Solar stocks get their power back

  • By Avi Salzman,
  • Barron's
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Solar-power stocks had a rough 2018, as U.S. tariffs on imported solar cells and less-generous Chinese policies sapped demand. The Invesco Solar exchange-traded fund (TAN) fell 28% for the year.

Global demand for solar fell for the first time ever, says Goldman Sachs analyst Brian Lee. In the U.S., demand also experienced a rare downturn, with installations falling 2%, according to the Solar Energy Industries Association (SEIA).

Expect the clouds to pass soon. Solar demand is back on the upswing, and solar stocks have already responded. The Invesco ETF is up 30% this year, nearly erasing all of its 2018 drop.

The trend seems likely to last. Global solar demand should grow 12% this year and 10% in 2020, Lee projects. Growth should be especially strong in Europe, where demand could surge 30% this year. And the Middle East, where solar adoption has been slow to pick up, could double its capacity this year.

Lee likes stocks of companies that sell to high-growth end markets like the U.S., Europe, and various emerging markets. But some of his picks—including Utah-based Vivint Solar (VSLR)—have a history of losing money and thus pose more potential risks to investors.

Among the stocks that could benefit from higher solar demand is Arizona-based First Solar (FSLR), a company that focuses on the utility market.

The utility-scale solar market contracted by 7% in 2018, largely due to U.S. tariffs, according to the SEIA. But the utility industry signed contracts for 13.2 gigawatts of power-purchase agreements in 2018, creating the largest pipeline of contracted projects in history. The U.S. utility-scale solar market should grow at a 40% compound annual growth rate through 2020, Lee estimates.

Utilities are ramping up their solar projects because of state initiatives meant to speed up renewable-energy projects and growing interest from corporations, among other reasons. First Solar won’t be the only company to benefit from this trend, but it has an advantage over other providers because it makes its solar film in the U.S. and thus isn’t subject to solar tariffs. First Solar is also seeing growing interest for its products from Europe.

“Relative to our module competitors, we are in an extremely favorable position essentially being sold out over the next eight quarters,” said CEO Mark Widmar on the company’s latest conference call.

First Solar stock is down 21% over the past year, in part because its sale of a project in Japan was delayed until this year, hurting earnings. It trades at 22 times forward earnings. But its ongoing results look promising, and the company has the added advantage of having more cash than debt—something many of its peers can’t boast. Wall Street expects its earnings per share to rise 84% this year. Lee sees the stock gaining 19% to $64.

Other solar operators also have promise, though they often carry more risk. Lee likes Canadian Solar (CSIQ), for instance, given its exposure to growth in China and the U.S. But with the stock already up 63% this year—after a 15% decline last year—investors need to be willing to ride a roller coaster.

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