By Mark Jones
I'm long First Solar (FSLR) and really think that everyone should expose their portfolio to clean energy stocks in some way. Jim Simons' Renaissance Technologies has a $20.8 million position in First Solar, and big players making bets like this are a welcome reassurance. As you're probably aware, we're fans of taking cues from hedge fund managers to earn healthy returns (see details here).
Why invest in clean energy?
Reason number 1: Like news of the harm of smoking started to spread in the 60s, in recent years we're hearing more about the harm of fossil fuels to the environment. Eventually, after this mantra has been pounded into multiple generations, further change will likely accelerate. I feel confident that a modest investment in some clean energy stocks would be more likely than not to pay off very big in the long run.
Reason number 2: We're going to run out of fossil fuels at some point. Eventually we'll be forced to either reduce or eliminate the use of this energy source. I'm not an expert on that topic, so I couldn't tell you when that would happen. But I am smart enough to know that there is a finite amount of fossil fuels. Eventually people are going to take this situation more seriously and push for greater investment in clean energy. The price of anything is controlled by supply and demand. The supply of fossil fuels will shrink while the demand (from a growing population) will increase. Eventually a day will come where price stability in the energy market becomes threatened and a more efficient method of generating energy will become essential for society to function.
Lastly, reason number 3: Clean energy companies have a positive role in our society, and I like to stand behind companies that are moving forward with this initiative. Sure, a lot of these companies will continue to need government backing to become competitive enough with the fossil fuel players. Consider what would happen if a solar company could build a solar farm that could power a small city - how much would they be worth? That's the ultimate goal, though.
What's so special about First Solar? First Solar is a big leader in the solar panel industry. It has grown revenue every year from 2007-2011 at a compounded rate of over 50% per year. Revenue is expected to increase 29% over 2011 when 2012 numbers are announced on February 25. At the same time, EBITDA has grown at a rate of 42.7% per year. Net income was up considerably in 2009 and 2010 relative to the prior two years, but slipped into the red in 2011. The stock is currently down roughly 75% since the start of 2011.
There has been concern for some time now that U.S. solar manufacturers won't have a competitive advantage in the long run, so the solar industry as a whole has been hard hit in recent years. I think the beating First Solar has taken over the years is excessive, and hedge funds are starting to hone in on these stocks. I'm keeping a close eye on upcoming 13F filings to see what the big hedge funds are doing with solar holdings. The main reason First Solar is my number one pick, though, is because I like its financial statements much better than other solar companies.
Let's take a look at a few other players:
SolarCity (SCTY) had its IPO debut in December 2012, and the stock is currently up double-digit percentage points from its IPO price. SolarCity focuses on the design, sale, leasing and installation of solar systems. It turned its first annual profit in 2011 and holds about 13% of the residential solar panel market. SolarCity leases solar panels to residential customers so they can pay less overall for electricity, and the combined lease payment with the reduction in their electric bill is typically below customers' normal electric bill. If First Solar has any major competition, it's from SolarCity. This is another company I will be keeping a close watch on over the coming months and years.
Sun Power Corporation (SPWR) is another competitor with SolarCity and First Solar. Its stock fell from 2008 highs of around $130 per share down to almost $3 a piece in 2012. It currently trades around $8 per share. Revenue has grown at an average rate of 31% over the past five years, though net income slipped into the red in 2011 to negative $603 million from positive $166.9 million in 2010. See how the "hedgies" are playing it.
JA Solar (JASO) is a smaller solar provider. Based in Shanghai, China, JA Solar develops, produces and sells its photovoltaic solar products to model manufacturers, system integrators and distributors in America, Europe, and Asia. Analysts are estimating 2012 revenue of $1.07 billion, 35% less than 2011 revenue. Earnings the past five years have been pretty volatile. Net income sat between $50-$70 million in 2007 and 2008. 2009 income fell to almost negative $19 million, then spiked to $262 million in 2010 before falling to a net loss $88.7 million in 2011.
LDK Solar (LDK) is another Chinese solar manufacturer. The stock is down over 95% from 2008 highs. Revenue has grown at a geometric rate of over 40% per year the past four years, though net income and EBITDA have slipped into the red two out of the last five years. Income fell from $290 million in 2010 to negative $655.4 million in 2011, while EBITDA fell from $593.61 million to negative $233.55 million.
In summary, I think it's a good time to get into solar stocks. Most of them are really cheap right now, and my personal favorites are First Solar, Sun Power, and Solar City. I like First Solar's financial statements the most since it hasn't had a single year of negative EBITDA through the recession, while every other stock mentioned here has had at least one year of negative EBITDA in the previous five years. First Solar also has the highest revenue growth rate and is more popular with big-name hedge funds, like Renaissance Technologies. At the very least, I would encourage every investor to purchase some shares in a clean energy ETF so they can capitalize on the progression of this change.
Disclosure: I am long FSLR.