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Rising Star Buy: SunPower

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This article is part of our Rising Stars Portfolio series.

Renewable energy stocks are solid contenders for a socially responsible portfolio. And while many stocks rallied in 2010, solar stocks took a real beating. This presents an opportunity to profit off others' pessimism, and buy a promising green energy stock at a low, low price for my SRI-focused Rising Stars portfolio.

After weighing alternatives like low-price solar leader First Solar, I settled on one choice: SunPower (Nasdaq: SPWRA  ) .

The business
San Jose, Calif.-based SunPower, a subsidiary of Cypress Semiconductor until late 2008, has a holistic approach to the solar panel business. It targets the entire gamut of customers seeking green energy alternatives: governments, corporations, utilities, homebuilders, and even homeowners.

SunPower isn't a newbie upstart in the alternative energy field. One of the company's co-founders, Dr. Richard Swanson, has been working on solar energy since the oil crisis in the 1970s. The company was incorporated in 1985.

Today, SunPower boasts high-efficiency solar solutions that generate 50% more power than conventional solar products. SunPower also boasts lowered distribution costs, thanks to less packaging and more efficient use of silicon in its products.

Last month, SunPower proclaimed that concentrated photovoltaic solar, which tracks the sun's path to harness the most sun energy in its products, could be a "game-changer" next year. Although other solar companies also plan to jump onto this bandwagon, SunPower's history of innovation and forward thinking should make it a solid contender for rising opportunity.

Why I'm buying
The largely unharnessed power that emanates from our life-giving sun has long been a fascinating and logical route to clean, renewable energy.

SunPower is one of the solar stocks that took a particular beating in 2010, watching its share price get slashed in half. Basically, it's cheap. Although it trades at 38 times trailing earnings, its forward price-to-earnings ratio is just 8. Its PEG ratio is likewise appealing, at 0.36. SunPower's low valuation reflects investors' flight from this segment last year, even though the solar industry still has plenty of growth prospects.

Demand hasn't dried up, and solar providers continue to get contracts for their products. SunPower has started the new year off on a sunny note, having just announced an agreement to deliver over 700 megawatts of solar power to Southern California Edison, a unit of Edison International.

And now, the risks
Admittedly, I consider SunPower more perilous than my previous portfolio purchases, Timberland and Costco.

Renewable energy still depends heavily on government subsidies and policies, which can be either good or bad for the solar industry. Germany, the largest current market for solar, is ratcheting back its support of solar power through feed-in tariffs, which encouraged widespread adoption of solar panels. Germany's adjustment of its green energy incentives helped feed the downbeat outlook that has plagued these stocks recently.

Solar power is just one form of alternative energy in a marketplace still dominated by fossil fuels. That means green energy concerns compete with traditional, entrenched utilities. In addition, renewable energy companies compete with one another; other alternatives include wind, hydro, biomass, as well as emerging technologies such as microturbines and fuel cells.

Even in solar power, there's no shortage of competitors, including First Solar, Trina, SunTech Power, and Solarfun, to name just a few.

There's a good chance of failure in this industry, regardless of a company's size, resources, or name recognition. As Fast Company recently chronicled, several years ago Applied Materials (Nasdaq: AMAT  ) was expected to revolutionize and disrupt the thin-film solar industry. Instead, it went supernova in that segment, shutting down its solar operations last summer. Even the mighty (and well-respected and well-capitalized) can fall here.

My Foolish bottom line
Despite the ups and downs that are bound to occur over the years, the market for alternative energy won't go away. In the near term, demand in the U.S. and elsewhere should offset some of the slowdown in Germany, and there are myriad reasons why so many of people all over the globe are looking for better, cleaner, cheaper alternatives to fossil fuels. As far as the long haul goes, this trend is certain to continue, out of necessity alone.

What better way to invest than in a company that seeks to harness the power of a clean, green resource that won't run out? SunPower shines an additional green light on this SRI portfolio.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

First Solar and Suntech Power are Motley Fool Rule Breakers selections. Costco is a Motley Fool Inside Value recommendation. The Fool owns shares of Costco and Timberland, which are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 5:23 PM, brucedieter wrote:

    Government subsidies big boosters for this nascent industry as exemplified by Germany who started with annually decreasing rebates. Germany was singled out by the author, that is the reason. Obama sold out to the Republicans so for the next two years, at least, there will be no advances made from solar; not dissimilar to eight years of Bush's censors preventing the truth about global warming from reaching the public. Only once governent (the United States) admits to the tipping point from being surpassed, and real problems ahead due to coal plants (exasperated by electric cars coming on stream) will solar be king.

  • Report this Comment On January 11, 2011, at 6:14 PM, SonicFoolAz wrote:

    Unfortunately we are a crisis driven society. Until there is a crisis there will be little advancement.

  • Report this Comment On January 19, 2011, at 8:26 PM, CMFStan8331 wrote:

    I agree that solar is likely to become an important part of our long-term energy future, but the idea of investing in solar stocks right now makes me very nervous. Additional technological breakthroughs are likely necessary before solar becomes a large-scale energy source, and it's really difficult to predict long-term winners and losers when that's the case.

  • Report this Comment On February 20, 2011, at 3:41 PM, mjtri wrote:

    Big picture: Solar will continue its advances although perhaps not the rapid advances made during the Bush administration. Tariffs will be reduced as is happening in Germany, but reduced costs are more than making up for it so far.

    Smaller picture: SunPower is reducing costs quickly and seems to managing its cash well. I'd still like to see more free cash flow.

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