Investing in Solar Energy Stocks

Updated: Oct. 5, 2020, 4:30 p.m.

The solar industry builds and installs devices to capture the energy from the sun and convert it into electric power. The sector encompasses a wide variety of companies with the following functions:

  • Manufacturing components and panels
  • Installing solar panels
  • Operating solar energy generating facilities

These companies are working together to help transition the global economy away from fossil fuels and toward renewable energy sources. It will take trillions of dollars and many years to complete this conversion, which makes solar energy a compelling opportunity for long-term investors.

Best solar stocks

According to the International Energy Agency, global renewable energy capacity is on track to expand by 1,200 gigawatts (GW) from 2019 to 2024, with solar powering 60% of that growth. To put that growth into perspective, 1,200 GW is roughly equivalent to the entire total installed power capacity in the U.S. in 2018.

While several large companies focus on solar energy and should benefit from its growth, not all have strategies designed to grow value for their shareholders. Because of that, investors need to be careful when selecting solar energy stocks.

Large solar panel energy farm

Image Source: Getty Images

The following three solar stocks, however, are worthy of consideration:

First Solar

NextEra Energy Partners

  • Operates solar-energy-generating facilities, wind farms, and natural gas pipelines

SolarEdge Technologies

  • Manufactures power optimizers for solar panels

Here's why these solar stocks shine brightly in this rapidly expanding industry.

1. First Solar

First Solar (NASDAQ:FSLR) is a global leader in developing solar energy solutions. It not only manufactures and sells solar modules, but also designs, constructs, and sells solar power systems and provides operations and maintenance services.

One thing that sets First Solar apart from other solar panel makers is its focus on manufacturing a proprietary advanced thin-film module. In less-than-ideal conditions like low light and warm weather, these panels perform better than competing ones made with silicon. They’re also larger in size, which helps reduce the cost per watt. Those factors make them ideal for utility-scale solar energy projects.

First Solar further sets itself apart from its peers in the solar sector by having one of the strongest balance sheets. It routinely has more cash than debt, which gives it the financial flexibility to continue executing its strategy to build thin-film solar modules for utility-scale customers. These factors put First Solar in an excellent position to thrive as the solar industry continues expanding.

2. NextEra Energy Partners

NextEra Energy Partners (NYSE:NEP) is a renewable energy yieldco created by utility stock NextEra Energy (NYSE:NEE). These entities generate renewable energy that they sell to end users under long-term power purchase agreements, which provide the yieldcos with steady cash flow that they use to pay attractively yielding dividends. NextEra Energy Partners operates not only solar generating facilities, but also wind farms and natural gas pipelines.

NextEra Energy Partners' relationship with NextEra Energy provides it with several important advantages over rival yieldcos. First, as the world's largest producer of wind and solar energy, NextEra has a vast portfolio of renewable energy assets that it can drop down to its affiliate to power dividend growth. Second, because NextEra has one of the highest credit ratings among the large electric utility companies, it has the financial flexibility to support the growth of its renewable energy partnership.

While NextEra Energy Partners doesn't quite boast the financial strength of its parent, it has a solid profile, including maintaining a conservative dividend payout ratio. Because of that, the company has the flexibility to continue delivering on its growth strategy of acquiring cash-generating clean energy assets. That should provide the company with the power to rapidly increase its high-yielding dividend for years to come; it projects 12%-15% annual payout growth through 2024.

Solar feels to me like the ultimate form of energy we'll be using on this planet for as long as we're around. It's taken us a long time to get there and there's still a lot of technological improvements that we need in things like storage to make it work for everybody. But it seems blindingly obvious to me that, looking backwards from the future, we'll say the sun made so much sense that it would be the biggest form of energy generation for us on Earth.

David Gardner, cofounder, The Motley Fool

3. SolarEdge Technologies

SolarEdge Technologies (NASDAQ:SEDG) manufactures power optimizers and inverters used to convert the sun's energy into usable electricity. These components have improved the way that solar panels convert DC power produced by the sun into the AC electricity used by the electrical grid. A system that utilizes SolarEdge's power optimizers will cost less than one that, for example, uses a microinverter built by a company like Enphase Energy (NASDAQ:ENPH), with minimal efficiency loss.

SolarEdge's focus on manufacturing low-cost power optimizers has enabled it to win market share from its competitors as solar project developers focused on cost. The company has also invested money to acquire and develop new products in the energy storage and energy management spaces, as well as smart modules to help grow its average revenue per installation.

The company complements its leading market position with a strong, cash-rich balance sheet. That provides it with the financial flexibility to invest in expanding its manufacturing capacity and technological lead over its competitors. Those factors set SolarEdge Technologies up for success in implementing its plan to expand its reach in the fast-growing solar sector.

Strategies designed to win

Given the anticipated growth ahead for the solar industry, many companies should thrive. However, the best-positioned solar companies have a clearly defined strategy and the financial flexibility needed to execute their plans.

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