Is Now the Time to Buy Solar Stocks?

Most solar stocks have been absolutely crushed over the past month as the broader markets have sold off. With the exception of First Solar (NASDAQ: FSLR  ) the biggest and most profitable companies in the industry are trading well below their 52-week highs.

SPWR Chart

SPWR data by YCharts.

The sell-off has brought down everyone from module makers SunPower (NASDAQ: SPWR  ) and Trina Solar (NYSE: TSL  ) to SolarCity (NASDAQ: SCTY  ) , the dominant residential solar installer. Given the fact that first-quarter earnings are just a few weeks away, it's worth looking at whether the sell-off is justified.

Residential solar gets most of the attention, but it's massive projects like this that account for most solar installed in the U.S. Source: SunPower.

Q1 will be a blowout for solar
We don't yet know exactly what first-quarter earnings will look like, but the signs point to another outstanding quarter. Solarbuzz recently estimated that first-quarter global demand for solar was 9 GW, 25% higher than a year ago.  

For manufacturers, that's a huge positive because an imbalance of supply and demand have led to low panel prices and low margins. In 2013, the industry started to shift toward more of a supply/demand balance, and prices started to rise. It looks like the trend will continue in 2014, and demand for the year could grow from 37 GW to over 50 GW.

Solar value is only improving
As the price of solar stocks fall, the value they're giving investors is improving. That's because earnings are rising as prices are falling. You can see below that First Solar, Trina Solar, and SunPower all saw earnings improve throughout 2013 and trade at reasonable valuations based on this year's estimates. Keep in mind that SunPower and Trina Solar crushed estimates in 2013, and given the trends, I think they'll do so again this year.

 

EPS Q1 2013

EPS Q4 2013

Forward P/E

First Solar

$0.69

$0.89

28.3

Trina Solar

-$0.90

$0.13

15.4

SunPower

$0.22

$0.47

24.7

Source: Yahoo! Finance.

If the market for solar grows overall, it's good for First Solar's long-term prospects as well as SolarCity, who is already expecting to grow installations up to 90% this year.

Foolish bottom line
All signs point to a great year for solar companies, even as their stocks fall. I expect record installations both in the U.S. and globally, expanding margins for manufacturers, and even capacity expansions for next-generation panels.

Put it all together, and I think now is the time to buy solar stocks. This is an opportunity to get in on an industry early in its growth phase and hang on for the ride. Just keep in mind that the ride can be volatile, as the last month has shown.

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Read/Post Comments (8) | Recommend This Article (1)

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  • Report this Comment On April 09, 2014, at 9:13 AM, chrisceeaustin wrote:

    I am surprised you left out Jinko (JKS) from your analysis. Barclays just came out with a 51 dollar price target for this company, perhaps the company with the highest gross margin in solar. The stock is solidly below 30 still, so that's almost a 70 percent gain Barclay sees.

  • Report this Comment On April 09, 2014, at 9:18 AM, clanza875 wrote:

    Your chart is very misleading as its based on NonGAAP numbers. The GAAP numbers tell a very different story. At the very least you should disclose the numbers are not based on GAAP accounting.

  • Report this Comment On April 09, 2014, at 9:24 AM, kunfu wrote:

    Yeah and why didn't you pick JA Solar, Currently latest PT of $19, What's up?

    Another 90% to go here from where it's currently sits.

  • Report this Comment On April 10, 2014, at 11:27 AM, DMC wrote:

    Travis, how does the blowout quarter comment apply to Chinese solar in your view? As you noted earlier this year, if those companies can't do brilliantly with good prices and high volume, such as last quarter, how will they fare in a quarter when they say their shipments will be significantly lower and when it seems module price is also in a downtrend.

  • Report this Comment On April 10, 2014, at 1:13 PM, vaultc wrote:

    What about CSIQ; Canadian Solar?

  • Report this Comment On April 10, 2014, at 1:32 PM, TMFFlushDraw wrote:

    Thanks for the comments everyone. A couple things in response.

    - I can't include every company in my articles so I have to pick and choose which ones to analyze. JKS and CSIQ would be two of the other top manufacturers I would look at from China.

    - Wall Street price targets are ridiculous for a number of reasons and you should ask for the analyst's 5-year price target history and see how it matches up to reality. Wall Street has been terrible at understanding solar so I'd take anything they say with a grain of salt (also see the article below for a further look at what ratings really mean). I hope I've provided meaningful insight here and you're free to judge my analysis and opinions on my track record. It's very public and free. I haven't gotten everything right but I hope I've been right more often than not.

    http://www.fool.com/investing/general/2013/06/03/the-shockin...

    - To @DMC's question: Chinese solar companies are extremely tough for me to analyze right now for a variety of reasons. Short-term, the rise in module prices should help them. GTM Research just said today that it expects a rise in prices this year and given supply/expected demand that makes sense. On the downside, many are still highly leveraged and owe billions to Chinese state run banks, who are pulling back on solar loans, which fueled expansion in the first place. This leaves them with less capital to invest in the next generation of equipment, which will start going in late this year and into 2015. GTAT has already said that China isn't where their new equipment is going in, it's going into the Middle East, Africa, Eastern Europe. So, short-term Chinese companies should do better, but long-term they're at risk from better technology being built elsewhere.

    Then we could get into what you actually own when you buy a Chinese solar stock and if you want a peak into that just look at the LDK and STP litigation taking place right now. It'll make your head spin.

    Long answer but I hope that helps.

    Travis Hoium

  • Report this Comment On April 10, 2014, at 3:54 PM, DMC wrote:

    Thanks Travis, I appreciate it, and I don't disagree with most of that, but my question was actually re Q1, which you mentioned would be blowout. Despite what GTM says about the year, isn't the trend for Q1 downward prices and fewer shipments?

  • Report this Comment On April 10, 2014, at 9:54 PM, TMFFlushDraw wrote:

    @DMC

    Blowout may need some context. It won't be better than Q4 but it'll be the best ever Q1.

    Industry data I've seen is mixed on pricing. Some show higher prices than Q4, some lower. Prices are flatfish Y/Y though, which is a positive long-term trend. Q4 is always a really high installations quarter so Y/Y is often more useful.

    Yingli did just come out with preliminary numbers and said shipments were lower than expected in Q1 because of lower than expected Chinese demand.

    It'll be interesting to see if a shift toward higher quality (both quality product and balance sheet) continues in 2014, which may have hurt YGE. Shipments were mixed last year as installers chose companies that had better balance sheets after the Suntech and LDK Solar bankruptcies. YGE is one data point so wait and see what everyone else has to say.

    I think the quarter will be great Y/Y for the best manufacturers (SPWR, TSL, JKS).

    Hope that made sense but I feel like I'm rambling.

    Travis Hoium

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