As the oil glut continues, some investors are becoming frustrated with traditional oil stocks. While many companies will survive when oil prices calm, stock prices simply don't reflect stabilization at the moment. For some investors, an alternative has been found in the form of solar energy. Oil prices have dragged overall energy prices down over the last couple of years, but solar energy's popularity has grown. This attention has given solar companies the ability to grow and become profitable, even with lower prices.
A long-term macro argument could be made that part of the reason for the fall in the price of oil is the climate change debate. The social and political debate brings about a global movement searching for cleaner forms of energy, making oil as a fuel obsolete. Tesla Motors (NASDAQ:TSLA) is the best example of this, with their popular electric cars. A direct beneficiary of this macro shift will be a growing solar infrastructure in both residential and non-residential consumers.
The solar sector currently has a Zacks Industry Rank of 26 out of 265 (top 10%). Many remember the beating solar stocks received in 2012, when Chinese companies flooded the market with cheap solar panels. Solar investors were burned that year, but today is a different story. Many solar companies are more mature, with healthy revenues and bottom lines. Infrastructure has been built, contracts are in place and tax credits keep new customers coming back.
According to GTM Research, the fourth quarter of this year will be the largest quarter for solar installations in U.S. history. The utility-scale segment will be the leader as the United States will install more than three GW (gigawatts). GTM sees cumulative PV installations doubling between now and the end of 2016, bringing the nationwide total to 41 GW.
Investors have many different choices in entering the solar space, but I've narrowed it down to two ETFs and three top ranked Zacks stocks. These choices will help the investor benefit as energy prices recover and as the solar momentum continues.
Guggenheim Solar (NYSEARCA:TAN) is an ETF that corresponds to the MAC Global equity index. The top three holdings are SolarCity (SCTY), First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR). The fund has a 0.70% expense ratio with a 1.6% yield. The ETF is down over 50% from its 2015 highs and provides an opportunistic entry point here at $24.
Market Vectors Solar Energy (NYSEARCA:KWT) is an ETF that replicates the price and yield of the Market Vectors Global Solar Energy Index. The top three holdings are also SolarCity, First Solar and SunPower. The fund has a 0.65% expense ratio with a .96% yield. The ETF is down over 40% from its 2015 highs and should be considered as an alternative to TAN.
First Solar (FSLR) is Zacks Rank #2 (Buy) with a Style Score in Value of "B." The Arizona based company develops, engineers, constructs and operates some of the world's largest grid-connected PV (photovoltaic) plants in the world. The company manufactures solar modules, with an advanced thin film semiconductor process, that lowers solar electricity costs.
First solar has been a place to hide over the last couple of years. While volatile, the stock is currently close to 52-week highs, off 7%. Meanwhile, the US oil fund ETF (NYSEARCA:USO) is down over 70%. This shows relative strength in the stock versus oil, which should continue if the company performs.
After a volatile past, in both earnings and price, the company looks to be positioning itself in a positive trend. Three out of the last four earnings have had a positive EPS surprise. More importantly, price action has followed, sending the stock higher. Earnings estimates for 2016 are rising as well, going from $3.93 to $4.17 over the last 90 days, a move of 6.1%.
JA Solar (NASDAQ:JASO) is a Zacks Rank #2 (Buy) and a value play with a Style Score in Value of "A." The Chinese company has a market cap of $430 Million and a Forward P/E of 5. There are obvious concerns about every Chinese stock right now, but JA Solar provides a value opportunity at this price.
Over the last 90 days, Estimates have shot up 55% for the current quarter and 26% for the current year. Furthermore, the last two quarters have provided quarters with triple-digit upside surprise, showing the company is underestimated.
These potential earnings beats could offer investors a nice reward on a beaten down stock.
8point3Energy (NASDAQ:CAFD) is Zacks Rank #1 (Strong Buy) that owns, operates and acquires solar generation projects. The San Jose based company operates as a subsidiary of First Solar and SunPower. The company has a market cap of $320 Million with a Forward P/E of 28 and a dividend of 5.4%.
Sales growth for the new company is over 46% and will be a number to watch when earrings come out. Estimates for the current quarter have risen 25%, showing potential for an upside surprise.
Oil has had an overall drag on energy prices, directly effecting most solar stocks. However, solar provides an alternative way to not only play a bounce on oil, but invest in a growing sector and the potential future of energy.