SunPower (SPWR -2.21%) and Arbor Realty Trust (ABR 0.88%) are great long-term buy-and-hold stocks, and both are selling for less than $20 per share right now.
SunPower's potential lies in the future of residential solar power, a trend that doesn't seem likely to slow considering rising energy costs and concern about the environment. Arbor Realty Trust has another trend in its favor, as the shortage of rental properties should lead to more construction and increase builders' need for financing.
Image source: Getty Images.
SunPower focuses on residential solar power
SunPower specializes in solar technology and energy services for homes. The company is riding the wave toward more green energy, and two trends are expected to drive business: an increased need for home electricity due to the increase of electric vehicles and tax incentives that lead homeowners to install solar panels. In the fourth quarter conference call, the company said it had its largest backlog of orders in its history.
In 2021, the company reported revenue of $1.3 billion, up 17.6% over 2020, although it did lose $0.22 in earnings per share (EPS) due to capital expenditures, compared to EPS of $2.48 in 2020.
Taken on its own, the fourth quarter of 2021 had some positives. In the fourth quarter, the company reported $384.5 million in revenue, up 18.8% sequentially. The company also reported net income of $20.2 million and EPS of $0.11, up from an $84.4 million loss and an EPS loss of $0.49 in the third quarter. The company said it expects net income of between $85 million and $105 million in 2022.
The company is in the process of selling its commercial and industrial solutions business to TotalEnergies for $250 million in cash, allowing SunPower to focus on residential sales. Toward that end, the company purchased residential solar provider Blue Raven Solar last fall for $165 million, gaining more customers in the Pacific Northwest and mid-Atlantic regions. The company also signed agreements with Toll Brothers and the New Home Company to provide solar, battery storage, and at-home EV chargers in new home communities in California. SunPower said the deal with New Home Company represents a pipeline of 66,000 homes while the Toll Brother pipeline is even larger, though the company didn't give a specific number .
The increased focus on residential sales should pay off in the long term. While most of the money SunPower makes is from the initial installation and financing of solar units, it makes money from servicing them as well. The company said in its annual report that the market is largely untapped, with only 4 million homes having solar panels. This year, the company said it expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) between $90 and $110 million.
According to a report by Grand View Research, the global solar panel market was $146.08 billion in 2021 and is expected to have a 7.8% compound annual growth rate from 2022 through 2030.
Arbor Realty Trust's total returns don't disappoint
Arbor Realty Trust is a mortgage real estate investment trust (mREIT) that specializes in mortgages, acting as a lender and servicer of the loans behind portfolios of multifamily and single-family rental properties and other commercial real estate. The company makes money off the interest income from its loans as well as the fees and other revenues from servicing those loans. The company borrows money to buy and hold mortgages and mortgage-backed securities that are backed by the federal government.
What makes Arbor a great long-term investment is its dividend. The mREIT has raised its dividend for 10 consecutive years and seven consecutive quarters, most recently to $0.37 per share, giving it a yield of 8.21% as of market close on April 20. Over the past five years, Arbor's total return has more than doubled that of the S&P 500, and its return on equity is better than those of two larger mREITS, Annaly Capital Management and Blackstone Mortgage Trust. It also grew its net income by 362.3% over the past five years, faster than those two competitors.
ABR Return on Equity data by YCharts
ABR Net Income (Annual) data by YCharts
Last year, the company reported annual net income of $317.4 million, up 92% over 2020, and EPS of $2.28, up from $0.80 in 2020. In 2021, the company's loan portfolio grew 122.1% as the company originated 422 loans totaling $9.72 billion, most of that total ($9.1 billion) came from multifamily bridge loans, which give developers short-term funds until they can secure long-term financing.
The stock is down 4.5% so far this year, reflecting fears investors have about what rising interest rates will do to the company's core business. The logic is that if Arbor has to pay more for financing, the spread between what it pays for financing and what it charges for interest on its current loans will narrow, squeezing profits. But in the long run, Arbor should benefit from rising rates, as most of its loans are for short terms (24.6 months or less). As they expire, they will be replaced by higher-interest loans. As builders ramp up to meet the shortage of homes and rental units, Arbor should benefit with additional business.
What to consider
Both stocks, while they appear to be strong long-term buys, come with risks. But I think they will succeed. There's plenty of competition among solar power companies, but SunPower is beginning to build a pretty good moat by focusing on residential customers and by connecting with homebuilders. The demand for solar panels, thanks to tax incentives, homeowners' preferences, and electric vehicle needs, is likely to go through the roof. As it is, the company has a big backload of orders.
Rising interest rates may hurt Arbor's stock price in the near term, but its business model, with funds from servicing loans and shorter loan periods, should allow it to thrive in a higher-rate environment. In the meantime, investors can still get in on the stock while it is relatively inexpensive and enjoy a high-yielding dividend.