Investing Cautiously in Solar Energy

 |  Includes: SPWR, STP
by: Semi-Standard Deviation

In December, I touched on two Chinese oil companies, PetroChina (NYSE:PTR) and China National Petroleum (NYSE:SNP) and highlighted their advantages in the Asian oil market. The stocks of both companies have delivered fantastic returns in the last year and are solid players in the energy sector. But for an investor looking to put his money into an alternative energy company, he'll have to look elsewhere. Solar energy companies are a completely different breed and must be analyzed on a different level.

Many solar energy companies are placed in the technology sector and, more specifically, in the semiconductor industry. Even within this bandwidth, their stock price, ratios and financial statements are extremely hard to compare with companies not operating on the same playing field, as the market place for solar energy products has many hurdles to overcome before it reaches maturity. That said, I think companies offering this product can offer an investor tremendous long-term growth as alternative energies gain favor with the public, the government and corporations.
Towards the beginning of the summer, as fuel prices were skyrocketing, the public and government started to seriously consider alternative forms of energy. The government has been offering tax-rebates for buyers of hybrid cars in an effort to promote the changeover. With this type of legislation, we can expect to see progress made in other types of environmentally friendly initiatives. These initiatives will hopefully be directed towards companies who are willing to take the plunge into solar energy use.

One such company that has already moved in this direction is Wal-Mart (NYSE:WMT). They will be installing solar energy panels on stores in five states. This is a major step in the right direction for companies wishing to employ solar energy. Wal-Mart is a trend setter, a leader in business, and is extremely influential.

This sort of move paves the way for other businesses who wondered about the feasibility and costs associated with solar energy. Joel Makower has an excellent article about the move here.

Al Gore has also put pressure on America with his book and movie, An Inconvenient Truth. Regardless of one's politics, it must be admitted that he has done his homework and his work should prove to be influential. His website can be found here.

So what does all this mean for solar energy companies? Inquiries about their products will increase and so will sales. It will take some time for them to reach maturity, but that should only encourage the value investor who wants to get in now. You must do your homework though, as many companies don't have any revenues coming in.

An example of a company like this would be SolarEnertech [SOEN.OB]. Their stock trades around 78 cents at a very low volume. The price could have a huge jump if they land some contracts, but that is a huge if and it is a very risky investment. The two profitable companies (and that appear to be the safest plays in solar energy) are Suntech Power (NYSE:STP) and Sunpower Corp (NASDAQ:SPWR).

STP trades at a high P/E (60), but has good financial strength and an excellent ROE (25). The stock currently trades at 34.56. SPWR trades at an even higher P/E (193) and has ratios which are much weaker than STP. The stock currently trades at 41.25. In regards to growth potential, one can see that a lot of speculation in regards to revenue has already been priced into these companies. With that in mind, I personally like the stock with the lower P/E, which is Suntech Power.

Also, in a side note, the movement of these stocks is correlated with the movement of oil prices. As oil prices dip, so do the solar energy stock prices, for the most part. I think oil will find support in the low $50 range and as it hits this bottom, solar energy stocks won't have to worry about taking an oil related plunge. In conclusion, these stocks are in a market which I believe has tremendous growth potential. One must exercise caution though and be aware of the level of risk involved with each company.

For an excellent list of solar energy companies, please look at Himanshu Pandya's column about their performance.

SPWR vs. STP 1-yr chart

stp chart