The market correction I’ve been expecting seems to have begun. If it continues, I will start buying again. Here are five solar (and solar balance of system) stocks I’d buy at the right price.
Tom Konrad, Ph.D., CFA
This article continues my Clean Energy Stocks Shopping List series. So far I’ve brought you:
- Five clean transport stocks,
- I looked at why it makes sense to wait for better prices,
- Five Energy Efficiency stocks (always my favorite sector), and
- Five Electric Transmission Stocks.
- Two Landfill Gas and Three Geothermal Stocks
Long-time readers will know that I don’t focus on solar because I feel that too many other analysts cover the sector, and so it is much more difficult to gain an informational advantage. I expect the price drops in the cost of photovoltaic modules, caused by efficiency gains from thin film producers such as Ascent Solar Technologies Inc (ASTI) and First Solar Inc (FSLR) and from increased solar grade silicon supply continue. For instance, LDK Solar (LDK) is having trouble with decreasing revenues despite increased demand. This trend should benefit sellers of balance of system components, such as inverters, something which many investors considering solar plays are unlikely to consider.
I’m also a long time fan of Concentrating Solar Power (CSP), mainly because it is the only dispatchable form of renewable electricity that has no practical limitations on scale. My optimism is fueled by the Department of the Interior’s recent move to speed solar development on public lands, something which has been a major roadblock to CSP.
#1 Solar Millennium AG (SMLNF.PK) is a proven project developer, having completed two 50 MW CSP plants with 8 hours of thermal storage in Spain. When I wrote about Solar Millennium in May, the stock was trading at $18. I didn’t buy, because I was already becoming bearish about the short term market outlook, but readers who did have seen 80% gains, due to a deal with Southern California Edison to build two 242 MW CSP plants, and the growing momentum of the Desertec initiative. I still like the company, but I don’t like the price, so I’m waiting on the sidelines.
If Solar Millennium’s stock does not drop to a point where I again feel comfortable, I can continue to participate in CSP through the back door with my Electricity Transmission picks. More than any other form of renewable electricity, CSP will need a massive investment in transmission infrastructure. The best solar resources for CSP are in deserts, mostly far from the large electric load centers (with the exception of the desert Southwest and Southern California. In order to achieve its potential of balancing fluctuations from other renewable energy sources, we will need continent-wide networks of powerful electricity transmission, as envisioned by the Desertec initiative, and North American grand solar plans. Such plans typically call for High Voltage Direct Current transmission, in which Siemens (SI) and ABB Ltd. (ABB) lead.
#2 SatCon Technology (SATC) is a leading supplier of inverters for large scale Photovoltaic and Wind farms. The company is not currently profitable, although analysts currently expect profitability in 2010. Between then and now, Satcon needed to find the money to fund at least another year of operating cash losses, which amounted to $10M in 2008. On July 3, the company raised $25M in additional preferred and common equity capital, which is enough to give the company a comfortable cushion.
The stock seems reasonably valued at the current $1.70, but a market decline will probably knock SatCon back with everything else.
#3 Power-One, Inc. (PWER) is far more diversified than SatCon, producing a wide range of power conversion products in addition to renewable energy conversion. They serve both commercial and residential markets with their inverters, and their power converters for electronics are ubiquitous.
They are also not currently profitable, but they have substantial cash and recently raised more through a private offering, so they should only need to raise further cash if it comes on favorable terms.
Renewable energy is still only a small slice of their business (only part of the 16% of revenues in their "other" segment), and so Power-One is still mostly a bet on the IT market. But the strong balance sheet makes this one worth watching. I especially like the fact that two of the directors have been buying shares.
#4 Sustainable Energy Technologies (STG.V) is a development stage company working to use a massively parallel approach in order to achieve a higher electri
city output from PV farms, with their technology especially targeted towards the fastest growing segment of PV, thin film. The company is not particularly well capitalized, with less than a year’s worth of operating cash on the balance sheet, and the stock could easily be knocked down if they are forced to raise capital on unfavorable terms. However, an investor who uses such an opportunity to buy shares on the cheap will have bought a low-cost, highly leveraged thin film solar play.
#5 Advanced Energy Industries (AEIS) is another diversified electronics play, which not only does power conversion for the solar market, but also power conversion for PV manufacturing. They also sell liquid and gas control systems and thermal instruments. The solar market accounts for about 20% of their sales.
Their solar inverters (introduced only in 2007) are particularly efficient, having achieved record ratings from the California Energy Commission, an advantage which should enable them to gain market share. With positive cash flow and a strong balance sheet, AEI seems to be the safest way to play the solar Balance of System.
DISCLOSURE: Tom Konrad and/or his clients own SI, ABB, SATC, STG.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
Thanks for the list of solar stocks Tom – there are certainly some interesting names here.
I find stock picking in solar PV challenging for three reasons: (1) informational advantage is very difficult to gain and exploit due to intense sell-side focus; (2) stocks tend to be volatile, so they either get destroyed when things go wrong (e.g. Timminco) or are too rich when things go right (e.g. First Solar); and (3) the industry is much further away from equilibrium than wind or even CSP, with disruptive applications and new entrants constantly threatening existing market positions (e.g. thin-film was not a big deal 8 or 10 years ago, and could have a 50% share of the market within a few short years).
I think the solar PV sector is thus perfectly suited for ETF investing, as the tremendous growth potential cannot be ignored despite difficulties in stock picking. While volatility and overpricing remain of concern with an ETF, this approach removes the need to monitor company-level developments, which can be time-consuming and difficult to do well for a retail investor without access to sell-side analysts.
Viewed another way, ETFs can also be great hedging tools for long positions in individual solar stocks or small portfolios.
I completly agree on all the reasons stock picking on soalr is difficult.
That’s why these five stocks try to get into solar though the back door… by ignoring the high profile PV companies and looking at others that may benfit.
I also agree that solar ETFs are a reasonable way to play the sector… but why would you hedge individual solar positions with an ETF if you didn’t think that it made sense to pick solar stocks in the firt place?
I wouldn’t because, as you point out, I think picking stocks in this sector and consistently outperforming is tough. One either has to have an immense amount of technical and public policy knowledge or be a very sharp trader.
But for someone who is actively picking solar PV stocks, the ETFs are a good hedging tool IMHO. As a short, they are overall less likely to rise suddenly to astronomical levels than are individual stocks.
Solar Stocks Shopping
Tom Konrad has published an interesting article about his favorite solar stocks to buy – if the prices come down to an acceptable level. His favorites are Solar Millennium AG, SatCon Technology, Power-One Inc., Sustainable Energy Technologies and Advan…