Joel Greenblatt (Trades, Portfolio) introduced the investing world to the “Magic Formula” when he published his bestselling book “The Little Book That Beats the Market” in 2005. The idea behind the Magic Formula is to apply a simple mathematical formula to find profitable businesses that trade at bargain prices.
The formula ranks companies primarily based on two metrics: earnings yield and return on capital. The earnings yield, which Greenblatt defines as earnings before interest and taxes (Ebit) divided by enterprise value, measures how much the company earns compared to how much the stock is valued by the market. The return on capital, which is calculated as Ebit divided by the sum of net fixed assets and net working capital, measures how much a company earns compared to what it spends to produce those earnings.
With the market for clean energy expected to increase at a compound annual growth rate of 8.4% through 2030 according to a report from Allied Market Research, which could further accelerate due to Russia’s war on Ukraine, here are four solar stocks that score at the top among their peers according to the GuruFocus Magic Formula Screen, a screener based on Greenblatt’s criteria.
First Solar
First Solar Inc. (FSLR, Financial) has a return on capital of 16.45% and an earnings yield of 9.43%, placing it among the top 10 solar stocks based on the Magic Formula.
GuruFocus gives the stock a financial strength rating of 9 out of 10 on the back of a Piotroski F-Score of 7 out of 9 and a cash-debt ratio of 4.58. The profitability rating is 7 out of 9 thanks to a three-year revenue per share growth rate of 8.9% and a three-year Ebitda per share growth rate of 45.9%.
Shares traded around $72.15 on April 26 for a market cap of $7.73 billion and a price-earnings ratio of 16.55. The GF Value chart rates the stock as fairly valued:
First Solar is an Arizona-based semiconductor company that manufactures solar panels and utility-scale photovoltaic power plants. It also provides supporting services for its systems, including maintenance, construction, financing and end-of-life panel recycling.
Due to increasing competition in the project development business, First Solar has exited this sector to focus on expanding its more profitable solar panel manufacturing business, which it hopes will improve operational efficiency and industry reputation.
Enphase Energy
Enphase Energy Inc. (ENPH, Financial) has a return on capital of 111.35% and an earnings yield of 0.81%, placing it among the top 10 solar stocks based on the Magic Formula.
The stock receives a financial strength rating of 6 out of 10 from GuruFocus, with the low interest coverage ratio of 4.78 balanced out by a strong Altman Z-Score of 8.79. The profitability rating is 4 out of 10; the return on invested capital has surpassed the weighted average cost of capital in recent years, indicating value creation.
Enphase traded around $153.44 per share on April 26 for a market cap of $20.79 billion and a price-earnings ratio of 150.99. The GF Value chart rates the stock as modestly overvalued:
Based in Fremont, California, Enphase designs and manufactures software-driven residential and commercial solutions for solar energy generation, home energy storage and web-based system monitoring and control.
Enphase trades at high valuation multiples on strong investor enthusiasm for its growth momentum. With its “next-generation” software-based solar solutions, it has achieved a three-year revenue per share growth rate of a staggering 45%, though any earnings misses could cause price volatility.
SolarEdge Technologies
SolarEdge Technologies Inc. (SEDG, Financial) has a return on capital of 26.06% and an earnings yield of 1.48%, placing it among the top 10 solar stocks based on the Magic Formula.
It gets a rating of 7 out of 10 from GuruFocus on financial strength due to factors such as a strong interest coverage ratio of 15.4 and an Altman Z-Score of 6.97. The company’s profitability is rated 8 out of 10, driven by a three-year revenue per share growth rate of 21.6% and a three-year Ebitda per share growth rate of 9.9%.
On April 26, shares of SolarEdge traded around $244.76 apiece for a market cap of $13.49 billion and a price-earnings ratio of 79.75. The GF Value chart rates the stock as fairly valued.
SolarEdge Technologies is an Israeli photovoltaics company that primarily produces power optimizers, solar inverters and monitoring systems that are aimed at increasing the energy output of solar power arrays.
This company has been a go-to component supplier for residential solar installers over the past decade. It has also expanded into commercial solar and energy storage, as well as electric mobility solutions in Europe.
Canadian Solar
Canadian Solar Inc. (CSIQ, Financial) has a return on capital of 6.09% and an earnings yield of 4.86%, placing it among the top 10 solar stocks based on the Magic Formula.
GuruFocus gives the stock a rating of 5 out of 10 for financial strength. The Piotroski F-Score of 3 out of 9 and Altman Z-Score of 1.21 show some financial distress. The profitability rating is 6 out of 10 thanks to expanding margins and ROIC recently surpassing WACC, indicating a switch to value creation.
Shares of the stock traded around $27.51 on April 26 for a market cap of $1.65 billion and a price-earnings ratio of 18.97. The GF Value chart rates the stock as modestly undervalued.
Canadian Solar manufactures solar photovoltaic modules and runs large-scale commercial and residential solar projects. The company was founded in 2001 and has operations in over 150 countries, including the U.S., Australia, China and Japan.
Canadian Solar’s modules have received multiple awards for their performance-cost ratio. The company offers a wide variety of specialty modules and has also diversified into downstream operations to combat operating multiple compression as solar energy becomes increasingly utility-focused.
