The solar energy boom is the modern equivalent of the California Gold Rush of 1848.
Data from Wood Mackenzie Power & Renewables and the Solar Energy Industries Association indicate that it took 40 years to reach 1 million solar installations in the United States, but only three more years to reach 2 million installations. And the forecast for 2021 alone is 3 million installs.
Green energy exchange-traded funds (ETFs) have benefited from investors’ investment in solar stocks. This is evidenced by the flagship Invesco Solar ETF (TAN), which is still up more than 50% over the past year, even after a sharp cooling in early 2021.
And the solar stock pattern still looks good, with climate change firmly high on the Biden administration’s agenda.
Like the supply companies that took advantage of the gold rush by selling pickaxes and shovels to avid prospectors, solar power offers a similar “pick and shovel” opportunity. Companies that manufacture components, batteries, materials to produce panels or software to manage them are following the inexorable march from fossil fuels to solar energy.
Here are five of the best solar stocks that offer a differentiated strategy for profiting from the green energy boom.
Data is as of August 25.
- Market value: $ 14.7 billion
Based in israel SolarEdge Technologies (SEDG, $ 281.44) manufactures inverters: a key part of the micro-grid that delivers solar power where it’s needed in homes, schools, businesses, campuses and beyond.
SEDG shares have exploded over the past two years. However, since hitting an all-time high of nearly $ 365 in December, stocks have fallen to around $ 200 this spring before rebounding to current levels.
Sentiment has likely moderated on solar stock thanks to a modest 2% increase in revenue in 2020 and a 3% drop in net income. The company’s earnings release did not explain the precise reason for this, but declines in gross and operating margins suggest that as the microgrid market grows, so do costs, at least at this point. Game.
This should be of little concern to long-term investors looking at solar stocks.
First, SEDG had just over $ 680 million in cash and marketable securities as of June 30, with just a few hundred thousand dollars in debt owing this year. Next, cash flow from operations for 2020 was $ 223 million, nearly double the reported net income, and that easily covered $ 126 million in capital expenditure (capex) with a considerable cushion remaining.
Finally, around 40% of SEDG’s sales come from the United States. While renewable energy policies have been flawed, a phased administration coupled with 37 states with renewable energy targets provides a good setup for sales and profit growth.
The consensus estimate for SolarEdge Technologies’ FY2021 adjusted earnings is $ 5.09 per share, which, if realized, would be a 24% improvement from 2020 – a pretty nice bump.
- Market value: $ 23.3 billion
Enphase Energy (ENPH, $ 172.91) also manufactures inverter systems. Unlike the “string converters” manufactured by SolarEdge, which draw energy in bulk from all the panels in a facility, Enphase sells microinverters, which draw energy from individual panels as needed or as per conditions. and, therefore, can be more effective.
Although microinverters cost more, their market can grow faster because they can be more responsive to site specific conditions. According to Research and Markets, a market research company, the estimated average annual global growth of microinverters through 2025 is 21% compared to around 15% for string inverters.
For investors who believe in the underlying fundamentals of the solar market and are looking to buy the lows, Enphase could be the right action for you.
Shares of solar stock fell from around $ 215 per share in February to around $ 115 in mid-May, thanks in part to Enphase’s first quarter report. As sales grew 46% year-on-year, profits fell and ENPH lowered its outlook for the second quarter due to semiconductor shortages and supply chain disruptions.
But things have improved for the stock since then, thanks to a second quarter report that saw earnings more than triple to 53 cents per share, easily beating estimates of 43 cents.
Enphase should be able to withstand all headwinds in the short term. It’s based on roughly $ 1.7 billion in cash, and while long-term debt is just over $ 900 million, the current part is only $ 85 million. Meanwhile, last year’s operations generated around $ 216 million in cash, while capital spending was modest at around $ 25 million.
- Market value: $ 26.9 billion
Generac Holdings (GNRC, $ 425.87) has grown by generously selling standby generators to consumers who have become more alert and proactive about power outages. The ice storms in Texas and the fires in California are a powerful reminder of the importance of emergency power.
