The Only Way to Play Solar

The heating up of the solar industry has been less than fun for retail investors. American innovation is at work in developing incredible solar technology, but fierce competition from government-subsidized Chinese firms has many solar companies on the ropes. As a result, investors lost their bottoms on their solar stocks. The technology involved is by far the most important for the future of solar, but if you want to make money on solar right now, invest a little further up the value chain.

Tough crowd, tough crowd
The innovative companies involved in solar design and manufacturing are doing incredible things that I could never explain to you. Anyone from the U.S. government to Google is providing billions of dollars to start-ups and their older siblings, a collection of publicly traded companies, to improve on existing solar design and make it more accessible and efficient. In the long term, this will be a great force that will help the U.S. move from unsustainable energy practices to slightly less unsustainable ones. But right now, these companies are struggling big time.

China is heavily subsidizing its solar manufacturers, allowing them to unload their products and flood the market, leading to lower prices. Companies like SunPower (Nasdaq: SPWR  ) , First Solar (Nasdaq: FSLR  ) , and SunTech Power Holdings (Nasdaq: STP  ) have gotten the crap kicked out of them as if they were Glenn Beck's career. The stocks once traded high on the hopes of an energy revolution, only to sink like... Glenn Beck's career. If you had invested in those three companies two years ago, you would be down nearly 80%.

So, wisely, investors aren't as interested in the big solar plays as they have proved too hard to value and guess when the companies will regain margins and either return to or increase profitability.

What's that? Profit?
Low and behold, someone is making money in the solar game. Installers and financiers of panels are the winners in today's solar landscape. These are companies, small and mainly private, focusing on small and medium-scale projects using very low-cost materials. Only one is publicly traded, and it's a $30 million company. It's called Real Goods Solar. Real Goods is based in Colorado and recently expanded to the East Coast, a mythical place riddled with subsidies to encourage individuals to panel up (yes, I said East). In its last quarter, the company increased gross margins by almost 28%! The solar installer is the beneficiary of the pricing battle and will only benefit from increasing demand.

The company has yet to turn a profit, but once the dust settles from its East Coast acquisition, Alteris, I think the numbers will go beaming into the black.

Another company, set to go public this year, is SolarCity. It's valued at around $1.5 billion, with a large market share of the residential and commercial panel installation market. The Rive brothers, founders of SolarCity, have Elon Musk, the co-founder of PayPal and Tesla Motors among others, as the chairman of the board, and a bevy of other big-name investors backing them as well.

Nice business model, bro
SolarCity and a few other companies are not just installing panels, they are creating lucrative investment packages. For example, after signing a contract with a homeowner to install panels on his home, SolarCity collects a fee from the homeowner as the customer will then pay a reduced or no utility bill at all. The energy systems are then put in tranches and sold to investors. In a Wall Street Journal interview, Nat Kreamer, CEO of competitor Clean Power Finance, says investors can expect a 9%-14% return on the investment bundles. That return significantly outperforms the majority of mutual funds.

If you want to be involved in solar but aren't keen on tying up funds into risky assets, these are companies to keep in mind. Essentially, you have lower risk and understandable businesses with built-in demand from the government and the investment community.

A bright future (really, dude?)
A shift to solar will be difficult to build and it will only reduce the reliance on fossil fuels energy production, but it is a step in the right direction. There is a tremendous amount of money to be made in the industry, but it may take time to realize the value in some of the tech-oriented risk takers. For now, keep an eye on the companies I mentioned, as more are sure to pop up.

Alternative energy is a tricky space. I typically shy away from any tech-reliant companies as they are just too difficult to forecast. While oil might not save the world, it is a more predictable business. There are plenty of good companies for your portfolio's oil exposure, but I would take a look at some that our analysts have pinpointed as being especially attractive. Check out the free report "3 Stocks for $100 Oil."

Fool contributor Michael Lewis owns none of the stocks mentioned. The Motley Fool owns shares of Tesla Motors. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, First Solar, and Tesla Motors. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 20, 2012, at 10:23 PM, sailrick wrote:

    "U.S. move from unsustainable energy practices to slightly less unsustainable ones"

    Although your insights about installers being a good place to invest are spot on, I really don't know what the above sentence is supposed to mean. There is a world of difference in sustainabilty, between fossil fuels and solar or wind power.

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