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Which Solar Stock Could Fall First in a Solar Industry Shake-Up?

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In all likelihood, bankruptcies are coming to the solar industry. The market itself is incredibly oversupplied (again) and demand likely won't grow to meet that supply for years, leaving overleveraged manufacturers nowhere to hide.

Companies are already selling solar panels at cash costs, meaning they can't generate a return on capital expenditures, and potentially won't be able to pay debt. This scenario frequently leads to bankruptcy, which happened in 2012 when the industry went through a similar downturn. Unfortunately, as with most highly competitive industries, it will almost certainly happen again. It's simply a question of who will survive this time around. So, in the spirit of succeeding by avoiding failure, let's take a look at which companies investors may want to avoid.

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Source: Company earnings releases. Note: Debt figure includes notes payable.

You can see that JA Solar has the weakest operating performance, but the least debt out of this group. What should concern JA Solar's shareholders is a decline in full-year guidance to 4.9 GW-5.0 GW of shipments, down from 5.2 GW-5.5 GW that it previously expected, indicating that weakening demand is already on the horizon. Losses are coming at JA Solar and that's cause for concern.

The company with the largest debt balance happens to be Canadian Solar, which has been among the most aggressive in expanding the last couple of years. That could be terrible timing and holding projects on the balance sheet, as it's done recently, may be bad timing as the value of projects declines. A net margin of 2.4% isn't much when solar panel prices are plunging. The windfall of profits that came from Canadian projects the last few years is almost gone too with management expecting to sell 100 MW of power plants in the next couple of quarters. Once it does, operations get far more difficult and $3.2 billion is a lot of debt to service if core operations are going to be losing money soon.

JinkoSolar and Trina Solar both have large debt loads, but also boast stronger margins than JA Solar and Canadian Solar.I would expect losses to creep into the business as panel sale prices decline, but it'll be possible to be near break-even next year, particularly as weaker competitors see volumes decline faster as customers seek quality manufacturers.

And the strongest on this list is Hanwha Q Cells, who bought much of its capacity out Q Cells' bankruptcy. That's helped drive lower costs and higher margins for the manufacturer.

Which should investors avoid today?

The solar industry in late 2016 is about risk management than upside potential. And the companies I have the most concern about are Yingli Green Energy and Renesola, who appear to be in serious trouble. So much so, in fact, that market forces may eventually lead to their demise. Investors should also probably avoid JA Solar and Canadian Solar, who both have low margins and, in Canadian Solar's case, a balance sheet loaded with debt.

Being the biggest has never been a way to generate value in the solar industry and history has often shown that the largest manufacturers often wind up in bankruptcy court. The decline in 2012 led to the demise of Suntech Power and LDK Solar and 2017 looks like it'll be a similar dynamic for manufacturers. For investors, the downturn in large solar manufacturers may just be getting started.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not 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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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