San Francisco-based JMP Securities is not the best stock picker on the planet -- but it's close. And when a stock picker this good spends a full day telling you about solar stocks, you might want to hear what they have to say. Assuming that is, that you're interested in solar stocks...
According to our records on Motley Fool CAPS, which stretch back through more than a decade of stock picking by JMP, this analyst has a record of only 45% accuracy on its recommendations. And yet, the picks that JMP has got right, it's gotten very right. Counting winners and losers combined, JMP has racked up a record of beating the market by an average of 20 percentage points per pick over the past decade, ranking it in the top 15% of investors we track.
Yesterday, JMP announced new ratings for six separate solar stocks (detailed here on StreetInsider.com). Today we're going to focus on just three of the highest profile ones: solar-inverter maker SolarEdge (NASDAQ:SEDG), and panel makers/solar plant operators First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR).
Here are three things you need to know about them.
1. What JMP likes about SolarEdge
On the whole, JMP is pretty optimistic about the solar industry, rating three of the six stocks reviewed today market outperform (aka buy). The analyst is particularly enthused about inverter maker SolarEdge.
According to GreenTechMedia, no fewer than four rival solar inverter makers have gone bankrupt, or shut down their operations, over the past three years. In stark contrast to those failures, JMP calls SolarEdge "the market share gain story in this industry." With less competition, and plenty of cash coming in to fund its own operations, JMP says "we do not see any signs of that trend reversing"
2. What JMP does not like about First Solar
One company that could do with a bit of market share gain is First Solar. As detailed on TheFly.com, JMP worries about the fact that the prices of solar panels are continuing to decline. Although falling prices are likely to increase demand for solar panels (that's just economics 101), falling prices are not good news for the companies that sell the panels -- companies like First Solar.
While First Solar is still profitable today, JMP warns that the company's "2017 earnings outlook" could be "impacted" by falling panel prices. According to Yahoo! Finance data, at least one analyst has already cut its earnings estimates for First Solar's earnings next year. JMP says First Solar stock is a sell, and likely to lose about 16% of its value over the course of the next year. If JMP is right about the earnings guidance, further downgrades could follow.
3. And what it doesn't like about SunPower, either
Last and least: SunPower. One of only two sell-equivalent ratings that JMP assigned yesterday, SunPower got the pointy end of the stick when JMP pegged its stock price for a decline to just $6 per share. From a current price north of $10, that amounts to the potential for investors to suffer 40% worth of losses on their SunPower stock over the next year.
Whereas the analyst's objections to First Solar hinge on the profitability of its panels business, at SunPower, JMP is more worried about "near-term challenges associated with" implementing the company's 14 gigawatts worth of upcoming solar projects.
The most important thing: Profits
Valuation-wise, these three stocks couldn't be more different, ranging from profitable and free-cash-flow-positive (SolarEdge), to profitable but free-cash-flow-negative (First Solar), to...neither profitable nor free-cash-flow-positive (that would be SunPower).
In fact, over the past 12 months, SunPower has racked up GAAP losses of $339 million, while its cash burn rate has zoomed past $1.4 billion. With numbers like those, it's not too surprising to learn that JMP thinks the stock is a sell.
JMP's recommendation to sell First Solar is a bit trickier. On the surface, First Solar stock looks pretty good. GAAP profits for the past year are close to $700 million a year, which is better than its full-year 2015 profits...which were better than the profits First Solar earned in 2014...which were better than 2013!
And yet, while First Solar generated positive free cash flow in 2013 and 2014, the stock dipped into the red last year, and was still burning cash at the rate of more than $150 million a year at last report, according to data from S&P Global Market Intelligence.
Only at SolarEdge does the hope for solar profits appear to still show a glimmer. Valued at $709 million, but with $133 million in the bank and no debt to speak of, SolarEdge sports an enterprise value of only $576 million -- a mere fraction of what First Solar and SunPower cost. SolarEdge reported earnings of $77 million over the past year, but only managed to convert half of that ($37 million) into free cash flow. Nevertheless, that's better cash production than either of the larger, panel-focused companies managed to do.
Weighed against the company's enterprise value, SolarEdge clocks in at a cash adjusted price-to-earnings ratio of just 7.5, and an EV/FCF ratio of 15.6. Both numbers look cheap relative to analyst expectations of 17% long-term annual earnings growth. But obviously, SolarEdge bulls would prefer that investors focus on the P/E number.