California Governor Jerry Brown signed a climate change bill that is designed to significantly boost the state's production of renewable energy over the next 15 years. This will include big increases in the state's use of solar and wind.
The Californian law is the first of what is likely to be a wave of similar legislations around the country. In my opinion that will be bullish for companies in the solar energy space, so I am going to look at several stocks that might benefit from this growing trend.
I own First Solar (FSLR). To me, this is both a growth and a value stock. I should say it's on the "edge" of value, at least according to my criteria. I don't like to buy stocks that have less than a 6.0% earnings yield (the inverse of the price/earnings ratio), and First Solar has a 6.25% earnings yield. (p/e of 16.)
The company's got a $5 billion market capitalization, which makes it one of the biggest in the industry. Furthermore, it's profitable, which is good, because I only look to buy companies that are making money.
The stock got hammered over the past year, dropping from $70 down to about $40; however, it has since rebounded to $50, and I think it goes higher from here. The only thing I don't like about this company is that it doesn't pay a dividend, and I really prefer to invest in companies that pay dividends. In this case, I am breaking my rule because I think it is a paradigm play. By that I mean it represents a long-term emerging theme.
Another solar stock that looks pretty good is Canadian Solar (CSIQ). This is not only a play on solar, it's also a play on the Canadian dollar, which looks to me to be very oversold vs. the U.S. dollar.
Like First Solar, Canadian Solar has seen its stock get pummeled in the last five months. It has been cut in half, to $19 from just under $40 back in May. The company is profitable and sports about a $1 billion market cap. The earnings yield on this one is 20%! (Nice!) That's one cheap stock, if I may say so. Unfortunately, no dividend, either, but like I said, we're giving up dividends to be part of an emerging secular trend.
Next up is SunEdison (SUNE). The company is based out of Missouri and has a segment that provides solar energy services such as design, installation, monitoring, etc. Personally, I'd steer clear of this company because it is losing money and like I said earlier, I don't buy companies that are losing money. I'm not saying you can't do well in a turnaround situation -- indeed, many have -- it's just one of my rules that I don't buy companies that are losing money. By the way, the stock has gotten crushed. It's down about 67% since July. It's probably due for a bounce.
Finally, there is SolarCity (SCTY). This company is based in California and it operates in the full spectrum (no pun intended) of the solar business: design, manufacture, installation, monitoring, etc.
SolarCity is reporting a small loss, so I am staying away from it even though the loss is minor. Its stock is down about 27% since May. One other thing you should be aware of is that it's got famed hedge fund manager and short seller, Jim Chanos, saying all kinds of negative things about it. Chanos is not infallible. He's been short China for who knows how long (and wrong!), and I've written quite a bit on Real Money as to why his views on China are misinformed. Probably same thing with Solar City. Even so, the company's loss keeps me away. If it turns the corner and remains cheap, I will gladly take the opposite side of Chanos.