Solar Power's Growing Pains -- Part II

But that reputation may be challenged in coming quarters as the company deals with sharply dropping prices and tepid end-user demand. The company recently secured new contracts equating to roughly 500 megawatts of new solar power. This should provide some smoothing to near-term results, but investors should be prepared to hear of a slowdown in order flow for the next quarter or two.

And as the credit markets reopen, as more governments look to push cost-effective renewable energy mandates, and if we see a reversal in energy prices, then First Solar may be poised for a nice rebound in coming quarters in anticipation of a return to high growth rates later in 2009 and into 2010. As a final tailwind, investors would benefit from a rebound in the euro, which has taken a beating recently against the dollar. Once the "flight to quality" phase of this crisis has passed, signs point to the greenback returning to its secular decline. FSLR derives more than half of its sales from Europe.

Although the production of wafers used to make solar panels has turned into a low-margin commodity business, China's LDK Solar appears to be the most nimble and effective player in the group. The company just handily exceeded third-quarter forecasts , but shares hover some 80% off of their 52-week high.

Shares are weak because of investor concerns that management is ambitiously boosting capacity at a time when demand may be weak. Management chose to pursue aggressive growth as the fastest path to margin expansion in a segment of the industry where gross margins rarely exceed 25%. And a rising backlog (the equivalent of 3.3 Giga-watts of power) means that LDK is already sold out of its production for the next two years.

By adding capacity, management is accelerating production to forestall competition down the road. This is clearly a risky strategy, but it could yield big returns if demand for solar power keeps building in 2010 and beyond.

Yet management insists that such a dire scenario would still enable the company to operate profitably in the tough times ahead and to become vastly more profitable when the market stabilizes in 2010 and beyond. The company has built a nice cushion to handle the near-term concerns, thanks to a September 2008 secondary offering that raised $200 million.

Many other intriguing names in this space are worthy of further research, including Emcore , Sunpower , Energy Conversion Devices and SunTech . All are well off their highs, and all could rally sharply when the industry's fortunes rebound.