With the economy as weak as it is now, there aren’t many good growth industries. The most commonly cited growth industry might be biotech, but the multiples in that sector are generally fairly lofty. Individual growth companies like Amazon, Google, and Facebook may look promising, but each carries a substantial amount of risk associated with owning an individual company, and all are well known already. Investors looking for a value with growth should consider the solar sector.
The solar sector is growing very rapidly as anyone who looks at the data knows. It’s impossible to turn on the news or drive down a street without seeing some subtle signs of how the increasing proliferation of solar is impacting the energy sector. That’s not to say that traditional energy companies won’t continue to exist and even thrive – but it is important to acknowledge the reality that the energy generation landscape is evolving.
Despite the promise of the industry, solar stocks are generally fairly inexpensive by many metrics. Part of the problem is that many of the companies in the nascent industry are unstable. Further, high profile events like bankruptcy of SunEdison are not helping the situation. And finally, the investment landscape in the industry is evolving rapidly. Tesla recently announced it was buying SolarCity. Trina Solar has told investors that it will be going private. Many investors are speculating about what other mergers or delistings…
With the economy as weak as it is now, there aren’t many good growth industries. The most commonly cited growth industry might be biotech, but the multiples in that sector are generally fairly lofty. Individual growth companies like Amazon, Google, and Facebook may look promising, but each carries a substantial amount of risk associated with owning an individual company, and all are well known already. Investors looking for a value with growth should consider the solar sector.
The solar sector is growing very rapidly as anyone who looks at the data knows. It’s impossible to turn on the news or drive down a street without seeing some subtle signs of how the increasing proliferation of solar is impacting the energy sector. That’s not to say that traditional energy companies won’t continue to exist and even thrive – but it is important to acknowledge the reality that the energy generation landscape is evolving.
Despite the promise of the industry, solar stocks are generally fairly inexpensive by many metrics. Part of the problem is that many of the companies in the nascent industry are unstable. Further, high profile events like bankruptcy of SunEdison are not helping the situation. And finally, the investment landscape in the industry is evolving rapidly. Tesla recently announced it was buying SolarCity. Trina Solar has told investors that it will be going private. Many investors are speculating about what other mergers or delistings could occur in the future.
With all of these changes, it is little wonder that investors are nervous about solar stocks. But that nervousness has helped to push valuations on many companies to reasonable levels given likely future earnings in the space. Against this backdrop, investors should reconsider opportunities here.
There are a number of remaining firms with enough stability in the space to be worth a look. The biggest player by far is First Solar. At roughly $5B in market cap, the company offers stability that’s lacking with many other players. First Solar manufactures and sells solar panels so it is poised to capitalize on advances in technology in the solar space. Investors looking for a market leader should certainly consider the stock.
Sunpower is another major firm in the solar arena. The $2B company has had a rough few months with its stock price cut in half since the start of the year. That negative trend has likely scared off many, but that may create opportunities for contrarian investors. Sunpower has a lot of positive aspects including a strong technology position, but the SunEdison situation has some investors nervous about how SPWR will perform, especially if the Fed starts to raise interest rates. To that end, investors have generally reacted positively to divestiture announcements from SPWR, like the recent deal to sell a controlling stake in the Henrietta Solar project in Southern California to Southern Co. On the whole, there is enough positive news coming out regarding SPWR that it is worth
For investors looking for smaller solar companies with more risk but also more potential upside, there are several names in the space that are still worth considering. One such firm is Jinko Solar (JKS). The $600M Chinese company manufactures solar system equipment. The firm is a low cost leader in its space. Investors should be aware that JKS is not be as technologically advanced as some other companies, and it is possible that future technology improvement could make JKS’ equipment outdated. These risks need to be weighed against the benefits that stem from JKS’ low cost leadership.
Similarly, JA Solar (JASO) and Canadian Solar (CSIQ) are also worth considering. Both compete head to head with Jinko, and each has its own customer base. JA Solar is another low cost Chinese manufacturer, while Canadian Solar is a Canadian firm (as the name implies) and is arguably a little more advanced in terms of the sophistication of its products. Both firms have market caps under $1B, and both have significant growth potential over time – if they can keep up with the pace of change in the industry.
Finally for investors who want to avoid picking favorites among solar stocks and the risks associated with that effort, ETFs present an alternative. The Guggenheim Solar ETF, ticker symbol TAN is a good choice for those that want to go this route. It’s a pure play solar ETF, but it is large enough that tradeability and liquidity are not a concern for individual investors. Fees on the ETF are reasonable, though higher than what you’d pay for a typical low cost broad market basket like those from Vanguard.
Regardless of the strategy one takes, it is clear that the solar sector has endured a rough year. The fundamentals in the space are strong though, and the sun is not going to set on the solar space anytime soon. Given that, investors should look closely at the opportunities and make decisions accordingly.
