There’s no question 2018 wasn’t a great year for solar stocks. In fact, the Invesco Solar ETF (NYSEARCA:TAN) declined 26.2% last year. However, Goldman Sachs analyst Brian Lee recently said that the sun will come out again for solar stocks in 2019.
After a cyclical downturn in 2018, Lee said solar demand is improving and prices are stabilizing. He also said China will turn from an albatross to a positive catalyst assuming a trade deal with the U.S. is completed at some point this year.
The good news for solar stocks that endured a rough year is that Goldman expects some of the biggest 2018 laggards to be the best leaders in 2019. Here’s a look at Goldman’s top three solar stocks for 2019.
Best Solar Stocks: First Solar
First Solar (NASDAQ:FSLR) stock dropped 37.1% in 2018, enough to make the stock an attractive risk-reward play for investors this year. FSLR stock has major exposure to utility-scale solar demand, which Goldman is projecting will hit a positive inflection point in the next 12 months. Goldman projects U.S. utility-scale demand will double the growth rate of residential demand in the next two years.
Consensus 2019 EPS estimates have also fallen from around $3.25 a year ago to only $2.59 today, which has set a low bar for the company to clear. Even if First Solar doesn’t beat low EPS expectations, $2.59 in EPS means FSLR stock is trading at a reasonable 19.3x forward P/E. Given its massive cash balance, FSLR stock has limited additional downside from here. By the end of the year, Goldman projects FSLR stock will have about 40% of its current market cap in cash alone. That cash balance makes FSLR stock a relatively safe bet for long-term investors.
Best Solar Stocks: Canadian Solar
Goldman is projecting about 10% EPS upside to consensus estimates for Canadian Solar (NASDAQ:CSIQ) stock this year. About 55% of Canadian Solar’s 2019 revenue will come from module manufacturing. That exposure allows Canadian Solar to take advantage of the same boom in U.S. utility-scale solar demand as First Solar. Goldman is projecting utility-scale solar demand will grow by 41% annually through 2020.
As recently as 2017, 26% of CSIQ’s revenue came from China. Therefore, an improving Chinese policy environment would also provide a big boost. While investors wait for market improvements, Lee said the company has one of the best cost structures in the group. He projects cost-per-watt will continue to drop by a double-digit percentage in 2019.
From a valuation perspective, CSIQ stock looks like the best opportunity to me. According to Yahoo, CSIQ’s P/E and forward P/E ratios are both in the single digits.
Best Solar Stocks: Vivint Solar
Unlike the other two energy stocks on this list, Vivint Solar (NYSE:VSLR) stock is a play on the residential solar market. Goldman is expecting double-digit revenue growth from Vivint in 2019. Lee says the company could gain residential market share from its competitors.
Although the residential market is not expected to be as strong as the utility market this year, Vivint could get a boost from a new California law passed in 2018 mandating that most new homes built in the state starting in 2020 be solar powered. If other states in the Southwest follow California’s lead, it could create even more momentum for U.S. residential demand.
Goldman is projecting 14% volume growth for Vivint this year. That growth rate is lower than the 40% growth it is projecting for FSLR and the 17% growth projected for CSIQ.
Given the unpredictability of the U.S. residential solar business and Vivint’s extremely high long-term debt-to-equity ratio of 3.79, VSLR stock looks like the biggest gamble of the three. VSLR stock has more than 60% upside based on Goldman’s $6.50 price target. It also could be a major risk if market conditions deteriorate.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.
