You’ve heard of sin stocks, right? Well, climate change and faltering energy grids have Wall Street looking to “sun stocks” for answers. One of the possibilities is SunPower (NASDAQ:SPWR) and SPWR stock.
Should SunPower be in your sun stocks portfolio, or should you look elsewhere? I’ll answer both questions, but in reverse order.
Consider Your Options
According to Finviz, there are 2,086 stocks you can buy with a market capitalization greater than $2 billion that are listed on a U.S. stock exchange. Of those stocks, there are nine with the word “sun” in their corporate name.
SunPower is one of them. The two other solar-related stocks are Sunrun (NASDAQ:RUN) and Sunnova Energy International (NYSE:NOVA). Of the three, Sunrun has the largest market cap at $11.3 billion, followed by SunPower ($5.6 billion) and Sunnova Energy ($4.5 billion).
All of them are decent-sized companies.
SunPower sells solar energy solutions to North American residential and commercial customers. Sunrun primarily leases solar power solutions to residential customers, although it does work with commercial developers in multi-family and new home construction. Sunnova was entirely in the residential solar market until it agreed on Feb. 17 to buy Lennar’s (NYSE:LEN) residential solar platform for its new home construction.
So, you’ve got three options that all compete in virtually the same sandbox. Of the three, the only one I’ve written about in recent weeks is Sunrun.
When I wrote about it in November, I called it a long-term buy, arguing that the use of RUN stock to buy Vivint, a large competitor, was a smart move because its stock was expensive at the time, making equity a better choice of capital than debt. When it closed the deal in October, RUN stock was trading around $80. It had a bit of a rally in January but has since fallen into the low $60s.
My InvestorPlace colleague, Faisal Humayun, suggested that investors keep an eye on the solar stock. While Humayun didn’t come right and call it a buy, he did say that achieving operational profitability – it’s not there yet losing $465 million from its operations in 2020 – would most definitely be a catalyst to push its share price higher.
As for Sunnova, InvestorPlace’s Luke Lango called its business interesting in a December article. Essentially, the company is trying to be solar agnostic, opting to connect the solar panel manufacturers with the installers to create a marketplace of sorts. That is interesting.
If you believe in solar as a long-term energy source in the U.S. and around the world but aren’t confident about which companies will win this race, I would go with the Invesco Solar ETF (NYSEARCA:TAN), a collection of 36 solar-related companies, including the three names mentioned in this article. It charges 0.69% annually, which for a $4-billion fund, is a tad high. But then again, it gets you in the game.
Is SPWR Stock a Buy?
SunPower reported Q4 2020 results on Feb. 18. Earnings beat estimates – it earned 14 cents in the quarter, 3 cents better than expected – while the company’s $342 million in sales was lower than expected and down from $402 million a year earlier.
The company’s guidance for 2021 really spooked investors, sending its stock down 17% on the day. However, it’s hard to feel sorry for SPWR shareholders. It has a three-month total return of 48.1% through Feb. 25.
In 2021, SunPower expects to grow revenues by 35% to $1.52 billion from $1.12 billion in 2020, with positive adjusted EBITDA growth.
While there’s no question SunPower is growing its business, I don’t think there’s any question that SPWR stock is expensive at 6.1x sales. But then again, the entire industry is expensive. Sunrun has a price-sales ratio of 8.4. Sunnova is almost 23x sales.
The price of admission to the solar world is likely to stay inflated in 2021 as analysts remain bullish about the sector. As for SunPower specifically, only two of the 14 analysts covering its stock rate think it’s a buy now, giving it a target price of $31.73.
My colleague mentioned profitability as a catalyst. I would agree with that assessment. I would wait for a better entry point in the mid-to-high $20s. Until then, I’ll continue to look for clues greater profitability is on the horizon.
If you’re planning to hold for two to three years, I wouldn’t have a problem recommending SPWR stock at current prices. However, I do believe waiting will get you a better price.
Alternatively, you could buy Invesco’s ETF and that would absolve you of making that choice.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.