The solar industry offers some stellar investment opportunities, but not knowing the landscape could easily waste your hard-earned money on a company on the brink of burning out.
It is truly a tale of two markets.
On one hand, the average solar stock has risen 50% through September. China, Japan and the U.S. account for 52% of demand for solar products in 2013, filling the gap left by a once solar-hungry Europe.
As a result, Deutsche Bank (DB) forecasts solar industry backlogs will “grow exponentially over the next two years and as much as a seven-fold increase in solar installations, measured in capacity, through 2016.”
On the other hand, three U.S. companies went belly-up in one week during July—all former sweethearts of President Obama and huge recipients of Energy Department loans from days of stimulus past.
Solyndra, Abound Solar Manufacturing and Beacon Power were all victims of high costs, low prices and oversupplies.
Shift to China
Analysts suggested that failure on the part of these American companies elevated China as the world’s dominant solar industry manufacturer. It makes sense, especially when you consider that the Chinese government has made solar the poster child of green energy and is funding companies and handing out tax breaks left and right.
So investors shifted to Chinese companies, but the same low prices and dependency on government funding brought some of those down as well.
Suntech Power Holdings put its largest subsidiary, Wuxi Suntech Solar Energy Electric Power Co., into bankruptcy. Just last week LDK Solar Co. announced that it is struggling to pay back $2.7 billion in short-term loans and shares fell 5.7%. The same day, JA Solar Holdings (JASO) forecast lower shipments to China in the current quarter and dropped 11%.
Like I said, investing in solar today is like walking through a minefield. Still, a few companies stand out with strong performance. Here are three stocks that have the right stuff:
Like most solar stocks, Trina Solar (TSL) has built momentum in the third quarter on improving fundamentals and increasing demand for solar panels. Revenue increased 24.4% from the previous quarter and a whopping 84% year-over-year. Trina was hampered by high production costs and low prices earlier in the year. But in the last three months, production costs have dropped and prices have gone up, buoying gross margins.
Key to current and future success is the company’s foothold in Japan and China, 11% and 2% of total third-quarter revenue, respectively.
Yingli Green Energy
Robust best describes China’s biggest solar module manufacturer. Yingli Green Energy (YGE) posted third-quarter revenue of $593 million, up 63% year-to-date. Its shipment growth jumped 43.7% in the same time frame, especially among Japan, China and the Americas. Shipments to China and the Americas accounted for 50% of its total.
Deutsche Bank recently raised its price target on Yingli to $8. Other analysts suggest $9 per share is conservative. If YGE can grow operating income to $450 million by 2017—a mark hit during peak European demand—it could be a $25 stock.
SunPower (SPWR) and Japan are a match made in heaven. This California-based manufacturer is best known for holding the world record of 24% for solar cell conversion efficiency and can charge a premium for it. Japan’s demand for high efficiency panels helped boost Asia Pacific sales for SunPower by 63% year-over-year in the third quarter. As a result, the company sees a need to expand its capacity by 25%.
SunPower is also very active in commercial installations in the U.S., taking on huge projects for Apple (AAPL), Verizon (VZ) and Macy’s (M). It has a $1 billion backlog in this arena with installations projected to take two to three years to complete. SunPower is up an astronomical 400% year-to-date.