This article was updated on November 16, 2016 and originally published on June 13, 2016.
The solar industry is one of the most volatile sectors in the stock market, and despite the growth of the industry, it has been difficult for investors to make money. But in the long run, it should be a goldmine for investors who can make the right investments and hold them through thick and thin.
The best examples are the performances of three of the biggest companies in the sector: First Solar (FSLR -2.30%), Sun Power (SPWR -0.07%)and SolarCity since the IPO of the latter company. It’s been a tough ride for investors, no doubt, but all three companies have outperformed the market for most of the past four years, despite recent problems. But the winners of the past won’t always be the winners of the future, and a sustainable competitive advantage is essential in today’s market. Which companies should investors consider buying today?
SunPower: The solar chameleon
One of the challenges in the solar industry is that geographies go from boom to bust quite quickly. Germany, Spain, Hawaii, and even Nevada have gone through these cycles, and depending on how the industry evolves, this trend will likely continue.
SunPower has the most diverse customer base of any major solar company, with exposure to nearly every international market, as well as everything from small residential systems to large utility projects. And its business is powered by the most efficient solar panels in the industry, which allow SunPower to create more electricity from any given piece of land than anyone else.
As the solar industry evolves, the opportunities to be exploited in solar will change, and no company is better prepared for this change than SunPower.
First Solar: the great solar company
First Solar is an equally strong solar company, but it’s mostly focused on building large, large-scale projects. Even though results can be volatile, the company has a proven ability to make big bucks by building long-term projects.
What makes First Solar attractive today is that it has a strong track record with which to build projects and sell them as needed, and it improves efficiency, bundling more power generation into a larger space. small. Efficiency used to be First Solar’s weakness against competitors, but now it is ahead of Chinese commodity suppliers, giving it a bright future.
The stable solar company
A business that offers more consistent returns is Energy partners 8point3 (CAFD), a yield company formed by SunPower and First Solar. The company owns projects with long-term contracts to sell power to utilities, and with the resulting cash flow, it pays a dividend to investors.
What differentiates 8point3 Energy Partners from other yield companies is its dual sponsor structure and a conservative balance sheet with zero project-level debt. The dual sponsor structure ensures that the company will not overpay for projects intended to support its sponsors, and the balance sheet avoids this financially.
With long-term contracts, the dividend yield of 6.3% is both strong and likely to grow for at least the next two years, given planned project acquisitions. If you are looking for a more stable solar stock than SunPower or First Solar, this is the one to buy.
High potential and high volatility
In the long term, the solar industry has a lot of potential and should offer good returns to investors if they can pick the right stocks. But considerations such as geographic diversity, balance sheets and competitive differentiation are important, which is why SolarCity is not in my top three stocks to buy today.
Keep in mind that no matter where you invest in solar, it’s going to be a bumpy ride, as we’ve already seen in 2016. That said, these are still three solar stocks I’d be very comfortable taking. buy right now.