Solar stocks seem to be in the balance. Many investors hope that the energy shortage will lead to proliferated earnings among solar companies. However, other investors think solar stocks are already priced or overvalued. I prefer looking at matters on an asset to asset basis, and SolarEdge (NASDAQ:SEDG) provides a captivating composition.
Here we have a company that has just missed earnings. It has also just decided to price a stock offering that could lead to shareholder dilution. Yet, I believe it is an excellent risk-return stock with one of the most appealing outlooks I’ve seen in the renewable energy space. Here is why I’m bullish on the stock.
Earnings Outlook for SEDG Stock
SolarEdge expects a recovery in the solar market after its fourth quarter in which it missed out on earnings estimates by 22 cents per share.
The renewable energy company’s management anticipates first-quarter revenue to reach a stunning $615 million to $645 million, exceeding the initial estimate of $551.9 million. It has also said that SolarEdge could run at an adjusted gross margin of 28% to 30%, leaving it with loads of ammunition to cover its operating leverage.
From an accounting vantage point, SolarEdge is sitting on $27.4 million in net deferred tax assets, meaning that future earnings reports could be proliferated if the firm chooses to exercise some or all of its tax benefits. Additionally, SEDG stock has a Pitroski F-Score of 5, suggesting that the company’s financial situation is exceptionally stable.
There has been much chatter surrounding SolarEdge’s $590 million stock offering, which would see it issue 2 million in additional shares. I don’t see any reason for investors to fret here.
I’m not concerned because we must remembered that SEDG is operating in a highly competitive industry. It is common for companies to raise capital to maximize their operational capacity to fend off new market entrants. If SolarEdge were a mature company, I’d be worried as the share issuance would indicate that the firm is having liquidity issues with an inability to cover its short-term obligations with core business activities. This clearly isn’t the case for SEDG as conveyed by its quick ratio of 2.2x.
I’ve been working on a Smart Beta project to help identify the best risk-return stocks in the U.S. market. Without giving away too much, I can tell you that environmental, social, and governance (ESG) factors have attributed the most to my model.
ESG factors are widely utilized by investment managers to optimize portfolio risk-return.
SolarEdge is operating in the renewable energy space and could be subject to many government subsidies and trending consumption due to the “greater good” of the firm’s operations. In turn, this decreases its ESG risk and leaves the stock with a better risk-return profile.
SEDG stock also provides sound risk-return characteristics from a statistical vantage point. Its Sharpe Ratio of 1.127x has increased by 3.27% since the turn of the year. The Sharpe ratio measures a stock’s expected return relative to the overall market volatility to display an asset’s risk-return profile with clarity. SEDG stock is considered favorable, with a growing Sharpe ratio that exceeds the threshold of 1.
The Bottom Line on SEDG Stock
SolarEdge is in prime condition for an objective investor. The stock is very investable as its earnings outlook poses a reason for excitement. The firm’s share issuance is for operational expansion rather than liquidity issues, thus shouldn’t be considered dilutive. And finally, statistical measures and ESG characteristics tell us that SEDG stock is good value for money.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.