Can Solar Stocks Continue Their Hot Streak?

Solar stocks have gone up this year on very little news. If SolarCity, SunPower, and First Solar are going to continue outperforming the market they'll need to show operational improvement and earnings season will show their progress.

Jan 16, 2014 at 5:03PM

SolarCity (NASDAQ:SCTY) was up as much as 10% today, and competitor SunPower (NASDAQ:SPWR) hasn't been too far behind. The catalyst of today's move was an upgrade of SolarCity from Deutsche Bank, which now thinks the stock is a buy.

Like Goldman Sachs earlier this month, Deutsche is getting into the solar game a little late after SolarCity has had a long run-up over the past year.

SCTY Total Return Price Chart

SCTY Total Return Price data by YCharts

The question now is if solar stocks can continue their hot run. Below, I'll cover what SolarCity, SunPower, and First Solar (NASDAQ:FSLR) need to do to outperform the market this year.

The rubber hits the road
We're less than a month from solar earnings season and that's where the run-up over the past month or two will really be tested. In a hot industry like solar, hitting your numbers often isn't good enough, so wowing investors will be important.

For SolarCity, management said it would deploy 101 MW of solar in the fourth quarter and 475 MW-525 MW in 2014. That's as much as 90% growth this year and is a main reason the stock is up so much in recent months. Keep an eye on continued growth momentum as well as retained value per watt, which last quarter stood at $1.37. This figure should creep higher this year along with total retained value, the figure used to approximate SolarCity's overall value.  

For SunPower, the stock's run will only continue if the company continues to increase profits. 2013 saw operations swing from huge losses to as much as a $1.50 profit per share this year on a non-GAAP basis. The stock sank after last quarter's report because investors were spooked that 2014 earnings may only be $1 per share, so look for guidance to get an indication as to where the stock is going. Higher prices in the market should help results, and SunPower really needs another blowout quarter to keep the stock moving higher.

SPWR Revenue (TTM) Chart

SPWR Revenue (TTM) data by YCharts

First Solar is the forgotten player in solar because it doesn't have exposure to the more popular residential solar market. But it's also the most profitable with $5.40 per share in earnings over the past year. For First Solar to begin performing like SolarCity and SunPower we'll need to see backlog increase and panel efficiency improve dramatically so the company's technology doesn't fall behind. That's what could push the stock higher this year.

Expecting 300% gains from any of these stocks is setting expectations too high this year. But there's still a lot of upside, especially for SolarCity and SunPower if they can continue to grow installments and increase margins. Doubling again this year isn't out of the question if they perform well operationally.

High quality is winning
We don't know exactly where solar stocks are headed over the next year, but it's reasonable to predict that high quality companies will continue to outperform low quality companies. Despite the incredible year solar had last year, LDK Solar and Suntech Power are essentially insolvent and won't survive long-term.

On the flip side, SolarCity, SunPower, and First Solar are thriving and lowering costs. Long-term, that will keep them competitive in solar and should help push their stocks higher.

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Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. 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.

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