In this article, we issue Buy Recommendations on SolarEdge Technologies (SEDG), First Solar (FSLR), and Canadian Solar (CSIQ). Before we discuss these companies, we first present the current context for the solar energy trade.
This week, the International Energy Agency (IEA) put out a report on the Global solar photovoltaic (PV) market. The IEA is forecasting a 50% increase in renewable energy capacities by 2024. The growth is expected to be driven by the collapse in cost of PV panels (seen at -35% over the next five years) and public policy incentives.
We believe that the resurgence of growth in the solar energy market is setting up an excellent entry point for investors. The soft patch in renewable energy has been attributed to two factors. First, the recent slowdown in Chinese economic growth since 2017 has resulted in disappointing growth among both wind and solar companies. Second, U.S. tariff regulations increased the cost of imported solar panels since Trump began the trade war. Tariffs are estimated to be responsible for a 15% year-over-year drop in solar panel installations for the second quarter of 2019. Recall that photovoltaic panels are overwhelmingly being produced in China. It is likely that these two headwinds for solar will be lifted in the coming year.
Again, according to the IEA, new production capacities from wind and solar are set to rise 12% this year, the strongest growth in four years. Of the new electricity generation capacity brought online in the U.S., 60% will be solar. It is important to note also that new solar farms now cost less to construct that coal-fired plants. This is a game-changing moment in the energy sector, we feel.
While the oil & gas energy sector is a contrarian play today, which should be played with caution as many oil companies won't survive, solar energy companies are seeing their stock prices participate in the equity bull market.
Our benchmark for solar energy companies is MAC Global Solar Energy Index (TAN). Not only has TAN decoupled from the dirty fossil fuel companies in the S&P Oil & Gas Equipment & Services Index (XES), TAN is actually beating the S&P 500 year-to-date (+59.8% vs. +21.7% through 10/21/19). And there is much more upside potential in solar stock prices. Just getting the price of TAN back to 2015 highs would represent another +68% for investors from today's price!
From an ESG viewpoint, we are strong supporters of solar. The biggest obstacle to increasing energy production is the impact traditional energy sources have on the environment. Conventional coal and oil power are responsible for significant disruption to the global ecosystem, and scientists agree that climate change is one of the most serious threats facing humanity in coming decades. While the world's energy needs cannot yet be met completely by solar and renewable energy, as investors, we want to encourage companies working on renewable energy solutions for our future.Three Solar Companies To Hold
SolarEdge Technologies designs, develops, and sells direct current (DC) optimized inverter systems for solar photovoltaic (PV) installations worldwide. The company's intelligent inverter solution enables solar panels to maximize power generation while reducing the cost of producing energy from a solar panel.
SolarEdge has also made several acquisitions to expand its opportunity set beyond the solar market, including a couple of deals in 2018 and 2019 to bolster its capabilities in the energy storage market. Already the firm's aggregate growth rate by our measure (based on next year's forecasted earnings and revenue) is at 17.9%, contributing to our Strong Buy rating as a growth company. In terms of valuation, SolarEdge is fairly-valued relative to technology peers, according to WMA rankings. We also like the solidity of SolarEdge's balance sheet. Our financials score for SolarEdge ranks in the top 20% of all technology companies and our WMA Altman-Z score of 1 implies no risk of financial woes.
SolarEdge's price chart shows that investors have been warming up to this solar energy stock in 2019. Looking at this chart, investors may feel like they have missed the boat with SolarEdge. Even with the stock trading at record highs, investors need not be told that record highs on price are not to be feared in this market. As traders, we'd like to see the stock pull-back towards $70 again and re-confirm the 2019 shift to a higher trading range. Given the absence of a dividend payment with SolarEdge, and the proximity of price to record highs, there is no need to rush in to SolarEdge today. Investors can either patiently hope for a pull-back or jump on board if price pushes above $90.
First Solar, Inc. provides photovoltaic (PV) solar energy solutions in the United States and internationally. First Solar designs and manufactures solar modules using a proprietary thin film cadmium telluride semiconductor technology. Their Components segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity. Their Systems segment provides PV solar power systems or solar solutions to utilities and independent power producers which operate solar power plants.
We expect First Solar to enjoy significant increases in solar installation volume through 2023 while tax credits make solar projects highly economic. If you are looking for a roof-top residential solar system, First Solar will be one of your primary suppliers.
In terms of valuation, First Solar ranks higher than SolarEdge (however among our growth criteria, it is SolarEdge that is forecast to grow earnings and revenue faster than First Solar). The 77.7 Valuation Score for First Solar places the company in the top 19.5% of tech peers. For technology, the 19.5x expected 2020 P/E is not an obstacle. Again, financials are solid for First Solar, unlike many fossil fuel energy companies, meaning investors don't need to panic and sell in the event of a market correction.
First Solar's stock price is setting up a buying opportunity. Right now, the relative price trend is down and we are dealing with a high-risk stock (WMA Risk Score of 5) with a 1.47 beta and 64% annual standard deviation. We see a small positive divergence between price and RSI, which should merit beginning a position in First Solar today. We will not build the position aggressively until price gets back above the 200-day moving average (in yellow). There is lots of upside in First Solar, so don't get frustrated trying to pick a bottom.
Canadian Solar Inc. designs, develops, manufactures, and sells solar ingots, wafers, cells, modules, and other solar power products under the Canadian Solar brand name. In the second quarter of 2019, Canadian Solar posted net income of $62.7 million, or $1.04 per share, a huge improvement from years of financial losses. The tide is turning on income statements for most solar companies. On top of the strong results, the future is looking brighter for Canadian Solar, with a 1.8 GW module sale agreement with EDF in France and another 500 MW deal with Solarcentury in Spain. Low interest rates and competitive economics of solar versus fossil fuels are driving higher demand globally.
We love Canadian Solar both on a relative growth basis as well as a relative valuation basis. Earnings growth is forecast at just 2.5% for the coming year but revenue is seen up 11.6%, which is much better growth than solar companies have seen since pre-Financial Crisis. A 5.6x forward P/E should also soon be getting every energy and technology investor's attention.
Financials for Canadian Solar are less solid than First Solar or SolarEdge (bottom 10% of tech peers, according to WMA rankings). Canadian Solar is a very high risk (WMA Risk Score of 5) stock with a beta of 1.83 and an annual standard deviation of 79%. With these caveats (for conservative investors), we believe that Canadian Solar is an excellent name to play the solar energy revolution.
Canadian Solar's stock has come off 2019 highs enough to merit an allocation to a balanced portfolio. For Canadian Solar's stock price to fall back to 2018 lows, our favorable solar energy thesis would have to be totally wrong.Conclusion
All indications are that clean energy production and consumption will grow robustly in the coming years, making the solar energy industry a solid choice for investors. The ride higher will likely be rocky, but unlike fossil fuel industry, these solar energy companies are worth getting excited about over the long term.
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Disclosure: I am/we are long CSIQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.