I am a firm believer in solar energy, and It’s been a great year for solar stocks. As storage technology becomes better, and the global middle class grows, solar stocks will remain excellent investments moving forward.
However, some companies in the space are better than others. You should be conscious of how solar stocks are doing individually since the sector will, more or less, always do well.
To give you some indication, Invesco Solar ETF (NYSEARCA:TAN), based on the MAC Global Solar Energy Index, has a year-to-date return of 163.4% versus the S&P 500.
So, with such a white-hot sector, we only have a few stocks to talk about doing relatively OK. Here is a selection of three such companies:
Solar Stocks to Avoid: First Solar (FSLR)
You might be wondering why Arizona-based First Solar is on this list. FSLR has had an excellent six months, rewarding shareholders with triple-digit gains since May. Then how come I think you should give this a stock a rest.
Well, my thesis is based on two factors: thin-film solar technologies and China.
Thin-film production market share in the global solar PV market grew from a mere 2.8% in 2001 to 25% in 2009. However, post-2009, the situation has become very different. In 2011, thin-film solar technologies constituted 11% of the global solar panel production, marking a steep drop in uptake.
Expectations are that thin-film solar PV technology will eventually outpace conventional solar PV technology in the long run. However, the writing is on the wall. It will be tough for First Solar and other thin-film solar panel makers to compete against silicon solar panel makers. The technology was already dominating the market before 2009. But the increase in production and substantial fall in costs are tilting the situation firmly in favor of silicon solar panel makers.
The other major issue is indiscriminate price-dumping by Chinese and Taiwanese makers. With a Biden presidency, we can hope that there will be more legislation to address this issue. A combination of tax breaks and energy subsidies should also increase demand.
Regardless, both these issues will haunt First Solar in the foreseeable future. That doesn’t necessarily make it a bad business. But it does make FSLR stock a bit risky at this stage.
U.S.-domiciled, Israel-headquartered SolarEdge Technologies is up 188% versus the S&P 500. However, the company is losing steam in recent months, making the stock expensive in my eyes.
Post-earnings, SolarEdge suffered a 23% selloff due to Q4 guidance disappointing analysts. Overall, the company did well in in the third quarter. Revenues came in at $338.1 million, a 2% sequential increase from $331.9 million.
However, revenues were down 18% from $410.6 million in the same quarter last year. Revenues fell short of analyst estimates by just $4.26 million, not a lot when you consider the short-term headwinds. But it’s enough to underline how the increased industry competition can curb the company’s growth prospects.
The revenue guidance of $345 million to $365 million is short of the $393 million expected before its earnings release. The revision doesn’t seem major. However, a drop of over 15% from Q4 2019’s $418.2 million is not something investors will take lightly.
For these reasons, paying 99.42x forward price-earnings for SEDG stock seems unreasonable at this stage.
Our last entry on the list is Total (NYSE:TOT)-backed SunPower. Again, like most companies on this list, the stock has performed excellently against the S&P 500. However, there are signs that the company is slowing down. It also doesn’t have a solid balance sheet, which places it in a precarious position versus its peers.
The company posted a $274.8 million GAAP revenue in the third quarter, a 26% increase sequentially from $217.7 million. On a twelve-month basis, the company has a gross profit margin of 7.26% versus a sector median of 47.49%.
On a positive note, the company completed the long-awaited Maxeon Solar (NASDAQ:MAXN) spinoff. Post-split, SunPower will shift to a residential and commercial installer, and Maxeon will be a module manufacturer. Both of these businesses will become more concentrated and efficient as standalone companies.
Valuation should also normalize for SPWR stock, which is trading at 73.62x, trailing 12 months price-earnings. However, all of this will take time, making it a lukewarm prospect in the interim.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.