Why Canadian Solar Inc.'s Stock Dropped 26% in a Month

What: Shares of Canadian Solar have plunged 26% since the start of August, highlighted by a 21% drop following second-quarter earnings.

So what: From the second-quarter earnings release, investors focused on an expected drop in gross margin from 15.2% in Q2 to 12%-14% in Q3. This could lead to a net loss in the quarter, which may be shocking for a company many investors thought was one of the most profitable in solar.

What's really happening is that high-margin projects in Canada are being completed, and by 2016 there likely won't be any windfall profits left. These projects are what has led to industry-leading margins, not lower costs or better execution than competitors.

Now what: I've been saying all year that investors may be in for a rude awakening when Canadian Solar's projects in Canada are completed. That's proving to be the case, and once the final projects are completed in the fourth quarter, the company is back to making commodity solar panels and building projects with similar components as competitors. That's a recipe for low margins over the long term, and I wouldn't be jumping on this solar stock for that reason, no matter the discount the stock appears to have been trading at over the past month.

The article Why Canadian Solar Inc.'s Stock Dropped 26% in a Month originally appeared on Fool.com.

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.

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