With additional cuts in sector support looming, solar stocks in Germany - the industry's No.1 market - could see a further drop in their shares after last year's sell-off.

Germany's OekoDAX - which comprises the country's largest renewable stocks - has dropped 35% in 2010 and massively outperformed global green stocks, mainly due to large-one off cuts in Germany's lavish sector subsidies, which boosted the industry in the past.

New one-off cuts envisaged for this year spar fresh uncertainty among analysts about whether Germany's solar companies will see a further drop in their share prices, while others wonder whether they have already reached record-lows.

Risks Are Priced In
German solar companies, despite delivering stellar results in the past year, have been massively underperforming their global peers, mainly due to their exposure to the German market, which was hit by large subsidy cuts last year.

Analysts at Goldman Sachs, however, argue that the sell-off was overdone and that investors have priced in the worst for solar stocks, adding they see upside risk on a three-year view with uncertainty determining the short-term.

"We believe the market is pricing in a bearish 'hard landing' scenario for the industry in 2011/12, with ongoing uncertainty on regulation in key markets following record demand in 2010," they said.

Jefferies International analyst Jesse Pichel shares the view that stocks are close to being undervalued, recommending Germany's SMA Solar, the country's largest solar company, and solar supplier Wacker Chemie.

Thomson Reuters StarMine shows that more than 50% of analysts rate both stocks "buy."

Margin Pressure
Bearish analysts argue that the gloomy prospects for growth in the German solar market will inevitably impact the sector in a negative way, singling out SolarWorld and Q-Cells as two stocks to sell.

UBS analyst Nikos Theodosopoulos said that additional subsidy cuts and growing competition will hurt SolarWorld's business. Subsidy cuts "could exacerbate SolarWorld's cost disadvantage vs. competing module makers pressuring margins," he said.

DZ Bank analyst Sven Kuerten, for example, sees SolarWorld's share price, currently at about €7.30 ($9.94) a piece, as too high, setting his fair value at €6.

Out of the 32 analysts covering Q-Cells, 11, or slightly more than a third, rate it "sell" and Steubing analyst Alla Gorelova said that a negative market outlook for Germany would result in significant volatility of the company's shares.