga continues
The strange and convoluted drama at Suntech Power (NYS: STP) continued this week. A little more than two weeks after the company said it was investigating potential fraud at an investment in Europe, the company said related assets have been frozen. A court order froze the assets of GSF Capital and Javier Romero, and a court-appointed manager has taken control of the fund.

To make matters worse, (former) CEO Dr. Zhengrong Shi owned 10% of the fund, and his involvement came into question when the potential fraud was discovered. This week he decided to step down as CEO, appointing David King to replace him, but Shi will serve as executive chairman of the board and chief strategy officer.

Whew, got all that?

All of this is confusing and not good for the company, but my question remains about the health of operations and financing. Suntech said it will give an update on the second quarter next week, as the full earnings announcement will be delayed because of the pending investigation. Suntech needs margins to improve and a plan for billions of dollars' worth of debt for investors to even consider it.

None of this adds up to a good investment, and investors would be wise to stay far, far away from a company with so many red flags.

New York says yes to solar
New York has set a high bar for renewable energy, hoping to install enough renewables to power 45% of the state by 2015. Solar is expected to be a big part of that push, and this week, the governor signed a series of bills that should help it along.

The bills provide for tax credits on solar-energy systems, give tax abatements for solar-generating systems in cities of 1 million people or more, and exempt the sale and installation of commercial solar systems from state sales and compensation use taxes.

New York doesn't usually register as one of solar's most important markets, but it should. The state has 7,500 photovoltaic systems installed, ranking sixth in the nation for PV systems. It also has one of the highest costs of electricity in the country, exceeding $0.20 per kilowatt hour.

New York is the perfect market for high-efficiency module makers like SunPower (NAS: SPWR) and Canadian Solar (NAS: CSIQ) , which are best suited for high-value, space-constrained locations where they can maximize kilowatt hours per square foot. Ironically, it's places such as New York and New Jersey that may drive the next growth spurt in solar, not sunny locations such as Arizona and New Mexico.

Numbers from Canadian Solar
Canadian Solar reported earnings this week, and there was some good and some bad news from the company. We knew the company's shipments would be less than expected, a trend we also saw from Trina Solar (NYS: TSL) and Yingli Green Energy, but the company's margins are improving despite a rough solar environment.

Canadian Solar's gross margin improved to 12.4% from 7.7% in the first quarter of the year, helped by a warranty insurance adjustment. Without the adjustment, gross margin would have been 8.4%, still an improvement in the quarter. This, of course, didn't swing the company into a profit. Net loss was $25.5 million, or $0.59 per share, but gross margin is what I'm watching as a sign of how the company is competing in the market.

The bad news is that the outlook for the third quarter was much worse than investors may have hoped. Shipments are expected to be flat, and gross margin is expected to be only 2% to 5%, a big decline from this quarter.

I think Canadian Solar has as good a chance as any Chinese manufacturer to survive based on margins and its balance sheet, but that doesn't mean it's a good investment. The company is seeing losses as far as the eye can see, and it still relies on the struggling European market for 69% of its business, while First Solar and SunPower are moving into more sustainable markets.

Foolish bottom line
China's solar companies are continuing to struggle while U.S.-based companies are improving in solar, a trend that few would have predicted a year ago. We'll continue to hear more numbers from manufacturers in the coming weeks, but what we've already heard from First Solar, SunPower, Trina Solar, Yingli, and now Canadian Solar shows that the strategy shift of First Solar and SunPower away from Europe was the right move.

For more on First Solar's moves and how it will hold up under competition check out our report on the stock. It includes free updates when conditions change for the company, and this is the only place you can find it.

The article This Week in Solar originally appeared on Fool.com.

Fool contributorTravis Hoiumowns shares of SunPower in personal and managed accounts. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdings, or follow his CAPS picks atTMFFlushDraw. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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