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mjones (< 20)

Solar Stocks On Fire: Why First Solar Is My #1 Pick



November 18, 2013 – Comments (3) | RELATED TICKERS: FSLR , SCTY.DL , SPWR

Solar stocks took a beating in 2012.  Throughout 2013, however, they have been providing investors double digit returns; some solar stocks, such as SunPower Corporation (NASDAQ:SPWR) even churned triple digit returns year-to-date.  This article brings up the question, how much longer will this bullish movement continue?  Is it too late to make money on this in 2014?

There is still concern surrounding the long-term viability of solar energy.  Looking at the very big picture, I believe this industry is still at a very immature stage of its full development.  There will no doubt be struggles ahead, but I think the market's 2013 price action undeniably shows support for several U.S. solar stocks.

Here are some of the solar stocks I think are worth watching:

First Solar (NASDAQ:FSLR) -  This stock fell from $170 down to about $30 in 2011 alone.  They consequently fell on my radar during this period of time.  This has been my favorite solar stock for a number of reasons.  I kept a close eye on their financial performance as their price lost over 96% of its value during the recession.  This company continues to impress me with their steady sales growth and rising EBITDA figures.  I feel comfortable with their P/E ratio of around 12.8.  Unlike some of their close peers, they have positive EPS and sport a lower than average beta for the industry.  They recently reported 3Q 2013 sales about 55% higher than 3Q 2012 figures and beat analyst EPS estimates by 128% ($2.28/share vs. $1.00 estimate).  They have long-term contracts in place to ensure consistent revenue flows for the next several years and this appears to be a critical objective to the company.  Most importantly, I think management is consistently making good calls about what direction they're steering the business.  The past six quarters, First Solar has managed a gross margin of between 22.4-28.7% with the average being roughly 26.7%.

Solar City (NASDAQ:SCTY) – Solar City’s IPO debuted less than a year ago and their stock price has already soared 450%.  Looking at their available financial data, you will quickly notice that revenue has been on a steady rise the past several years.  My concerns are the consistent annual net losses.  There is no evidence of improvement in their quarterly figures.  I personally am waiting to see turnaround in this area before getting serious about a long-term investment.  This stock has likely performed well not because of strong financial data but because of well deserved promise for strong numbers in the future.  The street didn't seem too impressed with Q3 numbers, however. 

Solar City has a deal with Wal-Mart (NYSE:WMT) to install solar panels to help power their stores.  The solar installations are expected to provide approximately 20-30% of the total power for those stores.  By the end of 2013, more than 130 Wal-Mart stores will have solar panels installed by Solar City.  The relationship seems strong, which I think will remain important for Solar City in the near future.  Solar City's business model is clearly being crafted around the idea of creating a one-stop-shop for both residential and non-residential consumers interested in installing a solar panel system in their home or business. 

SunPower Corporation (NASDAQ:SPWR) - SunPower has been in the solar business for 28 years.  This was one of the most badly beaten down U.S. solar stocks in 2008-2012.  In 2008 it traded its highest at 164.49, then as low as 3.71 in 2012.  After this stock lost 97.7% of its total market value, it went on to shoot up 580%, year-to-date.

SunPower offers a program where customers can lease panels and still save money on their energy bill (Solar City offers a similar service).  I think solar producers will find a big source of cash flow over the next several years using the leasing concept with both residential and non-residential consumers.  If you could save 15% on your electric bill without putting in much effort, why not sign up?  I'm eager to see how much this contributes to the bottom line for SunPower and other companies adopting this strategy.

Gross margins for SunPower have averaged 17% over the past 5 years.  Their top line financials look impressive for the most part, but they could improve their bottom line.  2011 and 2012 EBITDA dipped into the red by about $20 million both years.  The only concerning element I notice on their balance sheet is their debt and it's proportion to equity.  This is a company that is substantially leveraged.  If that's something that concerns you as someone who is currently invested, you might keep an eye on this to make sure it is managed well.

To conclude this article, let's take a moment to recap.  We saw many solar stocks get absolutely crushed over the past several years.  I personally feel that First Solar is the bellwether among U.S. solar stocks and they are my number one pick from a purely risk/reward standpoint moving forward.  I think there is a good chance that by holding some other solar names, such as Sunpower or Solar City, in your portfolio you could see significantly better or worse returns.  From a 5-20 year time horizon, it is still too early to tell which solar company will be number one.  They are all aggressively taking new approaches to differentiate themselves in a very competitive market.  I personally will soon be investing in one of the many solar ETFs that include these three big solar names.  I would highly recommend at least some exposure as this bull trend hopefully continues over the coming years.

3 Comments – Post Your Own

#1) On November 18, 2013 at 9:36 PM, awallejr (52.32) wrote:

I would be careful with FSLR.  I remember when it was approaching $300 in 2008.  The biggest concern is the materials they used in their panels.  From what I remember they use certain materials that are actually considered dangerous from an environmental point of view.  I think it had to do with their use of cadmium which is extremely toxic.

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#2) On November 19, 2013 at 12:03 AM, jiltin (47.16) wrote:

Great summary and history. I am already watching these and it helps me further. Thanks.

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#3) On November 19, 2013 at 5:05 PM, mjones (< 20) wrote:

Thanks for the feedback.  awallejr - intersting information.  I didn't know that they may be using potentially toxic material.  It's definitely important to understand that information well before committing to a long-term position.

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