3 Out-of-Favor Solar Stocks to Buy Now

The solar industry has exploded onto the energy scene over the last two decades and seems like it's not slowing down anytime soon. According to Our World in Data and BP, total solar installations globally have grown from 0.65 gigawatts in 2000 to 40.1 GW in 2010 and 708 GW in 2020. That's enough to power 116 million U.S. homes. 

Despite this growth, not all solar energy stocks have outperformed the market over the last two decades. And some stocks have fallen out of favor for one reason or another. Three of our contributors think First Solar (FSLR 1.80%), Array Technologies (ARRY 0.13%), and Enphase Energy (ENPH 0.68%) are three of the stocks that may not be loved by the market but should be in your portfolio today. 

Image source: Getty Images.

Growth is coming to this solar manufacturer

Travis Hoium (First Solar): Solar panel manufacturers have been kind of forgotten by the market for most of the last half-decade because they've struggled to generate the growth and profitability that investors hoped for. But financials are now improving again as the industry matures and First Solar is once again looking attractive for investors. 

You can see below that in the past four years First Solar's bottom line has improved significantly, despite stagnant revenue, and it continues to maintain a strong cash position. This improved financial picture is what gave management the confidence to announce plans to nearly double manufacturing capacity from under 8 GW this year to about a 16 GW run rate in 2024. The improved scale should help improve revenue, but it could also help improve the bottom line as First Solar leverages its in-house research to improve product performance. 

FSLR Revenue (TTM) data by YCharts

What I like about First Solar today is that it's reasonably priced for investors, it has a lot of cash, and this could be a growth stock in solar energy. On the price front, shares trade at 20 times earnings, which is relatively inexpensive in today's market. This is without pulling out the $2.1 billion in cash on the balance sheet today or the $1.35 billion to $1.45 billion in net cash that's expected to be on the balance sheet at the end of the year. 

On the growth front, First Solar expanding production over the next three years should dramatically improve its financial performance. And with shares trading at a reasonable valuation and the company's balance sheet looking second to none, this is a solar stock I wouldn't overlook. 

Large solar installations should continue to grow

Howard Smith (Array Technologies): It may not seem out of favor with the stock up 40% in the past month, but shares of Array Technologies are still down 56% in 2021. The company manufactures ground-mounted systems used in large solar energy projects. Array's stock plunged 46% the day after it released its first-quarter earnings for the period ended March 31. Quickly increasing input and freight costs caused the company to pull back guidance and review its projects for profitability levels. 

But since that time, Array has reached supply agreements that have fixed 85% of its input costs for the balance of the year. The company said in its second-quarter earnings report that nearly all of its steel requirements are now locked in for 2021, as the company has both domestic and global agreements with two steel suppliers. 

The added visibility helped drive a partial recovery in the share price over the past month. And the business itself should support it. As of June 30, Array had a record $882 million in total executed contracts and awarded orders. And the secular trends in solar generation capacity growth should continue. 

A recent brief released by the U.S. Department of Energy said that though solar has been the fastest growing renewable energy source in the nation over the last decade, the rate of growth has to accelerate. The report said that to reach decarbonization goals, "solar deployment would need to accelerate to three to four times faster than its current rate by 2030." The DOE estimates that solar could grow from its current level of 3% of generation to over 40% by 2035.

Now that Array can include known input costs in project planning, it can be sure to receive acceptable returns. In the second-quarter report, company CFO Nipul Patel said, "We are already seeing margins on new orders that are in line with our past performance and in some instances even higher." That bodes well for future returns. 

Image source: Getty Images.

Enphase is wasting no time returning to hyper-growth

Daniel Foelber (Enphase Energy): Investors in Enphase Energy have had a lot to smile about as the stock has rebounded from a share price of around $1 four years ago to $174 per share at the time of this writing. Enphase was added to the S&P 500 following a monster year where the company proved it could sustain growth (albeit at a lower rate) during the height of the pandemic. If Enphase had been in the S&P 500 in 2020, it would have been the second best-performing stock behind Tesla. 

2021 has been a different story. Enphase stock has lost a bit of steam, currently ranking in the bottom 20% of S&P 500 performers (and was in the bottom 10% before its recent rebound). In reality, the stock's underperformance could be little more than simply slowing down after last year's near sixfold increase. It seems counterintuitive, but Enphase's 2021 underperformance could actually be good for long-term investors. The company currently trades at a borderline nosebleed valuation compared to other top solar stocks. Giving the company a chance to grow into its valuation could give it a stronger baseline to beat the market in years to come.

The good news is that Enphase -- the company, not the stock -- has returned to its breakneck growth pace, generating the same amount of revenue in its most recent quarter as it did in all of 2019. In just the first half of 2021, the company shipped around 4.81 million microinverters (1,626 megawatts DC) compared to 6.83 million microinverters (2,238 megawatts DC) in all of 2020.

Data source: Enphase Energy 

Enphase's dominant position in the U.S. solar microinverter industry, its growing energy storage business, success in Europe, and continued expansion in South America through Brazil and in Asia-Pacific through Australia points to sustained growth on the global stage. Pair a large total addressable market with the fact that solar costs continue to come down, and you have a company that could very well continue growing at a rapid clip. 

Ride the wave of solar growth

Solar energy continues to grow around the world and products like solar panels, racking, and inverters are critical components to that growth. That's why First Solar, Array Technologies, and Enphase Energy are set up to grow over the long term, making them great solar stocks for investors today.