Which Are the Bargains In Solar Stocks?

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Includes: CSIQ, CSUN, ESLRQ, FSLR, HQCL, JASO, SPWR, STP, TSL
by: John Ryden

I think everyone can agree that solar company stocks have been volatile. There seems to be lots of disagreement on their current valuation. Some people see the stocks as having run up too much, over-bought and expensive, suggesting they should decline back to reasonable levels. Others see the stocks as cheap and are just getting started on major up moves.

All of these companies produce basically the same product. The product converts sunlight into electricity. Some of the companies use basic semi-conductor manufacturing processes to turn polysilicon into photo-electric cells. Other companies use more exotic (different) processes to make cells out of thin films.

This chart () shows us that all of the solar companies are growing rapidly. They are selling at high multiples of trailing earnings, but low multiples of future expected earnings. Many of the companies reported great growth in revenue and earnings in their last quarterly reports, beating analyst expectations. I like the trend.

On my web site I did a review of solar cell manufacturers, comparing their 2007 production of 3.8 GW of power producing capacity with world energy consumption. This is a trivial amount of capacity. They could produce over 10 GW in 2008 and still be only a tiny fraction of world new installed capacity. As long a countries like Germany, Spain and the United States continue to subsidize new solar systems, there seems to be plenty of demand that can't all be met for several years at least.

I like solar stocks as an investment in alternative energy and believe the future for these companies to be bright! I think the government incentive programs will continue and these stocks are cheap based on possible double or triple digit future growth. I especially like the stocks trading at low forward P/E ratios and low 5 year expected PEGs.

Disclosure: I have long positions in CSIQ and TSL.