Why Solar Stocks Popped Again Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Chinese solar stocks went on a tear today after the Chinese government said it would reform the industry. Canadian Solar , LDK Solar , Suntech Power , Yingli Green Energy , Trina Solar , and JA Solar all rose 10% or more during trading with Suntech leading the way up 15%.

So what: Today, the State Council in China said that it would reform the industry, including mergers, acquisitions, and bankruptcies. It also said it would reduce government support for the industry and ban local governments from supporting companies. Earlier this year, LDK Solar benefited from a local government bailout, and other companies have benefited from similar moves.

Now what: This is great news for the industry as a whole, but it's not great news for all solar stocks. The industry needs to consolidate and purge some supply, so the winners that emerge will be healthier and better able to compete in the global solar market. But the big news of the day was that China would reduce subsidies and make it easier for companies to declare bankruptcy. This will leave investors of some companies empty-handed.

Suntech Power, LDK Solar, and Yingli Green Energy have been some of the largest beneficiaries of government subsidies, and they also have some of the worst balance sheets in the industry. The jump in these stocks is purely speculation that the government won't let the largest players die after making such a big investment, but I don't think that's the correct assumption.

I'd lean toward companies that aren't carrying billions in short-term debt and that have stronger margins than their competitors. JinkoSolar is one of the only companies to have less than $1 billion in debt and a positive gross margin, but it has little cash and may need funding soon. Other potential winners are Trina Solar, Canadian Solar, and JA Solar, which have less debt than their larger competitors.

The bottom line is, betting on Chinese solar stocks is like throwing a dart right now. We have no idea whom China will choose to support, what companies will be pushed into a merger, who will be buyers and sellers, whether a buyout would wipe out shareholders or forgive debt, or who will simply declare bankruptcy. There are so many questions that if you want to bet on solar stocks, I would avoid all of these stocks and stick with U.S. companies with stronger balance sheets and no reliance on the whims of the Chinese government.

One of the companies to look at is First Solar, which is one of the only profitable companies in the industry. If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand-new report that details every must know side of this stock. To get started, just click here now.

The article Why Solar Stocks Popped Again Today originally appeared on Fool.com.

Fool contributor Travis Hoium has no positions in the stocks mentioned above. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.