Is It the Right Time to Invest in Solar Energy Stocks?
Exactly a year ago, a financial tsunami hit the solar industry—one fiasco big enough to wipe off fortunes. Investors in clean energy stocks saw their investments selling for pennies on the dollar. Green energy enthusiasts are now in two minds whether or not to invest in solar energy stocks. It’s true that finding the best solar energy stocks today is almost like looking for a needle in a haystack. And yet, it is not impossible. I promise.
The Sunedison Inc (OTCMKTS:SUNEQ) debacle is still fresh in our minds. And if you were an unfortunate investor, that painful memory will probably remain etched on your brain forever. But we at Profit Confidential had delivered the forewarning of an impending Enron-like bankruptcy nearly six months in advance. If you were paying attention, you would have managed to survive that disaster.
The fact of the matter is that big solar companies are heavily debt-laden. Their multi-million-dollar capital investments do not pay off in the short term. And because they are so highly leveraged, most value investors sidestep them. To them, it makes no sense to buy into a company that will take years or even decades to pay off its debt.
So to attract these value investors, some solar companies have resorted to using complex ploys. One such ploy is the phenomenon of a “yieldco.” SunEdison created one to get some of its debt off its balance sheets, but the temporary fix did it little favor. The result was catastrophic.
Now, a year later, we are hearing that another yieldco may be in trouble. Yes, First Solar, Inc. (NASDAQ:FSLR) is planning on selling its stake in its yieldco, 8Point3 Energy Partners LP (NASDAQ:CAFD), which leaves the latter in the lurch. (Source: “Owners of Solar Yieldcos Head Toward Door Marked ‘Sell’”, Bloomberg Quint, April 11, 2017.)
For savvy investors, there’s only one lesson to take away from this; don’t invest in something you don’t understand!
This brings us to the real question.
Should You Buy Solar Energy Stocks at All?
Solar stocks are like any other equity investment. And we know that no investment comes without risks. So we can’t tar all solar stocks with the same brush. My short reply to that question would be: Yes, sure, if you understand the business!
The skeptics are worried about solar energy stocks for one particular reason. How are these companies going to cope with Donald Trump in office?
It is no debate that our President is on the wrong side of the history. Yes, getting a man who thinks global warming is a hoax to support green energy over fossil fuels would be a tough egg to crack.
But what is often overlooked is the fact that in this matter, the decision rests with individual states more than the center. Plus, given the probability that he might consider carbon taxes as an additional source of government revenue, Trump may turn out to be a blessing in disguise for clean energy stocks.
Nonetheless, one hard pill we all have to swallow is that investing in solar stocks will never pay off well in the short term. This will be an investment for the long term. If you can commit, you can reap the rewards. I say “if” for a reason.
In the last one decade, something interesting happened in many developing nations. People who previously had no access to phones completely bypassed landlines and instead jumped to mobile phones. So while we had a whole era of landline telecommunications, parts of these developing countries remained oblivious to its concept.
The same is happening in the energy sector today. Parts of the world with no electricity are bypassing utility grids and instead jumping to solar generators. India and China are the biggest examples.
So if somebody says this industry is threatened, you can safely assume that they are either shorting the industry or are delusional. In fact, solar industry is threatening conventional forms of utilities and transportation.
Take the example of Germany, the second-biggest solar power. The country’s shift to solar was so monumental that two of its dominant utility companies were brought to the brink of bankruptcy.
Likewise, here, in the sun-rich southwestern states of the U.S., notice how solar installations on residential and commercial rooftops have grown exponentially in the recent years.
Case in point demand for solar is steady and growing. But then, where is the problem with solar stocks?
It’s on the supply side. And here’s how it begins.
As the landscape got competitive and more companies jumped in, prices started tumbling. But the manufacturing costs remained the same for most companies. The result was obvious. Margins started thinning and solar energy companies saw the equity portion of their balance sheet shrinking.
This led to the arms race in the solar industry—the race to produce the most efficient solar chips for the cheapest price. We saw many strong contenders getting left behind in the race because they were either late or not skilled. The good thing is that the companies that remain now are the strongest of those contenders.
Best Solar Energy Stocks List
Now, finding the the best stocks to invest in is a tough row to hoe—not because they are elusive, but because they are difficult to decipher. I’ve managed to track down three candidates that could be the best solar energy stocks to invest in right now.
|Market Cap||Year-to-date Return||5-Year Return|
|JinkoSolar Holding Co., Ltd.||$546 million||12%||202%|
|Solaredge Technologies Inc||$639 million||28%||-11% (IPO-ed in 2015)|
|Tesla Inc||$49 billion||44%||832%|
1: JinkoSolar (JKS) Stock
This company has been on my watchlist for nearly five years, going through many ups and downs, yet remaining strong. Like all other solar companies, this one, too, has faced thinning margins. And yet it has maintained its cost leadership.
