With President Trump placing Rex Tillerson as secretary of State and reviving the Dakota Access Pipeline, he seems pro coal, oil and natural gas - what I call dirty energy. Even with the environmentally conscious Elon Musk as an adviser, the president will likely continue to push the oil and gas industry’s agenda. I think this will actually work in the favor of solar over the long term, as no one will stop the expansion of the industry.
Global estimates are that grid-connected solar installations grew 50% last year. The U.S. installed 4,143 megawatts of solar photovoltaic (PV) cells in Q3 2016, now reaching over 35.8 gigawatts of total power, enough to power 6.5 million American homes. China is expected to exceed 100GW in 2017, adding 34GW last year, up 26% from 2015 and accounting for 45% of the total global deployment. With more record-breaking growth on the way, the industry is poised to nearly double year-over-year, which is forcing a lot of companies to gear up or get out.
Not to get into the socio-economics of climate change, but as a civilization, we need it to happen even faster. Eventually, it will either be clean energy powering 90% to 95% of our lives, or we’ll be living in a drastically different planet. I am agnostic to this other than climate change is the boogieman that gets us all, not just Republicans.
Currently there are many publicly traded companies in the solar industry, and I think the smart play is to buy into the stocks with the most potential and see where the chips fall, much like Warren Buffett with airlines.
First Solar, Inc. (FSLR, Financial)
Price: $32.28
First Solar is the largest pure play in solar with a market cap of $3.4 billion. The company is also in the initial phases of a major restructuring, terminating approximately 1,600 employees due to increased pricing pressure from Chinese manufacturers. China needs solar more than any other country with air pollution harming the majority of its major cities. At any rate, First Solar was looking bright at the beginning of 2016, but its stock has been cut in half as it looks to take a loss for the year and just break even for 2017 before getting back to profitability. First Solar does have a strong financial position with about $1.2 billion in net cash, good profit margins and a book value that is more than 50% higher than its share price at $57.22.
SunPower Corporation (SPWR, Financial)
Price: $6.86
SunPower is close behind FSLR with a market cap just under $1 billion. SunPower has been developing solar technology since the 1970s, when co-founder Richard Swanson was pondering ways to deal with the oil crisis. It wasn’t until the 1990s that the company received initial funding to start R&D and build a company around the tech. Now, as a publicly traded company, its has been a total disaster. Shares rose from $43 to over $130 in 2007, but have since lost 95% of their value. And, similar to First Solar, SunPower is cutting jobs - 2,500 in fact - maybe coming to conclusion that to survive it needs positive earnings and cash flow.
The company sold to Duke Energy three of its California projects for an undisclosed sum, and it could be a sign of the next M&A deal, but that’s speculation. Its main technology, Crystalline silicon (c-si) is old technology, and cost reductions are going to become increasingly difficult because solar is void of Moore's Law. It was just two years ago that SunPower’s CEO Tom Werner, said “we’ve just scratched the surface of this opportunity,” as the company stated that solar would “become a $5 trillion dollar industry within only 20 years.” It’s easier to make predictions than executing against them, though.
Canadian Solar (CSIQ, Financial)
Price: $12.53
Trading at nine times forward earnings with a market value of $719 billion, CSIQ may be the best pure play right now, especially with its market leadership in the Indian and African markets, which should help the company achieve higher than expected revenue growth in the next five years. The company has over 100 projects in the works around the world, and generates a hefty $3.3 billion in sales, just shy of the $3.4 billion of First Solar but priced at a quarter of the price. Going forward, Canadian Solar will seize upon the advancements in high-efficiency with passivated emitter rear contact cells (PERC) manufacturing capacity poised to jump from 15 GW at the end of 2016 to over 25 GW next year.
Even Buffett is on the solar train
In 2014, Warren Buffett (Trades, Portfolio) revealed that the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) subsidiary MidAmerican Energy (now Berkshire Hathaway Energy) had invested $15 billion into solar and wind projects with Buffett adding that "there's another $15 billion ready to go, as far as I'm concerned." With the industry assets cheap, BHE could easily buy up these producers if it saw value in them, or just price lower and lower and outpace them. I still think Berkshire is one of the handful of companies in line to be the first trillion-dollar organization by market capitalization. Solar could be a big driver. Berkshire has partnered with SunPower and First Solar to build large projects in the past, a trend that lends a ton of credibility to those companies.
China is leading the way
The Chinese are the low-cost producers, and it’s anyone’s guess how President Trump will deal with trade policy. On that front it's wait and see, but here are some of the top Chinese stocks in the sector.
Trina Solar Limited (TSL, Financial) is the stand out leader with $3.4 billion in sales and projects around the world. The company has been a pioneer in the industry since 1997 and has shipped over 21 Gigawatts to date. What makes this stock a buy is the shareholder approval of going private buyout that will be completed by the end of March for a total value of $2.3 billion or $11.60 per share. That’s a nice pop for investors if the deal closes.
JA Solar Holdings (JASO, Financial) is an interesting company, having shipped around 19 Gigawatts across cell and module solar power products. The stock has been public since 2007, yet while shareholders briefly saw a 275% gain, they’ve since lost 99% of their money in JASO. The stock is trading at three times earnings, garnering very little short interest or institutional ownership, and the company continues to grow. In the last 12 months it added another $450 million to its revenue run. The stock could be poised to finally make investors money.
JinkoSolar Holding (JKS, Financial) is relatively new to the market, going public on the NYSE back in 2010, trading up 30% since, despite being down 30% in the last year. Anyone looking for low P/E trades has run across this stock. Currently trading at less than three times earnings with a forward P/E of 6, the stock looks enticing, I have to admit, even on a flyer. The company looks to continue explosive growth in 2017, having gone from $1.1 billion in 2011 to over $3.4 billion in the last 12 months. With net income of $178 million and a market cap of $463 million, if this were an American company it would be a massive bargain.
Again, the industry as a whole looks cheap as many of the leaders are profitable or will regain profitability this year. That’s how the world drives economic progress - profit across industries that bring necessary change.
Disclosure: I have no positions in any of the stocks mentioned in this article.
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