Driven by the fact that solar has become as cheap as fossil fuels in many areas — along with intensifying environmental concerns — solar energy is poised to have a record year in 2020. Yet, due to some unjustified reasons, some of the highest quality solar stocks are again trading at bargain levels.
As a result, there are a few names definitely worth buying right now.
IHS Markit recently estimated that global solar installations would increase 14% this year to 142 gigawatts (GW). Moreover, it believes that more than 40 countries will add at least 1 gigawatt of solar in 2020. A recent estimate accounted for 30 GW of installations by China in 2019, which is nearly 32% fewer than 2018. IHS also predicts that China’s solar demand will be lower than in previous years due to its “transitional phase.”
Moreover, with China reportedly set to implement a national carbon trading system this year, IHS’ China estimate could be conservative.
As for the the U.S., IHS expects the world’s top economy to add 20% more solar energy this year than in 2019. After Europe’s installations doubled in 2019 versus 2018, the firm predicts that the continent will add more than 24 GW this year — 5% more than in 2019.
That said, these three solar stocks all have very low valuations. And, all of them are well-positioned to benefit tremendously from the rapid expansion of solar energy this year. So, it may be a time to add them to your portfolio.
Solar Stocks to Buy: JinkoSolar (JKS)
Even before the coronavirus outbreak in China started scaring investors, JinkoSolar (NYSE:JKS) stock had begun pulling back from its recent high of $24.36 reached on Jan. 14. I think the main catalyst for the retreat was China’s commitment, as part of the Phase One trade deal with the U.S., to buy $50 billion of America’s energy exports.
However, many doubt whether China will follow through on this commitment; Especially because it has not yet removed its tariff on U.S. natural gas imports. More importantly, with coal accounting for a majority of China’s electricity generation and the country striving to reduce its ruinous pollution, common sense dictates that the country will substitute natural gas imports for coal rather than for solar energy. Solar is also important to Beijing because it’s provided a good boost to the country’s exports and labor market.
Additionally, JKS is not dependent on China at all. Even while China’s solar market was slumping in the third quarter, the company reported very strong results. JKS solar module shipments jumped 12.6% year-over-year, its revenue surged nearly 12% YoY and its gross margin came in at 21.3% — up from 16.5% in Q2 and 14.9% in Q3 of 2018. Still, the company’s results will improve meaningfully if, as expected, China rebounds strongly in 2020. In November, JKS said that it expects its Q4 module shipments to jump about 35% versus 2019.
On Jan. 17, the company announced that its bifacial solar modules’ efficiency had reached 22.49%, breaking a world record, according to an independent reviewer.
Despite its strong growth in Q3, the forward price-earnings ratio of JKS stock is right near five. On Dec. 20, Morgan Stanley reported that it had acquired nearly nine million shares of JKS — good for a 5% stake in the company. All of this combined, and you’ve got a great member of the solar stocks on your hands.
Daqo New Energy (DQ)
China-based Daqo New Energy (NYSE:DQ) manufactures and sells polysilicon used to make solar modules. Like JinkoSolar, the company should benefit from the rejuvenation of China’s solar sector. That rebound likely already started, as one firm’s estimate indicated that the country had installed a huge 12 GW of solar in December.
Also like JKS, the company reported very strong Q3 results despite China’s solar slump. The company’s revenue from continuing operations jumped to $83.9 million from $66 million the previous quarter. Also, its gross margin surged to 21.5% versus 13% in Q2 of 2019.
In September, DQ signed a new two-year supply deal with JKS, who was viewed as the world’s largest module maker in 2018. Also, in August, DQ concluded a three year, 112,000 megaton polysilicon deal with another major Chinese solar energy company, LONGi.
Also, DQ predicted that its average production cost would fall in Q4 to $6.50 per kilogram from $6.97 per kilogram. As of Jan. 16, China’s average polysilicon price per kilogram was trending around 70 yuan, or about $10. This figure indicates that DQ’s gross margin had risen to around 40%.
Like JKS stock, DQ stock has pulled back in recent weeks. The shares sank to a high of $60.15 on Jan. 13 to its current price of around $53.28. Additionally, DQ is trading at about 5.8 times analysts’ average 2020 earnings per share (EPS) estimate. That said, I think DQ is another great addition to the “solar stocks to buy” list.
In conjunction with the deal, SunPower’s partner — Japan-based Tianjin Zhonghuan Semiconductor (TZS) — will invest $298 million in the solar production business through the company Maxeon Solar. That said, TZS will hold a 29% stake in Maxeon, while SunPower will own the rest of the shares. In turn, SPWR focus on selling solar panels and electric storage products to American homes and businesses.
After the deal takes effect in Q2 of 2020, SunPower’s cash flow should jump as it will no longer have to foot the bill for polysilicon contracts it made awhile ago; Maxeon will have to pay those bills. And, depreciation — which weighed on SPWR’s EPS previously — should not be much of a factor for it anymore.
Furthermore, SunPower should continue to benefit tremendously from multiple trends. Specifically, as I noted in earlier columns, SPWR has deals with a majority of California home builders. Under state rules that took effect this year, these home builders have to add solar panels to most new homes. Additionally, the company will benefit from the expected continued steady growth of U.S. residential and non-residential solar installations. That growth should accelerate as U.S. solar tax breaks rapidly fall starting in 2021. This is hopefully when solar and storage costs become cheaper than fossil fuels in more parts of the country.
SPWR sells storage solutions, which are becoming much more popular with American businesses. That trend should meaningfully boost its top and bottom line going forward. Meanwhile, Maxeon, which, like JKS, will sell solar panels with relatively high margins — and should also benefit from the rapid proliferation of solar around the world.
In Q3, the revenue of SPWR’s residential business jumped 12% YoY and the unit’s EBITDA came in at over $10 million. Its commercial business generated revenue of $99 million, and the deployments of its commercial unit rose YoY. The company also reported that 35% of its commercial customers bought its storage solutions. The Q3 EBITDA of the combined residential and commercial businesses came in at $1.5 million. Additionally, the company expects the U.S. residential storage market to double this year versus 2019, and to increase another 50% in 2021.
In Q4, SPWR expects overall revenue of $520 million to $720 million, while adjusted EBITDA is expected to reach $74 million to $94 million.
SPWR stock is trading for just 0.9 times its sales of the 12 months through September, and its forward P/E ratio is 67. But, as I noted, its profitability should rise meaningfully following the spinoff. And given its huge opportunities, its enterprise value of just over $2 billion is quite low.
With all of that in mind, you should adding SPWR to your portfolio with the other solar stocks you have.
As of this writing, Larry Ramer owned shares of JKS, DQ, and SPWR