Solar stocks have skyrocketed since March on optimism about government efforts to stimulate demand for the clean energy source, but analysts warn that with earnings season beginning, investors in the high-flying sector are in for a strong dose of reality.

Makers of solar panels were virtually unscathed by the economic downturn until late last year, when funding for all types of projects dried up, green ones included.

Solar companies' shares, however, were battered throughout 2008 by concerns that a pullback in solar tax breaks in Spain would lead to a flood of solar panels in the market, driving prices and profits downward.

This year, that very scenario has played out, with a global recession and credit crunch making matters worse. Until March, solar stocks continued their sell-off, with many hitting 52-week lows early that month.

Since then, however, investors have snapped up solar stocks, driving share values to double in some cases, in the hopes that government efforts to boost solar power in both the United States and China would help restore the industry's booming double-digit growth.

Such a sharp and sustained rally, however, has left many specialist investors scratching their heads, Commerzbank analyst Robert Schramm said in a note to clients. The negative fundamentals have not begun to change.

Shares of Chinese solar companies have been among the biggest gainers since China said in late March that it would launch a generous subsidy for solar power systems. That nation's top solar panel maker, Suntech Power Holdings Co Ltd, more than doubled to close at $12.89 on Monday after hitting a lifetime low of $5.09 on March 2.

Trina Solar Ltd's stock has also more than doubled since early March, while shares of LDK Solar Co Ltd and Canadian Solar Inc have soared over 90 percent from lifetime lows hit last month.

In comparison, the Standard & Poor's 500 index has risen 13 percent in the same period.

U.S. solar companies SunPower Corp and First Solar Inc, meanwhile, have each gained more than 30 percent since hitting year lows in March, while top German solar company Q-Cells' stock has soared 65 percent from its 52-week low last month.

'NOTHING HAS CHANGED'

Analysts, however, warn that the party will be over as soon as companies begin reporting results for the first quarter and updating their outlooks for the rest of the year.

Really nothing has changed, Wedbush Morgan analyst Al Kaschalk said in an interview. We still have oversupply of modules in the market, credit is still not readily available and production capacity plans are still on hold. It's going to be difficult for companies to say with any conviction that they are going to blow right through this.

San Jose, California-based SunPower will be the first major solar company to post first-quarter results this Thursday, and Kaschalk said Wall Street is expecting the company to cut the top end of its $1.6 billion to $2 billion 2009 revenue view.

On Monday, solar stocks already showed signs of decelerating, with many posting losses of more than 10 percent on a dismal day for the broader market.

This is not an environment for short term investors, said Karina Funk, an analyst with Winslow Green Mutual Funds in Boston, who added that it was too difficult to time the recovery of the solar market. You do see rallies and stocks down because people are trying to time this. I see those as opportunities for long-term investors.

At the beginning of the year, many solar companies said they expected to see demand for solar panels recover in the second half of 2009 as money from the U.S. economic stimulus begins to flow to new projects. Continued tightness in credit markets is now calling that forecast into question, with many expecting the market's oversupply of solar panels to last another six months to a year.

A recovery in the second quarter will be milder than expected mainly because of excess capacity, HSBC analyst Christine Wang said in an interview. The extent of the (solar) market's weakness and pressure on margins have yet to be fully reflected on solar stocks. There's reason to be cautious.

Enthusiasm surrounding the Chinese government's subsidy program has also waned.

It's hard to have visibility on any timing or magnitude of that impact from China, said Funk. It's not clear that the government and the industry have been coordinating yet on how to make that money flow effectively.

(Reporting by Nichola Groom; Additional reporting by Christoph Steitz in Frankfurt and Leonora Walet in Hong Kong; Editing by Richard Chang)

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