Solar stocks took a beating in 2012. Throughout 2013, however, they have been providing investors double-digit returns; some solar stocks, such as SunPower Corporation (NASDAQ:SPWR) have even churned triple-digit returns year to date. But how much longer will this bullish movement continue? Is it too late to buy?
There is still concern surrounding the long-term viability of solar energy. Looking at the very big picture, I believe this industry is still at a very immature stage of its development. There will no doubt be struggles ahead as efforts continue to make solar use more feasible for large-scale powering needs, but I think the market's 2013 price action undeniably shows support for several U.S. solar stocks.
First Solar (NASDAQ:FSLR): This stock fell from $170 down to about $30 in 2011 alone. This has been a personal favorite solar stock for a number of reasons. I kept a close eye on its financial performance as the stock lost over 96% of its value during the recession. I constantly find myself impressed with First Solar's steady sales growth and stable EBITDA figures. I feel comfortable with its P/E ratio of around 12.8. Unlike some close peers, it has positive EPS and sports a lower beta than the industry average.
First Solar recently reported 3Q 2013 sales about 55% higher than 3Q 2012 figures and beat analyst EPS estimates by 128% ($2.28/share vs. $1.00 estimate). The company has long-term contracts in place to ensure stable revenue for the next several years. This appears to be an important objective for the company. I think management has consistently made smart decisions about how they're managing the business. The past six quarters the company has managed a gross margin of between 22.4%-28.7% with the average being roughly 26.7%.
SolarCity (NASDAQ:SCTY): SolarCity's public debut was less than a year ago, and the stock price has already soared 450%. If you glance at the available financial data, you will see that revenue has been on a steady rise the past several years. The consistent annual net losses are concerning, however. There is no evidence of improvement in the quarterly figures' trend. This stock has likely performed well not because of strong historical financial data but because of well deserved promise for strong numbers in the future. Unfortunately, the street still didn't seem impressed with Q3 numbers.
SolarCity has a deal with Wal-Mart (NYSE:WMT) to install solar panels to help power its stores. This is a great business relationship to have. The solar installations are expected to provide approximately 20%-30% of the total power for those stores. By the end of 2013 more than 130 Wal-Mart stores will have solar panels installed by SolarCity. The relationship seems strong, which I think will remain important for SolarCity in the near future. SolarCity's business model is clearly being crafted around the idea of creating a one-stop shop for both residential and non-residential consumers interested in installing a solar panel system in their home or business.
SunPower: SunPower has been in the solar business for 28 years. This was one of the most badly beaten down U.S. solar names in 2008-2012. In 2008 it traded its highest at $164.49, then as low as $3.71 in 2012. After this stock lost 97.7% of its total market value, it went on to shoot up 580% year to date.
SunPower offers a program where customers can lease panels and still save money on their energy bill (very similar to SolarCity's offering). I think solar producers will find a big source of cash flow over the next several years using the leasing concept with both residential and non-residential consumers. If you could save 15% on your electric bill without putting in much effort, why not sign up? I'm eager to see how much this contributes to the bottom line for SunPower and other companies adopting this model.
Gross margins for SunPower have averaged 17% over the past five years. The only concerning element on its balance sheet is debt: This is a company that is substantially leveraged. If that's something that concerns you as an investor, you might keep an eye on this to make sure it is managed well.
We saw many solar stocks get absolutely crushed over the past several years. I personally feel that First Solar is the bellwether among U.S. solar stocks and is my No. 1 pick from a pure risk/reward standpoint. There is a good chance that by holding some other solar names, such as Sunpower or SolarCity, in your portfolio you could see significantly more volatile returns.
From a 5-20 year time horizon, it is still too early to tell which solar company will emerge as a clear leader. They are all aggressively taking new approaches to differentiate themselves in a very competitive market. I personally will be investing in one of the many solar ETFs that include these three big solar names. I have faith in these companies' business models and in general the long-term viability of the solar industry.
Fool contributor Mark Jones has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. 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.