Among investment sectors, solar energy is one of the most misunderstood. For casual observers, the appeal is obvious: solar is a clean and renewable energy source. Fossil fuels aren’t going to last indefinitely, and they represent environmental liabilities. As a result, finding the best solar companies to invest in seemingly provides tremendous upside potential.
That’s still the case if you make the right picks. But going about this plan is a lot easier said than done. In prior write-ups about specific solar businesses and the broader sector, I’ve questioned the energy source’s efficiency. Yes, solar is scientifically viable, but it’s not nearly as economically practical as you might believe. To capture this energy requires significant (upfront) infrastructural investments.
Industry advocates will argue that solar is a technology, not a fuel source. As such, involved costs are sharply decreasing, putting this alternative energy reasonably into the hands of everyday consumers. But no matter what, solar will always cost something. Furthermore, you can’t actualize solar-energy benefits unless you have the real estate to host necessary systems and equipment.
Finally, investors seeking the best solar companies to invest in should understand that the industry’s “clean-energy” street cred is more hype than substance. According to Power Electronics:
“Large-scale solar farms may influence land degradation and habitat loss. Utility-scale solar facilities require large plots, and could interfere with wilderness areas, mineral production, military uses, and protected natural environments.”
We all know there’s no such thing as a free lunch. Scientifically, we must realize that free energy doesn’t exist. Somebody has to pay, either in the form of setup costs, or environmental damage. But if you really want in, here are my choices for best solar stocks to invest in, and a few to avoid.
Best Solar Stocks to Invest In: Solaredge Technologies (SEDG)
In my opinion, Solaredge Technologies (NASDAQ:SEDG) is hands down the best sector player for two reasons. First, SEDG is a multi-faceted organization, but with a particular specialty toward residential solar-energy systems. As I mentioned, technology within the industry has improved dramatically, thereby lowering costs. Residential, in turn, represents a significant money-maker for Solaredge.
The second reason why SEDG beats everyone else when considering the best solar companies to invest in is corporate heritage. Solaredge is an Israeli company, and as I mentioned last year, Jewish culture eschews the idea of growth through debt. A significant number of Israeli organizations have little to no debt on their books, and Solaredge is one of them.
Of course, debt isn’t the end-all, be-all on whether a firm should be considered among the best solar companies to invest in. But let’s pay attention to the context. No matter where you stand on the solar issue, it’s a volatile sector. If you’re going to play this market, you want a company with strong financials to weather inevitable storms.
In this rough-and-tumble industry, it doesn’t get any better than SEDG stock.
Best Solar Stocks to Invest In: Vivint Solar (VSLR)
Globalization is so commonplace today that it’s nearly impossible to find organizations that aren’t levered somewhat to international markets. But this trend can have consequences, especially under a nationalistic administration. That’s why Vivint Solar (NYSE:VSLR) is one of the best solar companies to invest in. Unlike most of its competitors, Vivint calls the U.S. home.
Another reason to consider VSLR stock is its consumer-centric business. Selling governments on solar energy is a challenge considering that many countries don’t have the infrastructure to support mass-scale projects. But the average American family? That’s where the money is! It’s much easier trying to sell the benefits of mitigating rising utility bills.
This isn’t just lip service. Vivint’s financial performance provides ample proof. Over the past four years, the company’s revenue skyrocketed over 959%. In its most recent quarter, Vivint delivered $68.3 million in sales, up nearly 29% from the year-ago quarter.
Since the markets have the final word, prospective buyers will find encouragement that VSLR stock is up 40% year-to-date. Notably, shares have also avoided the dramatic fallout that has accompanied Chinese solar companies.
Still, VSLR remains a speculative investment because its overall financial standing isn’t that great. But if you can handle likely volatility, VSLR offers intriguing upside potential.
Best Solar Stocks to Invest In: Hannon Armstrong (HASI)
Even though I’m putting Hannon Armstrong (NYSE:HASI) on my list of best solar companies to invest in, let me provide a major caveat: in my view, HASI stock is the riskiest play here. The Annapolis-based capital and services provider has varied exposure to the broader renewable-energy sector. This is both a pro and a con.
The benefits are fairly straightforward. For starters, continued reliance on fossil fuels is not acceptable. With exposure to solar, wind and other energy-efficiency protocols, Hannon Armstrong is built for longer-term success. But will investors have enough patience to see HASI stock through?
This is a tough call. On one hand, bears will point to HASI stock’s YTD performance, which is a discouraging 14% loss. And as I mentioned, this sector is incredibly volatile. One minute, you’re riding high; the next, you’re staving off bankruptcy.
But the flipside to the pessimism is that since hitting bottom this year on the last day of February, HASI stock is up almost 17%. Additionally, selling pressure throughout May and early June failed to sink shares to new lows.
I like the technical resilience, but its middling financials and nosebleed valuations concern me. HASI stock has potential, but proceed with caution.
