The solar industry shows much promise heading into 2015: Over half a million solar installations are on-line in the U.S., and solar energy comprised 53% of all new electric capacity so far this year. As this once-niche power source becomes more mainstream, our analysts are taking a close look at the key players propelling the industry forward. We asked a few of them to identify their favorite solar stock picks today, and they offered up three distinct businesses in Canadian Solar (NASDAQ:CSIQ), General Electric (NYSE:GE), and Vivint Solar (NYSE:VSLR).
Here's why they're excited about the future for these solar energy players.
Asit Sharma: Going into 2015, I like Canadian Solar's prospects. Headquartered in Ontario, Canada, CSIQ has manufacturing operations in China and Canada and serves a diversified base of customers in over 70 countries, with a focus on the major markets of the U.S., Germany, Canada, Japan, India, and China.
Canadian Solar has worked hard to provide insulation against the vagaries of commodity pricing by increasing its "solutions business," which consists of solar power project development and related services, as opposed to core solar module shipments. The solutions business made up only 10% of CSIQ's revenue as recently as 2011, yet it's projected to be over 50% in 2014, and in the most recent quarter, accounted for 53% of the company's overall top line.
Even as the third largest global solar module manufacturer, Canadian Solar shows vigorous growth potential: 2014's projected $3 billion in revenue will exceed the prior year by roughly 75%. Margins are improving as well: After two loss years followed by a slightly profitable 2013, CSIQ has posted a net profit margin of over 8% year to date.
But perhaps the most compelling reason to invest in Canadian Solar is the relative comfort of its balance sheet. The company sports a healthy current ratio of 1.2, has no net debt (defined as cash and cash equivalents less long-term debt), and is generating attractive cash flow: Cash from operations last quarter reached $204 million, on net income of $104 million. For the long-term investor, Canadian Solar offers fiscal strength to offset the inevitable swings inherent in this industry.
Isaac Pino: While some investors want to dive headfirst into solar energy stocks, others would like to test the waters and also avoid getting burned. A good way to hedge your bets is to invest in a diversified energy player like General Electric. Solar makes up only a sliver of GE's $49 billion energy portfolio, but this is a company with deep renewables expertise and a chest full of cash to deploy as the economics of solar improve.
For those familiar with GE's solar strategy, you might remember that the company made a somewhat surprising move in 2013 when it decided to abandon plans for a large solar factory in Colorado. Chinese manufacturers had ramped up production of solar panels, and profit margins virtually disappeared. And even though GE has access to immense resources, it's not a company that throws good money after bad.
So, GE took a step back in solar panels, but it began to focus on the areas of the solar value chain that align with its strengths. It sold its solar patents and technologies to competitor First Solar in 2013, created a partnership with this major solar player, and in the process, acquired 1.75 million shares of First Solar's stock. Since then, GE teamed up with First Solar again to develop what the latter calls "the next generation of utility-scale PV power plants." Looking to the future, GE aims to lend a hand in fitting the pieces of the power plant and energy distribution puzzle together.
Meanwhile, GE's well-positioned to link solar to the smart grid, a long term but potentially lucrative area. And it's busy investing through its finance arm, too. In April, GE Capital announced plans to plow $1 billion annually into wind and solar annually, which adds to the $10 billion already invested to date.
GE's piecemeal bets in solar -- including a recently announced solar "microgrid" in Africa -- might seem disjointed, but there's a game plan behind it all. GE's building exposure to practically the entire energy spectrum, watching the economics carefully, and situating itself to become the link between fossil fuels and a renewable-heavy future. That's not a bad place to be.
Travis Hoium: Within the last two years, the residential solar market has exploded as costs have come down and financing options have lowered the cost of solar for consumers. SolarCity has gotten most of the publicity, and has the industry's biggest market share, but Vivint Solar is No. 2 and growing significantly faster.
In the first three quarters of 2014, Vivint Solar installed 106 MW of residential solar, up 165% from a year ago. This compares to 84% growth for SolarCity.
What makes Vivint Solar different from competitors is that it standardizes almost the entire process of going solar. It uses the same racking, panels, inverters, and lease or power purchase agreement options for each system, which lowers overhead costs and makes the process very simple.
What's interesting from an investment perspective is Vivint Solar trades at less than a quarter the value of SolarCity, despite installing a third as many systems this year and growing more quickly. That provides an enticing entry point into a market that's growing rapidly in the U.S.
Investors getting into solar today should be prepared for a wild ride, which goes for Vivint Solar as well, but the upside is tremendous, and being a market leader in residential solar will give Vivint Solar a lot of flexibility to adapt and grow in the future.
Asit Sharma has no position in any stocks mentioned. Isaac Pino, CPA, owns shares of General Electric Company. Travis Hoium owns shares of General Electric Company. The Motley Fool recommends SolarCity. The Motley Fool owns shares of General Electric Company and 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.