JinkoSolar Holding Co., Ltd. (NYSE:JKS) is one of the world’s biggest manufacturers and suppliers of photovoltaics (PVs), or simply put, solar panels. Unlike most of its U.S.-based peers, this Chinese company is not only profitable; it’s also growing.
The best part is, no matter how the Trump policy plays out in the U.S., JinkoSolar will be little affected. The company maintains its stronghold in Japan, Germany, and China—the world’s top three biggest solar markets. Plus, I’m also particularly bullish on JinkoSolar’s growing foothold in the emerging markets of India, Brazil, and Mexico.
Now, one interesting thing has happened lately that warrants a second look at JKS stock. JinkoSolar sold off one of its business segments—Jinko Power—that took with it over $1.0 billion in debt. It was a huge sigh of relief for JKS stockholders because the balance sheet looks much rosier now with the debt cut down by half.
And you can tell that markets wholeheartedly welcomed the move with a flattering response to the stock this year.
Chart courtesy of StockCharts.com
Long story short, JinkoSolar stock deserves to be on your watchlist of the best solar stocks to invest in 2017.
2: Solaredge (SEDG) Stock
In an industry flooded with highly leveraged companies, finding a company like Solaredge Technologies Inc (NASDAQ:SEDG) could be as rare as hen’s teeth. Believe it or not, my friends, this company boasts a clean balance sheet.
That’s because Solaredge doesn’t manufacture PV cells or modules like JinkoSolar, which is a capital intensive business. Instead, it sells inverters that are cheaper to make. These inverters convert the energy captured by solar panels into electricity that can be fed to the wiring to power your house or office. Simple put; Solaredge is your middleman in the solar energy business chain.
The company is well-managed for having turned around its fate from a loss-making company three years ago to a profitable company today. Solaredge also partnered with Tesla Inc (NASDAQ:TSLA) recently to provide inverters that supplemented Tesla’s “Powerwall.” Plus, like JinkoSolar, Solaredge is also diversified outside of the US, particularly Europe and India.
The bonus is that SEDG stock fundamentals are some of the best in the solar energy industry, with double-digit profit margins and positive free cash flows—both of which are a rarity in this industry. Also, the year-to-date stock performance is outstanding as the stock recouped much of the losses from its 2016 slump.
Chart courtesy of StockCharts.com
In a nutshell, Solaredge stock could be one of the best solar energy stocks to buy in 2017.
3: Tesla (TSLA) Stock
What is a car company doing on a list of solar stocks, you ask? I say, the company dropped the word “Motors” from its name for a reason. Tesla Inc (NASDAQ:TSLA) is no longer just an automaker. Since its acquisition of SolarCity Corp (NASDAQ:SCTY), Tesla has become a solar energy powerhouse.
Take a look at three of its products—solar roof tiles, “Powerwall,” and Tesla cars. Can you see the pattern here? Tesla wants you to harness the solar energy on your roof with its tiles, then store it in its battery, Powerwall, and later use it to power both your house and your Tesla car. Ingenious!
The company has effectively created a vertically-integrated business model where it is offering its customers a complete solar-based product package.
But there’s another reason why I like the company: Tesla caters to the high-end market—the aesthetically-charged affluent buyers who like the company for its quality, beauty, and brand appeal. That gives Tesla a peculiar edge over its peers in the solar industry.
Now, if you were to look at its financials, you’d likely get cold feet; Tesla is currently not making any money. But time and again, I’ve maintained that investing in this company is rather investing in Elon Musk—the visionary leader of the company who dreams of a green future.
TSLA stock is one investment definitely for the long run and the market subscribes to that thesis. Just look at Tesla stock performance this year. Absolutely spectacular!
Chart courtesy of StockCharts.com
Indeed, this is one of the best solar stocks to invest in for the long run.
The Bottom Line on the Best Solar Stocks to Watch
Solar energy stocks can give even the savviest of investors the heebie-jeebies. The SunEdison fiasco was a major setback for the industry last year. But things are starting to look up for clean energy stocks in 2017.
More than just environmental reasons, there are now political reasons to shift to solar energy. Governments want to quit their reliance on imported oil and take control of energy internally. Emerging markets are proof of it.
But as an investor, you must understand that if you go after quarter-to-quarter performance, you’ll almost certainly be disappointed. Solar energy companies have to pump a lot of money into the pipeline before they can make money.
So take a good look at these three of the best solar energy stocks before you dive in. Because remember, you’ll be going in for the long haul, my friend.