Canadian Solar Inc (CSIQ): Should You Own This Small Cap Solar Stock? TAN & KWT

Small cap solar stock Canadian Solar Inc (NASDAQ: CSIQ) rose another 13.35% yesterday and is up 841.2% since the start of the year, soundly beating the performance of solar ETFs Guggenheim Solar ETF (NYSEARCA: TAN) and Market Vectors Solar Energy ETF (NYSEARCA: KWT). But why has this solar stock gone parabolic and what are (if any) potential dark clouds that investors need to be aware of?

What is Canadian Solar Inc?

A vertically integrated provider of ingots, wafers, solar cells, solar modules, solar power systems and specialized solar products, small cap Canadian Solar was founded in Ontario, Canada in 2001 and listed on the NASDAQ 2006. In the past 12 years, Canadian Solar Inc has worked with over 1,000 customers in over 70 countries to deliver over 6GW of solar modules from its manufacturing facilities in Canada and China.

For reference, the Guggenheim Solar ETF tracks the MAC Global Solar Energy Index by investing in approximately 22 solar stocks selected based upon the relative importance of solar power and the Market Vectors Solar Energy ETF tracks the Market Vectors Global Solar Energy Index by investing in 32 different solar stocks

What You Need to Know or Be Warned About Canadian Solar Inc

Despite the company's name and its headquarters being in Ontario, three out of four key executives listed on Canadian Solar's website are Chinese plus most of the manufacturing would be done in China – meaning the company is really a Chinese stock (for better or for worst). It should also be mentioned that Canadian Solar had disclosed an SEC subpoena requesting documents in 2010 and that investigation surfaced again last summer when it was revealed that accounting firms had blocked giving documents to the SEC because of China's secrecy laws (CSIQ's name came up in the investigation of those accounting firms).

With that said, Canadian Solar surged yesterday on earnings after it reported net revenues of $490.9 million verses $380.4 million thanks in part to increased shipments to Japan and net income of $27.7 million verses a net loss of $12.6 million (making it the only profitable Chinese solar stock) plus the company had $681.7 million in cash, cash equivalents and restricted cash verses $540.6 million at the end of June 30. It should also be mentioned that Canadian Solar did close the sale of its Brockville 2 and Burritts Rapids solar plants plus announced the separate sale of two solar power plants to BlackRock. 

However and what investors seem to like about Canadian Solar is how its moved into power plant construction to limit dependence on the extremely competitive business of selling solar panels and other solar products. In fact, the company's "total solutions business", the unit that includes its power plant operations, contributed 41% of total revenue in the third quarter, up from 21.5% a year earlier.

In the earnings call transcript (available on Seeking Alpha here), executives mentioned how they are already in construction of 13 projects out of the remaining 24 plus the CEO noted:

Now for module shipment, geographic wise, we see China continue to be one of the key market in terms of volume. And for Japan, we believe we'll keep the same momentum and maintain roughly the same shipment and market share. And U.S. is a growing market, so we see some growth in the U.S. market as well. In Canada, Canada is -- will be a very busy year for us since most of the -- we are -- we'll be in construction with almost all of our projects in Canada next year. And we still -- I expect a strong market in Southeast Eastern Asia and South Asian countries. The examples there are Thailand and also India.

Share Performance: Canadian Solar and TAN & KWT

On Wednesday, small cap Canadian Solar surged 13.35% to $32 (CSIQ has a 52 week trading range of $1.95 to $32.24 a share) for a market cap of $1.48 billion plus the stock is up 841.2% since the start of the year, up 1,089.6% over the past year and up 280.5% over the past five years. Here is a look at Canadian Solar's performance verses that of Guggenheim Solar ETF and the Market Vectors Solar Energy ETF:

As you can see from the long term chart, Canadian Solar has taken investors for a wild ride in the past while the Guggenheim Solar ETF is actually down some 61.7% over the past five years (according to Google Finance) as the Yahoo! Finance chart appears to not be taking into account some sort of stock split back in February 2012.

Finally, here is a look at the latest and rather bullish technical charts for Canadian Solar, Guggenheim Solar ETF and the Market Vectors Solar Energy ETF:

The Bottom Line. If you have already been invested in Canadian Solar, congratulations but if you are not already in, its probably a little late to get in on the party with a big investment and you might want to limit your risk by choosing the Guggenheim Solar ETF or the Market Vectors Solar Energy ETF.