Energy Stocks Poised for Huge Gains in 2016
With every passing day, the outlook for renewable energy stocks becomes increasingly optimistic. Using solar power to service our energy needs seems like an obvious necessity to me, which is why I’ve compiled a list of the best solar energy stocks to watch in 2016.
Before we get to which solar energy companies are best situated within the renewable energy space, let’s back up for a second. Not everyone is fluent about solar power and solar energy stocks, so it makes sense to cover some of the basics.
For instance, what are the big-picture dynamics working for and against the solar industry? How do solar energy companies make money? And why should anyone invest in solar energy stocks rather than wind or nuclear?
These are useful questions to consider before putting your money into solar energy stocks. If you haven’t considered them before; don’t worry, it’s not your fault. It’s our fault. We in the financial media have an obligation to demystify the sea of information around renewable energies, an obligation we sometimes fail to meet.
Let me make up for it. Solar power is as close to a certainty as we can get.
To put it in perspective (and humour me on this), imagine an advanced alien race visited Earth and appraised us as a species. The first thing they would see is that we’ve set up civilizations and a legal system. Bravo to us.
But then they would ask how we provide energy for ourselves. We would reply that we drill into the planet for compressed carbon fuels that can devastate our planet. The inefficiency of our system would boggle their minds!
Look up, they would say! There’s a giant fission reactor in the sky that appears like clockwork. Although we may not often think of it that way, a Sun is exactly that: a fission reactor, a nuclear power source at a distance.
Solar Energy Stocks Skyrocket as Costs Plummet
All solar panels do is harness the energy sent by the Sun into energy we can use here on Earth. That’s how a more evolved alien race would design our energy supply, because that’s what is efficient. The reality of getting to that point is more complicated.
It used to be that solar energy companies would have to fight against the incumbent energy players on our planet. Namely, the oil and gas sector. But in recent years, the solar industry has looked inwards to resolve its growth conundrum.
It became obvious that the success of solar power hinged on lowering the cost of solar panels and finding a business model that makes solar energy stocks profitable to shareholders. Once those two things are accomplished, the rest takes care of itself.
Investors should buy into solar energy stocks because it makes financial sense for them, not because they were convinced by an abstract moral argument. The burden of building a win-win proposition falls to the energy companies in question.
But how do you lower the cost of producing solar panels? The answer is surprisingly easy, as anyone with a credit in Econ 101 knows. You make more solar panels until the cost per unit goes down. That relationship between quantity and cost is what economists refer to as economies-of-scale.
And that’s exactly what the solar energy companies did. Take a look at the volume of solar panels produced measured against the cost per square foot:
(Source: “Solar power is still growing rapidly, but it’s about to hit a speed bump,” Vox, September 9, 2015.)
Scaling up the production solar panels is clearly working to reduce the cost of doing business for solar energy companies. That was step one.
The second part is making solar power into a viable commercial venture. Since solar energy stocks are still in their infancy, we’ve seen the formation of three distinct segments: commercial, rooftop residential, and utility-scale.
The Best Solar Energy Stocks to Watch in 2016
Many of the best firms offer a mix of products. But knowing the different segments is helpful in mapping out how solar energy companies are evolving. Commercial solar power and residential solar power are the most popular right now.
The main difference between residential and commercial is scale. Businesses usually have more roof space than an individual’s house, meaning they can accommodate larger-sized solar panels. Business buildings also tend to place larger orders, reducing the cost per panel for solar energy companies.
However, solar energy stocks don’t usually restrict themselves to just commercial or residential sales. They tend to offer both lease and financing options on both. Leasing solar panels may seem strange at first, but it’s revolutionizing the solar industry. (Source: “Buying or leasing solar,” SolarCity web site, last accessed October 21, 2015.)
Individuals or businesses that want access to renewable energy without the upfront costs of buying solar panels can simply lease a photovoltaic setup. There are no maintenance costs, nor are there any installation costs. The savings are immediate.
That being said, not all solar energy stocks were born even. Here is my list of the top solar energy companies as we head into 2016.
Five Undervalued Solar Energy Stocks For 2016
SolarCity Corporation (NASDAQ:SCTY)
Guess who’s the chairman of SolarCity Corporation (NASDAQ:SCTY)? Kudos to anyone who thought of Elon Musk, the genius founder behind PayPal Inc., Tesla Motors, Inc., and SpaceX Technologies Corp.
Musk helped fund this massive solar operation with two of his cousins, showing once again his knack for building great companies that can change the world.
SolarCity installs and finances more solar panels than any other solar energy company in the United States. They have more than 34% of the U.S. market, but SolarCity’s bottom line is continually getting worse. The growing losses have weighed heavily on SCTY stock this year, which investors pushed down nearly 27% this year. (Source: “Elon Musk just bought up $5 million of SolarCity stock,” Fortune, August 25, 2015.)
Does SolarCity stock deserve this kind of pessimism? In a word: no.
The devil is in the details. A majority of SolarCity’s cash is being spent on selling and administrative costs, which is to say the initial expense of acquiring a customer. There’s the first assessment of the property, then the installation, and all the necessary paperwork involved. It’s a capital intensive process, there’s no doubt about it.
