5 Top Solar Energy Stocks to Watch in 2016

Solar Energy StocksEnergy Stocks Poised for Huge Gains in 2016

With every passing day, the outlook for renewable energy stocks becomes increasingly optimistic. Using solar power to service our energy needs seems like an obvious necessity to me, which is why I’ve compiled a list of the best solar energy stocks to watch in 2016.

Before we get to which solar energy companies are best situated within the renewable energy space, let’s back up for a second. Not everyone is fluent about solar power and solar energy stocks, so it makes sense to cover some of the basics.

For instance, what are the big-picture dynamics working for and against the solar industry? How do solar energy companies make money? And why should anyone invest in solar energy stocks rather than wind or nuclear?

These are useful questions to consider before putting your money into solar energy stocks. If you haven’t considered them before; don’t worry, it’s not your fault. It’s our fault. We in the financial media have an obligation to demystify the sea of information around renewable energies, an obligation we sometimes fail to meet.

Let me make up for it. Solar power is as close to a certainty as we can get.

To put it in perspective (and humour me on this), imagine an advanced alien race visited Earth and appraised us as a species. The first thing they would see is that we’ve set up civilizations and a legal system. Bravo to us.

But then they would ask how we provide energy for ourselves. We would reply that we drill into the planet for compressed carbon fuels that can devastate our planet. The inefficiency of our system would boggle their minds!

Look up, they would say! There’s a giant fission reactor in the sky that appears like clockwork. Although we may not often think of it that way, a Sun is exactly that: a fission reactor, a nuclear power source at a distance.

Solar Energy Stocks Skyrocket as Costs Plummet

All solar panels do is harness the energy sent by the Sun into energy we can use here on Earth. That’s how a more evolved alien race would design our energy supply, because that’s what is efficient. The reality of getting to that point is more complicated.

It used to be that solar energy companies would have to fight against the incumbent energy players on our planet. Namely, the oil and gas sector. But in recent years, the solar industry has looked inwards to resolve its growth conundrum.

It became obvious that the success of solar power hinged on lowering the cost of solar panels and finding a business model that makes solar energy stocks profitable to shareholders. Once those two things are accomplished, the rest takes care of itself.

Investors should buy into solar energy stocks because it makes financial sense for them, not because they were convinced by an abstract moral argument. The burden of building a win-win proposition falls to the energy companies in question.

But how do you lower the cost of producing solar panels? The answer is surprisingly easy, as anyone with a credit in Econ 101 knows. You make more solar panels until the cost per unit goes down. That relationship between quantity and cost is what economists refer to as economies-of-scale.

And that’s exactly what the solar energy companies did. Take a look at the volume of solar panels produced measured against the cost per square foot:

Industry Scales Prices Fall Chart(Source: “Solar power is still growing rapidly, but it’s about to hit a speed bump,” Vox, September 9, 2015.)

Scaling up the production solar panels is clearly working to reduce the cost of doing business for solar energy companies. That was step one.

The second part is making solar power into a viable commercial venture. Since solar energy stocks are still in their infancy, we’ve seen the formation of three distinct segments: commercial, rooftop residential, and utility-scale.

The Best Solar Energy Stocks to Watch in 2016

Many of the best firms offer a mix of products. But knowing the different segments is helpful in mapping out how solar energy companies are evolving. Commercial solar power and residential solar power are the most popular right now.

The main difference between residential and commercial is scale. Businesses usually have more roof space than an individual’s house, meaning they can accommodate larger-sized solar panels. Business buildings also tend to place larger orders, reducing the cost per panel for solar energy companies.

However, solar energy stocks don’t usually restrict themselves to just commercial or residential sales. They tend to offer both lease and financing options on both. Leasing solar panels may seem strange at first, but it’s revolutionizing the solar industry. (Source: “Buying or leasing solar,” SolarCity web site, last accessed October 21, 2015.)

Individuals or businesses that want access to renewable energy without the upfront costs of buying solar panels can simply lease a photovoltaic setup. There are no maintenance costs, nor are there any installation costs. The savings are immediate.

That being said, not all solar energy stocks were born even. Here is my list of the top solar energy companies as we head into 2016.

Five Undervalued Solar Energy Stocks For 2016

SolarCity Corporation (NASDAQ:SCTY)

Guess who’s the chairman of SolarCity Corporation (NASDAQ:SCTY)? Kudos to anyone who thought of Elon Musk, the genius founder behind PayPal Inc., Tesla Motors, Inc., and SpaceX Technologies Corp.

Musk helped fund this massive solar operation with two of his cousins, showing once again his knack for building great companies that can change the world.

SolarCity installs and finances more solar panels than any other solar energy company in the United States. They have more than 34% of the U.S. market, but SolarCity’s bottom line is continually getting worse. The growing losses have weighed heavily on SCTY stock this year, which investors pushed down nearly 27% this year. (Source: “Elon Musk just bought up $5 million of SolarCity stock,” Fortune, August 25, 2015.)

Does SolarCity stock deserve this kind of pessimism? In a word: no.

The devil is in the details. A majority of SolarCity’s cash is being spent on selling and administrative costs, which is to say the initial expense of acquiring a customer. There’s the first assessment of the property, then the installation, and all the necessary paperwork involved. It’s a capital intensive process, there’s no doubt about it.

But the SolarCity bears forget one important thing: duration. The lengths of their contracts are in the order of decades, meaning a loss in the short-term is nothing. Customers will be paying SolarCity years after these losses are forgotten, and investors will flock to SCTY stock.