Solar energy has been the energy source of the future for as long as I’ve been alive. It has always been attractive and intensely modern—no hulking, smoky power plants, no dams, no reactor domes—just clean power that’s as reliable as the sun itself. That has always been the promise of the best solar stocks.
But for as long as I’ve been in the investing industry, there have been problems with solar. Each of these problems got solved, but each kept investors either on edge or out of the industry completely. At first, it was the higher price per watt that solar cost, meaning that anyone wanting to get power from the sun had to be ready to pay more for it. When oil was cheap (and coal even cheaper), solar power made sense only for calculators or remote installations where power lines couldn’t reach.
Gradual improvements in the efficiency of solar cells and a more rapid decrease in manufacturing costs as volumes rose eventually brought solar electricity closer and closer to cost parity with fossil fuels. (As of March 2016, solar’s cost per kilowatt/hour was about 12.2 cents, while residential electric rates average 12 cents in the U.S. But residential rates will rise if crude prices increase.) This chart shows the drop in the price per watt of silicon photovoltaic cells from $76.67 per watt in 1977 to 74 cents per watt in 2013.
The second huge problem, which shows up in the above chart as a pause in the decline of the price of solar power from 2006 through 2008, was a shortage of silicon manufacturing capacity. This shortage kept the solar industry from keeping up in the heady years when big German clean-energy mandates (and heavy subsidies) sent demand skyrocketing.
The resulting boom in silicon manufacturing facilities eventually led to overcapacity, which, combined with the damping effect of the Great Recession on demand (and subsidies) led to a crash in prices. But in the long run, even after the bankruptcy and buyouts of a number of silicon makers, the luxury of adequate manufacturing capacity was another factor in making cheap solar a reality.
The third problem with solar—at least from the point of view of investors—has been that commoditization and fractionally incremental progress in efficiency has made the solar industry a difficult place to make big money. The companies that have done well are either 1) vertically integrated firms that own the entire process, from refining silicon to installing solar arrays, which gives them the potential to produce turnkey power plants or 2) companies with innovative financing deals or other intellectual capital that separates them from the pack.
First Solar (FSLR) has to be considered one of the best solar stocks. A Massachusetts-based company whose original claim to fame was a thin-film technology that got electricity from less silicon, First Solar competes on efficiency, cost controls and vertical integration. The company now has 10 gigawatts (GW) of generating capacity installed worldwide and more than three GW of contracted capacity in its pipeline.
First Solar has tuned its solar arrays to work in extreme heat, humidity and partial shade, just the kind of incremental advantages necessary to thrive in a commoditized environment. It also has big experience in constructing utility scale solar farms, including the sophisticated software necessary to optimize smooth delivery of electricity.
So, what does that mean for investors? A look at a few numbers will tell part of the tale, but not the whole story.
First Solar has a market cap of $5.2 billion and annual sales of $4.0 billion. Revenue grew 3% in 2014 and 6% in 2015, and earnings increased in 2015 to $5.37 per share, up from $3.90 in 2014. Q1 results showed an 81% jump in revenue and an impressive 372% leap in EPS, with a 20.1% after-tax profit margin. Earnings estimates for 2016 and 2017, though, call for reductions of 19% and 27%, respectively.
FSLR trades at an attractive 7 P/E ratio and the number of institutional investors on board has increased steadily since Q4 2015.
The real trouble with FSLR, at least from an investor’s point of view, is that the stock just hasn’t worked, that is, hasn’t made money for anyone but short-term traders. Here’s a weekly chart of FSLR that shows that it was trading at today’s price (just under 51) back in May 2013.
There have been plenty of ups and downs for nimble traders to jump in and out of, but there hasn’t been a buyable uptrend that produced a 100% gain, which is what growth investors like to shoot for. And big rallies have given way to equally sizable corrections. And for long-term investors, the situation is similarly bleak, as price moves have netted out at zero and there is no dividend to compensate the investor for holding.
Taken as a whole, First Solar, which industry observers would probably agree is about as blue chip as it gets in the industry, just doesn’t make the grade. I have no doubt that it’s one of the best solar companies, even one of the best solar stocks, but there are better places to invest your money.
I won’t do all the numbers, but the situation in the other solar stock I follow, SolarCity (SCTY), is equally bleak.
The company has a couple of headline selling points—Elon Musk at its head and an innovative business model that installs home solar arrays for nothing and sells the resulting electricity to the homeowner at market prices—but it isn’t making any money.
After four years of diminishing losses ending in a 60 cents per-share loss in 2015, losses are forecast at $9.63 per share in 2016 and $9.58 in 2017. And the chart shows a stock that has been shedding value since early 2014.
I have immense admiration for Elon Musk and love the business strategy that drives SolarCity’s admirable revenue growth (56% in 2014 and 57% in 2015). But investors can’t eat good ideas. And a stock that has fallen from 88 in February 2014 to 19 in recent trading is just a bad investment. That’s the story the market is telling in the stock’s chart.
The bottom line is that the best solar stocks just aren’t good enough to allow rational investors to buy them. At least for now, if you want to invest in solar, the best investment goes on the roof of your house, not in your portfolio.
Fortune Cookie
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s comment: The world has changed a lot since Carnegie wrote these words; we now have an income tax, and monopolies are frowned upon. Nevertheless, the unequal distribution of wealth remains a matter of concern. Interestingly, Carnegie’s concern was not about unequal income; he had no qualms about the riches he earned. His concern—shared today by the likes of Bill Gates and Warren Buffett—was with the “proper administration” of wealth.
Paul’s comment: Andrew Carnegie funded many free libraries in the U.S. (including the one in Medford, Oregon that I treated like a second home), and believed that the only proper activity for a man who had accumulated great wealth was figuring out the best way to give it away. This is just one more idea he shares with Warren Buffett and Bill Gates. But his idea that great differences in wealth can rip apart the “ties of brotherhood” is one that’s getting a thorough examination again today.
Sincerely,
Paul Goodwin