Best Solar Stocks to Invest In: iShares S&P Global Clean Energy Index Fund (ICLN)
Let me start my discussion on the iShares S&P Global Clean Energy Index Fund (NASDAQ:ICLN) by first acknowledging the obvious: ICLN is not a company, but rather, an exchange-traded fund. That said, I don’t think I’m cheating on this list of best solar companies to invest in. My justification? Solar companies are hit-and-miss affairs.
If you haven’t figured it out by now, solar isn’t my favorite investment sector. I’ve been bearish on speculative organizations, only to see their shares jump up for irrational reasons. Later, these same organizations will fall due to the fundamentals catching up to them. Or, at the current juncture, political pressures can wreak havoc when you least expect it.
Given so many variables, the ICLN just makes perfect sense. The ETF holds many names that I don’t like, but many others that each have a reasonable chance for success. At the very least, investors can use the ICLN fund to mitigate this sector’s notorious choppiness.
But please don’t mistake ICLN as “easy” exposure to the solar industry. ICLN is down almost 3% YTD, and since May 22, the ETF has lost over 9%. If you really want to invest in solar, though, please consider ICLN in addition to individual picks.
Solar Stocks to Avoid: First Solar (FSLR)
Now that I’ve spent some time discussing the best solar companies to invest in, here are my picks to avoid. I’m going to start with First Solar (NASDAQ:FSLR), perhaps the most popular name among solar stocks.
First Solar gets credit for being an American company and having a relatively strong balance sheet. However, the income statement worries me. In the past four years, top-line sales are down more than 13%. That’s not the kind of “progress” you want to see from a supposedly exciting and emerging industry.
Moreover, this is a company that used to deliver positive earnings. The last two years have been awash in red ink. Of course, negative earnings isn’t necessarily a killer, but it’s a tough pill to swallow in a speculative market.
Investopedia.com contributor Sheila Olson noted that the Trump administration’s China tariffs may not impact First Solar. That’s because FSLR uses thin-film solar panels, which is a different technology than what the tariffs address. However, beware that thin films are the least-efficient solar-energy format.
Solar Stocks to Avoid: SunPower (SPWR)
I don’t know what to make of SunPower (NASDAQ:SPWR) and neither do the markets. On a YTD basis, SPWR stock is down 6.6%. More critically, SPWR hasn’t moved since September 2016. It’s plenty volatile, which means shares are good for shorter-term trading.
If you are going to expose your portfolio to SunPower, that’s the only route I’d recommend. Over the past four years, SPWR stock has lost nearly 80% of its market value. You absolutely cannot stay complacent with these shares. It can kill your money before you realize what’s going on.
And even if you’re the risk-taking type, just do yourself a favor and look at SunPower’s financials. They’re ugly. The company has tacked on excessive and perhaps unsustainable debt. It runs negative margins, negative earnings and negative annual sales growth. Needless to say, its free cash flow constantly registers red ink.
A notable saving grace is that it delivered $392 million in sales last quarter, up 19% year-over-year. But is that enough for me to take a bite? Nope.
Solar Stocks to Avoid: JinkoSolar (JKS)
On the surface, JinkoSolar (NYSE:JKS) isn’t necessarily a bad pick. On the contrary, some strong fundamental factors support JKS stock. Primarily, I’m looking at its three-year revenue growth rate, which currently stands at nearly 44%. According to Gurufocus.com, that’s ranked better than 90% of global-solar companies.
So why didn’t I include JKS among the best solar companies to invest in? Quite simply, JinkoSolar, if you haven’t guessed from its name, is headquartered in China. If you’ve been paying attention to the news over the past few months — although I don’t blame you if you’ve deliberately tuned out — U.S.-China relations are rapidly deteriorating.
That’s the No.1 reason why JKS stock is down nearly 43% YTD. Since the beginning of June, JKS hemorrhaged 21% in the markets. Some might say this is a contrarian opportunity. I would counter that this argument is too optimistic. With an unpredictable presidential administration, you easily have better, and more stable options available.
Solar Stocks to Avoid: Canadian Solar (CSIQ)
Like JinkoSolar above, Canadian Solar (NASDAQ:CSIQ) features okay fundamentals — nothing great, nothing horrendous. The problem is that CSIQ is significantly exposed to the Chinese market, given its facilities there. And if we’re being honest, Canada isn’t exactly President Trump’s next vacation spot.
But the biggest reason I must pass on CSIQ stock is its volatility. Shares are down 23% YTD, and while it’s not the worst performance in this sector, it’s still money lost. Plus, it took a beating recently, with shares down nearly 22% since June 1.
To those who say that CSIQ is a contrarian opportunity, look at its longer-term trend. Since November 10, 2006, shares have lost over 13%. Logically, this dynamic indicates that success from CSIQ comes from trading it, not “HODLing” it as the cool kids say.
I just see too many risks here. If you want to trade it, go ahead, but for a longer-term investment, look elsewhere.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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