SunPower (NASDAQ:SPWR) shares have been hitting 52-week highs day after day. Shares of the San Jose, California solar company are up over 400% year to date while the sector ETF, the Guggenheim Solar ETF, is up 130% year over year. Sunpower, along with Trina Solar (NYSE:TSL) and SolarCity (NASDAQ:SCTY) are leading the way. Can this rally continue?
Behind the solar rally is a powerful cocktail of stabilizing margins, full utilization, and increasing government support.
Over the past few quarters, there have been signs that margins have bottomed for the solar industry.
SunPower's gross margins have increased from 15.1% to 19.5% year over year, while Trina Solar's second quarter gross margins increased from 8.4% to 11.6% year over year . SolarCity, which installs solar panels and does not produce solar equipment, has seen its gross margin hold steady around 40% quarter over quarter .
Both SunPower and Trina Solar are in full utilization, and there is speculation that both companies will start to expand megawatt capacity next year.
Governments are also stepping in to help the sector with China recently announcing a 50% rebate on value added tax from October 1 2013 to the end of 2015.
SunPower has several key competitive advantages over its peers.
First, it has an institution with deep pockets behind it. French oil giant Total owns 60% of the company and has actively increased its stake. Total can provide SunPower with financial support in bad times, while providing SunPower cheap access to capital to grow faster in good times. Total was there for SunPower in the depths of the solar market downturn by providing SunPower with a one billion dollar credit line in 2011 and will likely help SunPower again if the solar market takes a turn for the worse.
Secondly, SunPower is the only vertically integrated leader in the solar sector. By being vertically integrated, SunPower can make a better product than anyone else by controlling quality. This advantage shows in SunPower's products, with SunPower panels having the highest efficiency at 24% and least degradation on the market. .
Finally, SunPower is the sector leader in the rooftop business. The rooftop industry has been growing over 40% year over year and SunPower is the market leader in the rooftop business with a 22% share of the residential market and an 11% share of the commercial market.
By having the most efficient and dependable panels on the market and an institutional backer with very deep pockets, SunPower has a commanding position where it should be able to continue to grow its market share as the market itself continues to grow.
The bottom line
Stocks near 52-week highs must be doing something right. SunPower has had a rally for the ages in the past year. Given the current budget crisis concerns, SunPower may be due for a healthy short-term pullback as investors go into risk-off mode. Long term, however, SunPower will likely be a winner as its competitive advantages help it gain market share in a growing and promising solar market.
Jay Yao has no position in any stocks mentioned. 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.