If you were to throw a dart at almost any stock in the solar energy sector, you’d likely hit a winner. But in the July issue of Fry’s Investment Report, my readers and I aimed that dart. We hit SunPower (NASDAQ:SPWR) stock — and, less than a month later, that has turned out to be a big winner already.
Yesterday, after the market closed, SunPower reported its second-quarter results — including a surprise profit and a beat on revenue estimates.
While the solar panel manufacturer expects to return to losses soon, it posted a quarterly profit of $121.5 million, or 75 cents per share. That’s a huge turnaround from its $447.1 million loss from a year ago. Plus, it reported revenue of $ $481.9 million, easily beating guidance of $420 million to $460 million.
This morning, SunPower stock soared as much as 37.2%. And as I write this, it’s still up 27% for the day, at $15.70.
From where I recommended it on July 12, it’s up 33.2%. That’s annualized gains of 575.5%
I try not to brag too often … but that’s not bad for three weeks’ work.
In this report, I’d like to show you why we went after SunPower in the first place — and how yesterday’s quarterly report basically proves my case.
Plus, I’ll tell you whether SPWR stock or any other solar stocks out there are still “Buys”…
Rays of Hope for SunPower
SunPower designs, manufactures and markets the industry’s most highly efficient solar systems. It’s the only major solar company that addresses all three end segments: power plant, commercial rooftop, and residential.
And it’s a classic “turnaround story.”
During the last two years, the company has taken significant steps to sharpen its strategic focus and strengthen its balance sheet. It has slashed its net debt by more than half, while also boosting its capacity to produce its industry-leading solar panels.
Based in the heart of Silicon Valley, in San Jose, Calif., SunPower has always billed itself as a “technology company.”
While it holds hundreds of patents, the company pursued a strategy that pulled it down into the weeds of the power-generation business. It would design, build, and operate solar installations for its customers and then sell the power under a long-term power purchase agreement (PPA).
On the residential side of SunPower’s business, it pursued a similar strategy, financing its customers via long-term leases. All of these high-touch activities absorbed a lot of the company’s labor and capital. Even worse, these activities weren’t often profitable.
So the company decided to put a halt to its financial strain by selling off its power-generation assets and most of its residential leases. These transactions raised precious capital for SunPower and reduced its net debt to less than $800 million.
These divestments created a leaner, meaner, much less capital-intensive company.
SPWR Stock Is Playing to Win
SunPower manufactures the industry’s most efficient solar panels. They produce approximately 60% more energy than conventional panels. That’s why commercial customers like Target (NYSE:TGT), Walmart (NYSE:WMT), and others tend to favor SunPower’s products.
Historically, the company’s high-efficiency panels have been more expensive than the lower-efficiency panels its competitors sell. As a result, many residential customers shied away from SunPower’s equipment — choosing to save money up front by buying the less efficient panels. The import tariffs made the price competition even more intense.
The company addressed this challenge through innovation. SunPower developed its next-generation technology to produce solar panels that maintain the superior efficiency of its current panels but are much less expensive to produce.
In other words, even including the 30% tariff, SunPower developed the capability to bring its industry-leading panels to market at a price comparable to commodity panels. But now, instead of pricing that would be “comparable” to that of commodity panels, SunPower has an extra 30% to “play with.”
It could pass some of those savings through to consumers in an effort to grab market share, and/or it could pocket some of those savings to boost its profit margins. Either maneuver would produce a big benefit for the company’s growth and profitability.
Playing to Its Strengths
SPWR stock is deploying its competitive strengths with great success. In the residential market, SunPower supplied its systems last year to 58% of the new homes that included solar. In California, 18 of the state’s 20 top homebuilders are under contract with SunPower.
The company is also a dominant player in the commercial and industrial market. It has the largest market share in the industry and already has $3 billion in future projects in the pipeline. Eight of the top 10 corporate U.S. buyers are SunPower customers.
Although SPWR stock has still not completed the turnaround it initiated two years ago, the company is making rapid progress. And the nascent global boom in solar-plus-storage is accelerating that turnaround.
In the July issue of Fry’s Investment Report, I told my readers that, based on analyst consensus estimates, SunPower should return to profitability in the fourth quarter of this year, and then continue trending higher.
This is one case in which I don’t mind being wrong.
And I’m happy to be right that my thesis that SunPower’s overhaul would soon bear fruit. It just happened even sooner than I expected.
Going forward, I believe SPWR stock will still report an overall loss this year. But I think it could earn about 30 cents per share next year and 75 cents per share the following year. If it hits those targets, the stock would be selling for about 40x 2020 earnings and 16x 2021 earnings.
But there’s a lot of upside “wiggle room” in those estimates. If solar demand surprises on the upside, and industry pricing stabilizes, SunPower could earn substantially more in both 2020 and 2021.
I expect this stock to continue making strong upward progress throughout the balance of this year and beyond.
That said, SunPower is a “Hold” right now. After today’s big surge, it’s gotten a bit ahead of itself – but I’ll let you know if it gets back on my “Buy” list.
A $4 Trillion Profit Opportunity
There are a lot of companies out there jumping on the solar bandwagon, and there is clearly a lot of investing potential here.
But it’s all about finding the right companies that offer significant long-term potential.
That’s why I’ve released an “all solar” edition of Fry’s Investment Report.
In it, besides SunPower, I share other recommendations to get investors in on this technology’s profit ground floor. And I packed it full of other research laying out my case for solar’s blindingly bright future.
For example, the International Energy Agency (IEA) anticipates global spending on solar power to total $4 trillion over the next two decades – or about $180 billion per year.
Eric Fry is the resident expert on global investment trends at InvestorPlace. And he and his members have been experiencing much success when it comes to solar over the past year or so. In late October 2018, Eric recommended buying some call options on a solar-focused exchange-traded fund. By late January, that ETF had soared more than 30%. (Over the same time frame, the S&P 500 Index advanced just 3%.) The way Eric played it, readers who followed his advice ended up making 203% on their entire position – in just a smidgeon over three months. And in early October 2018, Eric suggested they get in on a certain solar stock’s call options. Since then, the stock has skyrocketed more than 75%. They’ve closed out the first third of that option trade for 168% gains… and the second third for gains of 282%. And they’re still sitting on 200%+ gains with the final third of that trade. To learn how to join them, go here.