But the SolarCity bears forget one important thing: duration. The lengths of their contracts are in the order of decades, meaning a loss in the short-term is nothing. Customers will be paying SolarCity years after these losses are forgotten, and investors will flock to SCTY stock.
First Solar, Inc. (NASDAQ:FSLR)
First Solar, Inc. (NASDAQ:FSLR) is a utility-scale solar energy stock. Some of you may have noticed I skated over the definition of utility-scale when describing the three emerging segments of solar power. That’s simply because First Solar stock is the perfect example.
A utility-scale solar energy stock does not sell directly to end consumers. First Solar is a business-to-business company that sells its energy directly to utilities firms. There are several upsides for FSLR stockholders in this arrangement.
First Solar doesn’t have to worry about customers selling their house and transferring the solar lease to the new owners, or worry about the composition of their financing portfolio. FSLR stock is more stable than its residential and commercial peers because the stock has a handful of static contracts with just a handful of clients.
Moreover, utility-scale solar energy plants are built in a concentrated location. They are not dispersed to thousands of homes and offices, meaning the construction can be outsourced. First Solar does not require a broad or expensive workforce; and it shows in their financial results.
One reason FSLR stock suffered less than its peers is because they made more than $57.0 million in the last quarter of 2015. Not bad at all for a young firm in a young industry.
TerraForm Power, Inc. (NASDAQ:TERP)
Another cash-positive destination for investing in solar energy stocks is TerraForm Power, Inc.(NASDAQ:TERP). TerraForm is actually the subsidiary of SunEdison, Inc. (NYSE:SUNE), a conglomerate of renewable energy initiatives around the world.
To put it mildly, TerraForm is about to come into a windfall. SunEdison is pursuing an acquisition of a young and booming solar energy stock called Vivint Solar, Inc. (NYSE:VSLR). Vivint is an emerging giant in the world of residential rooftop solar power, having installed 40,000 rooftop systems in relatively short period of time. (Source: “Why SunEdison is buying Vivint Solar for $2.2 billion,” Fortune, July 20, 2015.)
TerraForm will inherit Vivint’s entire portfolio, which is fantastic for anyone holding TERP stock. If you don’t own TerraForm stock, or SunEdison stock for that matter, fear not. Both TERP stock and SUNE stock took a nosedive this year, falling 40% and 56% respectively.
Don’t let the dramatic fall shock you too much. Investors turned bearish on solar energy stocks almost as soon as oil prices plunged, but crude prices can’t stay this low forever. The natural endgame is an oil shortage which drives the solar energy stock sky high.
Another plus for investing in TerraForm stock is its structure. SunEdison crafted TERP as a “yieldco,” meaning the firm is legally obligated to pass through a high proportion of its dividends to shareholders.
Canadian Solar Inc. (NASDAQ:CSIQ)
Speaking of solar energy stocks trading at discounted values, I’ve been taking another look at Canadian Solar Inc. (NASDAQ:CSIQ). While I wouldn’t put Canadian Solar at the top of my list, the company has been exploring some interesting avenues lately.
CSIQ stock could see a breakout in 2016. The main driver of a bull run on Canadian Solar stock would be its entry into foreign markets, especially the opening of several solar power plants in Japan. It’s genius.
Remember that Japan has a horrific history with nuclear power, which makes up 30% of its entire energy infrastructure. The 2011 meltdown of the Fukishima nuclear plant rocked the country to its core, with over 120,000 still uprooted as of 2014.
The scars of Fukishima will not easily heal. By opening four solar energy plants, Canadian Solar is offering the Japanese people a renewable energy alternative that can help them move away from nuclear power.
Rabobank Hong Kong is funding the project. If it succeeds, we will likely see expansion of solar energy companies into the Far East. The upside for Canadian Solar stock is directly related to this trend as they are among the firs to tap the Japanese market. (Source: “Canadian Solar Announces that it Successfully Started Commercial Operation of Four Solar Power Plants in Japan,” PR Newswire, October 20, 2015.)
Amec Foster Wheeler plc (NYSE:AMFW)
The final firm on my list is Amec Foster Wheeler plc (NYSE:AMFW). It’s entirely possible, likely even, that you’ve never even heard of Amec Foster Wheeler stock.
That may be because AMFW stock falls quite in line with the first four tickers on this list. It is a consultancy firm that will supply the solar energy industry with everything from design to construction services. (Source: “Cupertino Electric, Amec Foster Wheeler Build One of the Largest Photovoltaic (PV) Solar Projects in the U.S.,” MarketWatch, April 6, 2015.)
By not tying itself to any one long-term project, Amec Foster Wheeler can carve a solid niche for itself as a solar energy stock. It can be the hired gun, a specialty firm to fill the gaps whenever needed. There are fewer upfront costs and illiquid investments for a stock like AMFW.
Like its peers, Amec Foster Wheeler stock moves in lockstep with energy prices. Thus explaining its horrendous performance over the last year. But once again, the lack of illiquid assets makes it more agile than some of its bulky competitors.
If the pace of technological innovation among solar energy stocks continues to quicken, some firms will not be able to pick up. Their revenues will be rising, but the demand for expert advice will blossom as incumbents try to protect their competitive edge.
In such circumstances, I expect Amec Foster Wheeler to be one of the most profitable solar energy stocks around.