Solar energy stocks are promising, but still quite risky

— -- Q: What do you think of solar stocks? And does Evergreen Solar eslr or Canadian Solar csiq have the strongest balance sheet?

A: Solar power seems like one of those things that should be a natural winner for both consumers and investors.

Thanks to falling prices for solar panels, it's increasingly cost effective for homeowners, especially in the sunbelt to put solar panels on their roofs. And thanks to a variety of subsidies, governments are helping pay for alternative energy.

While falling product prices might be a problem in other industries, it's actually a benefit to solar companies. When the prices on solar gear falls, that makes the technology more competitive with fossil fuels.

First Solar fslr, a leading solar panel maker, for instance, can now produce a watt of power for 93 cents, according to Standard & Poor's. And the company hopes to get its cost per watt down to 65 cents by 2012. You can compare that with your local utility bill to see that the technology is getting more interesting.

Given the economics, solar power will likely play a part in how households generate their power. But here's the problem: Making money on seemingly obvious trends is difficult. In the short term, the solar stocks can be extremely volatile as they tend to move with the price of oil. If the price of oil falls, solar stocks tend to fall as well.

Longer term, the trouble is trying to pick companies that will win from those that will lose. There are a number of solar companies vying for the business and clearly many won't make it. So if you invest in the wrong player, you could suffer a large loss, even if the industry does well.

The importance of picking the right solar stock is what you're getting at with your question about the financial strength of Evergreen Solar and Canadian Solar.

There are many ways to determine how financially strong companies are. One popular way is to examine free cash flow, or the amount of cash a company uses or generates from operations after paying for the overhead they need to keep going.

Let's look at Evergreen Solar. The company during the past 12 months burned through $95.2 million in cash from operations and used another $342.3 million to invest in plant and equipment. That's a pretty hefty burn rate of $437.5 million if you consider the company only had $59.6 million in cash and liquid investments as of April 4.

Meanwhile, at Canadian Solar, the company had a more significant $115.7 million pile of cash as of the end of 2008. The most recent cash flow statement I was able to find from Canadian Solar, though, dates back to June 2008. That document indicated the company consumed $80 million in cash during 2007. In addition, it used $42 million for capital expenditures for a total 2007 cash burn of $122 million.

The Money section of USATODAY.com provides another way to look at the fundamental strength of the companies. Just enter their symbols in the Get a Quote box at money.usatoday.com and you find their Stock Meter scores. The closer a stock's score is to 5, the more aggressive the investment is. The score incorporates both the volatility of the stock and the company's financial resources. The closer a stock's score is to 1, the more conservative an investment it is.

Using USATODAY.com's Stock Meter, you see Evergreen Solar scores a very aggressive 4.5, and Canadian Solar scores an even more aggressive 4.8 rating.

These numbers just drive home the point that, yes, solar is a fascinating technology. More homes will likely use solar to provide some power. But many companies won't survive to see it happen. Just think of the Internet. The Internet has been a huge success, but many of the early Internet companies didn't survive; in the process their investors incurred massive losses.

You don't want to invest in the solar equivalent of a dotcom disaster.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz