Solar Is Booming: Here Are 3 Smart Growth Picks

Summary

• Smart Solar: Why it's the future.
• SolarEdge: Growth with solid financials.
• Enphase: A big turnaround and now exploding growth.
• Sunrun: Run with the U.S.'s top solar installer.

You see them almost everywhere: rooftops, along highways, downtown buildings, in the desert, landfills, retired coal power plants (no one else wants the toxic land), suburban landscapes, and elsewhere. Solar panels are now becoming an accepted part of the scenery. It's likely just the beginning.

Solar panels in northern Michigan. Image source: Author

Ironically, Exxon (XOM) was one of the first to research solar energy back in the early 1970s for use in oil fields. Subsequently, others picked up the baton of solar energy research and costs plummeted. Today, things have progressed to the point that solar and other renewables are starting to seriously erode fossil fuel dominance in large-scale energy generation.

Smart Solar: Why it's the future

Nothing is driving growth faster than smart solar - solar systems paired with sensors and digital intelligence. The newest systems not only collect, store, and distribute electricity from the sun, but they also do it in such a way there is little, if any, waste.

Everyone talks about efficient panels. Sure, more efficient panels help, but it's only part of the story. Many factors are at play. Shade, clouds, seasonality, matching supply to time and demand, and more. Smart solar looks at all these to maximize productivity for the system as a whole.

A crude example: I have a small, inexpensive, off-grid 900-watt solar system on my house. It's complete with panels, charge controller, batteries, and inverter. I power the TV, lights, office, small fridge, and most of the cooking (with efficient 120-volt appliances) with the system. If the grid goes down, I have the basics covered.

That's great as far as it goes. But there are many inefficiencies.

On sunny days, the system fully charges the batteries by early afternoon but if we are gone or only lightly utilize electricity, the rest of the afternoon sun is wasted. Even worse: When we go on vacation, the batteries charge up the first day, but after that, no solar is captured till we get home, maybe weeks later. Since panel angles aren't always optimal, we lose efficiency there also.

With smart solar and a grid connection, all or most of the sun on the panels is utilized. The first priority is the customer's immediate needs, the second is charging the batteries, and finally, any excess is fed into the grid giving you get a credit on your bill. A vacation can put money into your bank account!

Did you ever wonder how utilities can replace the generational capacity of retired fossil fuel (especially coal) plants? They can do it because they are replacing lumbering behemoths with smaller but much nimbler systems. Since construction and time to bring online are considerably less, new wind or solar is often cheaper than simply maintaining existing fossil fuel plants.

Germany's experience transitioning to renewables has shown that flexibility is extremely important and that smart solar is extremely flexible.

Here are three fast-growing "smart" and profitable solar companies for investors to consider.

SolarEdge Technologies (SEDG)

SEDG is one of my favorite solar stocks and the company has rewarded stockholders very well over the last few years. Since my first article on the company in October of 2016, the share price has risen over 300%.

SolarEdge serves residential, commercial, and utility markets with power optimizers (makes panel arrays more efficient), advanced inverters (DC to AC conversion), storage batteries (solar power at night), and monitoring platforms (intelligently manage the various system components). The company markets its products in Israel, Europe, the U.S., and, is now expanding elsewhere.

SolarEdge has a solid balance sheet. Annual sales growth has averaged 48% over the last five years. Trailing PE is 25 and forward PE is 15. EPS this year was up 16.6% and next year is expected to be up an additional 18.7%. Total debt to equity at 0.04 is very low.

Data by YCharts

Good growth, low debt, a solid balance sheet, and a top position in the fast-growing solar sector make SEDG a very attractive investment.

SolarEdge is not sitting on its laurels. The company is actively collaborating with Google (GOOG) (GOOGL) to integrate EV charging (another fast-growth sector) with solar systems, and it is also now getting into the hyper-growth energy storage business.

Enphase Energy, Inc. (ENPH)

Enphase is a huge turnaround story. Back in 2017, the company was in dire straits; rumors of bankruptcy swirled. Then, in August of that year, Badri Kothandaraman, the former COO, became CEO and the stock has been on a rocket ever since - up 17-fold from the lows of that year.

Sales in Q1 2019 are up 43% over the previous year. The company is just now becoming profitable and has an expected forward PE of 27. ENPH is also making progress reducing its considerable debt (Total debt to equity is high at 4.85). In January, it paid off an onerous term loan, which substantially reduced interest expense and removed restrictive liens.

Why all the excitement? Well, the company, always known for great (but expensive) technology, has both reduced costs while at the same time improving the technology. As a result, its microinverters - the company's main product - are flying off the shelf (Microinverters change DC to AC at the panel level rather than at the system level as most competitors do).

Enphase is now into its eighth generation of microinverters, the IQ8. Its microinverters are built with semiconductor-based Application Specific Integrated Circuits (ASICs). As noted above, the product keeps evolving, getting cheaper, becoming easier to install, more powerful, and lighter. It's not just new installs, but the microinverters also can upgrade existing systems.

Enphase also builds redundancy into its products - a single failure point does not bring the entire system down. This, of course, is a highly desirable feature for mission-critical applications.

Readers who wish to delve deeper into Enphase's technology and prospects are encouraged to read Seeking Alpha author TJ Roberts' multiple articles on the company. Roberts is a bull on the company, but as he installs them, probably knows what he is talking about.

Based in Freemont, California, Enphase markets its products in the United States, Canada, Europe, and Australia.

Data by YCharts

Like SolarEdge, Enphase offers storage solutions. Its microinverters are compatible with hundreds of contractors, and it partners with large companies such as SunPower (SPWR) and Panasonic (OTCPK:PCRFY).

Any stock which goes up 17-fold in two years practically screams overvaluation. Adding to the caution: Enphase is just now becoming profitable and does not have competitor SolarEdge's solid balance sheet. Long term, however, the company looks well positioned and appears to have a major role to play in the flourishing solar sector.

Sunrun (RUN)

Sunrun is the largest residential/commercial solar installer in the U.S. Many analysts though are bearish on the company. Shares are on a run (pun intended) - up 64% this year.

Financial metrics show sales growth has averaged 69% annually over the last five years. Revenue growth is expected to climb an additional 35% this year, while EPS is expected to grow 30% annually over the next five years. Forward PE is 18, while total debt to equity is relatively high at 2.36.

Recent Seeking Alpha articles on Sunrun have been mostly bearish. And it's true the company's financials are not exactly stellar - relatively high debt and low margins. Also, home solar installation companies have seen spectacular failures in the past. Yet the stock has done well. So why the strong performance?

To find positives, I checked out the company website (always a source of optimism), a recent Barron's article, and, just in, a customer satisfaction review.

The company's website heralds "Freedom, Simplicity, and Sustainability" and follows that up with a well-written, chatty summary of why it will make you, a potential customer, happy. Since company websites are well-known sources of optimism (even in near bankruptcy situations), let's look at some less biased sources.

Barron's, in a February article, claims Sunrun's stock looks ready to soar. The article notes that the U.S.'s top solar installer has long-term contracts which provide long-term, positive cash flows. Also, as solar module prices plunge, Sunrun's costs are falling.

Perhaps most intriguing: the article notes that Sunrun, with its solar and BrightBox battery products, has the potential to help remake the American power grid. Sunrun's virtual power plant project in Los Angeles shows how it might be done.

As to customer satisfaction, EnergySage notes customers are mostly happy with Sunrun. Rating websites such as Yelp, ConsumerAffairs, Better Business Bureau, Facebook, and BestCompany.com all show mostly positive ratings from Sunrun customers. Friendly salespeople, hassle-free installs, and flexible financing were frequently mentioned.

It might also be noted that Sunrun is partnering with Enphase to offer that company's microinverters to its customers. This is all heady stuff and might explain why Goldman Sachs upgraded Sunrun to a buy on June 18.

Data by YCharts

Sunrun's less than solid RUN financials may give investors pause, but the company appears to have a lot of positives going for it as it runs with the solar installation boom.

Takeaway

The solar sector has matured and the fly-by-night operators have been replaced by solid, profitable, and fast-growing companies. The recent integration of storage and digital controls has opened up high growth opportunities which the above three companies are exploiting.

Solar energy and battery costs continue to fall. When this trend is paired with digital, often app based, technology, one can see that smart solar has a bright future.

Erosion and replacement of fossil fuel dominance are already well underway in regions with high electric rates and, eventually, it will be everywhere. Climate change fears will only accelerate the process. Investors need to be aware of this fast-evolving revolution.

Disclosure: I am/we are long SEDG, ENPH, PCRFY. 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.