But in 2019, Generac entered the battery storage business with a pair of acquisitions. By purchasing Pika Energy and Neuroio Technology, GNRC has positioned itself to develop and distribute its PWRcell and PWRview solar energy products.
Sales are low and not broken down on earnings reports, but Generac is pitching PWRcell as a high growth area for the company. And what we’re seeing today with PWRcell might be the thinnest part around – a setup that many investors are enjoying. Think of Apple (AAPL), where the relatively small services division is expected to be the next big growth milestone for the company, and contributed about 19% of total sales in its fiscal second quarter. And Amazon.com’s cloud division (AMZN) – with just over 10% of total sales – is seen as one of the pillars of the company’s growth.
Generac is going solar with two distinct advantages. First, it is experiencing reliable growth in its core generator business, increasing sales and cash flow at an average annual rate of 10% over the past five years, according to Value Line. Notably, last year’s operating cash flow was some $ 487 million, which is enough to fund its foray into the solar energy business.
Second, unlike Enphase and SolarEdge, which rely primarily on third-party vendors and are relatively young companies, Generac has been in business since 1959, has a global network of 7,000 resellers, and has decades of customer data that it can handle. exploit with its solar offer. .
Shares have hit record highs, up more than 410% since April last year. Arguably a lot of the excitement is driven by generators, but GNRC could become one of the best solar stocks as its green power business takes hold.
Daqo New Energy
- Market value: $ 4.0 billion
Daqo New Energy (DQ, $ 54.01) is based in China and produces polysilicon, which is used to make solar panels. At present, China is the world’s largest producer of solar panels and therefore Daqo is well placed to capitalize on the country’s leadership in this green energy space.
Another driver for Daqo stocks is that the demand for polysilicon is increasing and this is pushing up prices. For example, according to Bernreuter Research, in 2021 alone, prices per kilogram of polysilicon have risen from $ 11 to almost $ 28 – and much of that growth is going directly to Daqo’s revenue. Daqo is solidly profitable and increases in the price of its core product lead to increased gross and operating margins.
Chinese companies have eroded the hegemony of Western polysilicon producers. Daqo, which is among the top 10 polysilicon producers in the world, illustrates this trend. The company plans to increase its capacity to 270,000 metric tonnes by the end of 2024, representing compound annual growth of about 50% over this period.
With the solar boom, Daqo will likely find a home for all this new polysilicon, which looks like higher prices and better margins. This could make DQ one of the best solar stocks to have on your radar.
Market value: $ 469.8 million
Almost nothing in this world works without software, and solar power is no exception. CleanSpark (CLSK, $ 13.20) offers a suite of software solutions that provide end-to-end microgrid modeling, communications, and power management.
CleanSpark is tiny, but its market cap, at around $ 550 million, suggests some investors think it could be powerful. CLSK is not for the faint of heart, but the fact that it shows a certain momentum beyond what has been seen in the larger green energy sector is remarkable. In its recently released fiscal third quarter, the company reported that nine-month revenue was $ 22.3 million, up 176% year-over-year.
CleanSpark is not profitable on a generally accepted accounting principles (GAAP) basis, but analysts believe CLSK will grow to adjusted profit of 41 cents this fiscal year, down from a loss of $ 2.44 in fiscal 2020 If so, catching the solar stock now, while it is trading at half of what it was at the start of 2021, could be a viable first step in building a wider position long. term.
It’s also worth noting that CleanSpark is stepping up its stake in Bitcoin’s mining business. Mining revenues did not appear as an item in its most recent annual report, but it did appear in CLSK’s first quarter results. And in April of this year, the company announced a significant expansion of its Bitcoin mining operations.
Bitcoin mining and renewables may disagree somewhat, but CleanSpark notes that 95% of the energy for its mining operations is carbon-free – an important marker for ESG investors, those who focus on governance. environmental, social and corporate, and perhaps a source of purchasing support for solar stock in the future.