Pigs get fat, hogs get slaughtered. When it comes to the solar sector, this is not the time to be slaughtered.
June is a good time to look at SolarCity (SCTY), SunPower (SPWR) and First Solar (FSLR). These stocks have had a great run. Their fundamentals are weak, however, and their growth appears unsustainable. Their valuation today seems to be more sizzle than pork. As such, this might be a good time to take profits.
SolarCity is up over 400% since January. This company designs, installs and operates small solar systems for residential, commercial and industrial consumers. In these deals, SolarCity owns the system, the tax equity, the renewable energy credits and they sell solar output to host consumers at a small discount.
It can be a lucrative business because SolarCity operates at the retail level, produces power behind the utility's meter and the company owns the underlying asset. Instead of competing at the wholesale power level like a utility, they sell power indexed to the retail level, which can be 200% to 300% greater than wholesale.
That is the good news. There is some not-so-good news. There are few barriers to competition. Mounting panels on other people's rooftops is an operational headache. Worse, the bank has its hands in SolarCity's pockets. The bank in this case is Goldman Sachs (GS)
The real beneficiary in this solar story is Goldman, not SolarCity. Goldman is a partner with SolarCity in a structured financing deal. They will not disclose the terms of the deal, citing proprietary concerns. We know Goldman is providing loans against SolarCity's solar installations. Goldman is likely harvesting traditional banking fees. In all likelihood, Goldman is taking a position in SolarCity's tax equity.
It is not clear who is benefiting more -- SolarCity or Goldman Sachs. But, if one had to guess, the pick would likely be Goldman.
While the pork is still sizzling, this might be a good time to take profits. If SolarCity seems intriguing, investors might consider leaving the original investment in play and moving their profits to another investment.
SunPower presents a similar situation. Since January, SunPower is up over 350%. This company is in the strategic position of owning unique technology where it counts. Some of their "off the shelf" panels can reach 21% efficiency, which allows their customers to produce more power with less space.
Some perspective might be helpful. SunPower's customers need about half the land as some of their competitors. If real estate is valuable, then SunPower has a distinctive competitive advantage.
There are concerns for SunPower's investors. Historically, SunPower's cash flows have been abysmal. While cash flow has improved and their deal with Berkshire Hathaway (BRK.A) is a clear boost, there is a banker behind SunPower's deals. French oil company, Total, SA (TOT) has full control over SunPower and they own enough to override all other shareholders.
This leaves First Solar; since January, First Solar is up over 150%. This company has a clear cost advantage. Their cost advantage may be overcome, however, by land costs. Unless customers have access to low-cost land, First Solar cannot compete on panels.
To overcome technology risks, First Solar and SunPower opened new lines of businesses. They offer offer engineering, procurement, construction and operations management services to companies like SolarCity, Berkshire, NextEra Energy (NEE) and Duke Energy (DUK). Management services, however, do not command high price-to-earnings ratios normally attributable to high technology firms.
Like SolarCity, this might be a good time to take profits in SunPower and in First Solar. Investors might consider leaving the original investment in play and move profits elsewhere.
Keep in mind that the big stories are already priced in the market. The fundamentals appear overpriced. Sell on the news. Going forward, if investors plan to keep a few shares, they should consider technical analysis from the Real Money Pro team. Pay particular attention to some of the technical insights that are offered by Tim Collins and Bob Lang. Both analysts have been active in the energy sector.
Meanwhile, enjoy some profits. It has been a good run. Maybe a nice pork barbecue and a good baseball game are in the works.