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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Power-One (Nasdaq: PWER ) today, and see why you might want to buy, sell, or hold it.
Founded in 1973 and based in California, Power-One has a market capitalization near $600 million. It specializes in power supply products for a range of industries, including renewable-energy (RE) inverters that convert solar or wind energy into forms usable in power grids. Over the past year, the stock is down 9%. Over the past five years, it has averaged an annual loss of 4%.
A key reason to be interested in Power-One is if you believe that our planet's future includes growing use of solar and wind power. That's not necessarily enough, though, as many such companies have not rewarded investors in recent years. You have to settle on the companies that will be winners and to invest in them over the right time frame. First Solar (Nasdaq: FSLR ) , for example, is down 63% over the past year, and has averaged a 30% annual loss over the past five.
Fellow solar specialist GT Advanced Technologies (Nasdaq: GTAT ) is down 38% over the past year, and has averaged a 6% loss over the past three. First Solar has been hurt by a supply glut of solar panels, and has also suffered from product reliability issues. GT Advanced Technologies is viewed as stronger, though some question why it's taking on more debt when it has plenty of cash.
But back to the solar energy industry. There's a lot to be hopeful about regarding solar power. My colleague Travis Hoium has offered some "solar stats that will blow your mind," such as strong growth of solar power in the U.S., sharply dropping prices for it, and major companies investing heavily in it for their own power needs. He has also drawn similarities between the solar and wind industries, pointing out how, whereas the U.S. was an early mover, China has become a major player, and competition has intensified.
The company's financials offer more reason to be hopeful. Until the past year or so, revenue was growing at double-digit rates. Meanwhile, earnings turned positive in the past few years, but they've been inching downward a bit. (Again, these have been tough years for the industry.) The company's cash pile has been steadily growing, and it has paid off its long-term debt, leaving its balance sheet very attractive.
It has solid prospects, too, leading in the inverter market, expecting a boost in demand from China and emerging markets, and seeing overall growth in demand as solar energy becomes more affordable in many regions.
Those same financials offer some reasons to steer clear of Power-One, too: Revenue has been roughly flat in recent years, and earnings have been trending downward. Free cash flow is solid over the past year, but it has alternated between positive and negative in recent years. The latest earnings report was positive, though, and Power-One raised its projections.
Another concern is the company's share count, which has been creeping upward in recent years, from 88 million at the end of 2009 to 146 million in its last quarter. Rising share counts can dilute the value of existing shares and hurt shareholders, so it's worth keeping an eye on this.
Then there's the danger of commoditization. As solar products become commodities and competition heats up, profit margins are likely to fall. (This can sometimes be countered if a company is able to brand itself, as Intel (Nasdaq: INTC ) did with its "Intel Inside" campaign.)
Given the reasons to buy or sell Power-One, it's not unreasonable to decide to just hold off. You might want to wait for it to post a string of profitable quarters, and for the alternative-energy business to pick up more.
You might also look at other players in the alternative-energy world. Small ones that turn into long-term winners may pay off the most, but they carry more risk. Thus, some big and diversified companies are worth considering, such as General Electric (NYSE: GE ) , which has recently installed 300 wind turbines in Brazil, and announced partnerships with energy concerns in Turkey and Mexico. In solar power, though, GE is holding off on some projects, due to the not-so-profitable environment. Another area where GE is getting busy is in batteries, as energy storage is a promising field.
I'm going to pass on Power-One at the moment. Everyone's investment calculations are different, though, so do your own digging, and see what you think. Remember that there are plenty of other compelling stocks out there.