As a kid I remember exploring the unused coal bin in my grandparents basement. (They had upgraded to oil back in the 1940s.) Other than the scolding I received for the coal dust on my clothes I best remember the Walking Liberty half dollar I found in the bin - they let me keep it.
And so it has gone with energy over the last couple hundred years: first wood, then coal, followed by oil, and now natural gas. Each step providing us with better, cleaner and more cost-effective energy.
And the future? I feel renewables, especially solar, will be next. Unlike its predecessors solar is incredibly scalable, from the 0.1 watt produced in a $1 solar light to China's planned $2.4 billion 2 gigawatt solar farm. It's all rather amazing. Homes and businesses can now generate electricity right on site.
Photovoltaics Phenomenal Growth
The growth in photovoltaics (the conversion of sunlight into electricity) is phenomenal. Growth is driven by falling prices and prices in the U.S. are now under 3.87 cents per kWh. In August there was news of a project in Chile which sells its electricity for half that of coal.
Solar has burst on the scene so fast the ramifications are only now beginning to manifest themselves. Suddenly you see solar panels everywhere - roof tops, landscaping, highway signs, next to universities, even out on piers in the Great Lakes - the growth is truly astonishing.
As with any new technology, change can be disruptive. Integrating solar into the existing grid is already causing problems. Customers substitute cheap solar during peak (high utility rate) hours in the afternoon. Then there is the fact that solar (and wind), as critics love to point out, are intermittent energy sources (i.e. power is only generated when the sun shines or the wind blows).
Intermittency, however, is not insurmountable. Look at food. Though it's only gathered once or so a year, we eat well all year. The same will happen with renewables (solar energy usually needs only be stored a day or two). Rapid advancements in battery and other storage technologies are already well underway.
The Current Slowdown And Glut In Solar Panels
Ironically, the unexpected extension last December of tax credits in the U.S. slowed solar installations. Companies no longer needed to rush to meet looming tax credit expiration dates. This, along with surging panel supplies, has slowed demand and created a panel glut. Adding to the industries woes, bankrupt companies such as SunEdison (OTCPK:SUNEQ) are shedding assets at fire-sale prices.
It's bad news for solar companies and their stockholders but good news for installers and residential and business owners.
So how can investors profitably invest in solar? Indeed, investments in the sector have fared poorly over the last few years. Look at the proxy Guggenheim Solar ETF (NYSEARCA:TAN) - it's now 38% off its 52-week high.
Yet exploding, if erratic, growth in the sector means the survivors will likely prosper. The question is which companies will be still standing in a year or two?
Are These Three Solar Companies Winners?
Rather than invest in a broad-based renewables ETF such as TAN, it may be prudent to look at a few fast-growing but low-debt companies in the sector. Below are three to consider. All three have solid balance sheets and have avoided the high-debt/fast growth path which proved to be so disastrous to SunEdison and others.
First Solar (NASDAQ:FSLR) is a leader in utility-scale solar. What is utility-scale solar? The SEIA (Solar Energy Industries Association) defines utility-scale solar as those installations which generate 1 megawatt or more of electricity. I will use the term "large-scale" in this article as not all 1 megawatt plus solar installations tie into utilities.
Why are companies and other organizations getting involved in large-scale solar? Two reasons: First, as noted above, solar generated electricity is now very cost competitive, especially during peak afternoon demand hours. Why use expensive grid electricity when you can generate large amounts of it cost free on premises with solar? Secondly, solar generated electricity offers independence - independence from the grid uncertainty in supply and cost.
First Solar (market cap: $4 billion) is a conservatively run company with little or no debt. According to Finviz the company has a trailing PE of 5.7 and a forward PE of 18.3. Debt to equity is a low 0.04% while annual sales growth over the last 5 years has been 6.9%
Although First Solar has strong bookings, caution is warranted. On August 4 and 5 no less than seven insiders sold major portions of their stake in the company at prices around $44 (October 11 price: $38.2). Although insiders can sell stock for many reasons this heavy selling makes you wonder. Therefore, even though the company looks solid, I would not buy First Solar now.
SolarEdge Technologies (NASDAQ:SEDG) is an Israeli-based company which builds solar equipment, primarily power optimizers, inverters, and storage systems. The company also sells cloud-based monitoring software.
Basically the company builds the equipment which provides the "smarts" as to how to efficiently distribute PV electricity, whether it be for in situ demand, batteries such as Tesla's (NASDAQ:TSLA) powerwall, or the grid.
SolarEdge recently won an award for its HD-Wave inverter. The company claims the inverter is "one of the most significant leaps in solar technology in the past 20 years."
SolarEdge (market cap: $720 million), like First Solar, has practically no debt. According to Finviz the company has a trailing PE of 9.3 and a forward PE of 8.3. Annual sales growth over the last five years has been an extraordinary 84%.
At this point SolarEdge looks to be an attractive buy but there are threats. Tesla, for example, may use its own inverters in SolarCity (NASDAQ:SCTY), a major SolarEdge customer. Tesla's powerwall is also now compatible with SMA inverters.
JPM also likes what it sees in SolarEdge and in August gave the company a $31 price target - 60% above the current price.
Sunworks (NASDAQ:SUNW) is a small ($60 million market cap) rapidly growing company whose primary business activity is installing residential (along with some commercial and agricultural) solar in California.
The company is profitable and, like First Solar and SolarEdge, has practically no debt. According to Finviz it has a trailing PE of 29 and a forward PE of 11. Sales, on a quarterly basis, are up 186% over last year while EPS is expected to grow over 350% this year.
Technology development at Sunworks is focused on its three-dimensional silicon cell which it says works better in partial shade and produces 200% of the power output of conventional solar cells. (Most panels currently capture 11-15% of the sun's energy.)
It will be interesting to see if this rapidly growing company's three-dimensional cells perform as well as expected. If so, it should do very well.
Since Sunworks is quite new and small it should be regarded as the most speculative of the three companies profiled in this article.
Clouds Now, But The Future Looks Bright
Clouds hover over the solar sector now and most (including First Solar and SolarEdge) are near 52-week lows. Yet, with the tremendous growth in the sector it seems inevitable that the sun will eventually break through. Indeed, a massive transformation in how we generate electricity may be in the works.
Companies with solid balance sheets such as the three profiled above may handsomely reward investors.
Disclaimer: This article is for informational purposes only and should not be taken as investment recommendations. Investing in stocks is risky and investors should use all due diligence and consult a financial advisor before investing.
Disclosure: I am/we are long FSLR, SEDG, SUNW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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