Tom Konrad CFA
Green 2014 image via BigStock
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With the average solar stock having doubled in 2013, it’s much harder to find bargains in the solar industry than it was a year ago. But two of the professional green money managers think there is still value to be found. When I asked them for their top three green stock picks for 2014, they came back with two solar picks each. You can also read about my panel’s green income stock picks and green information technology picks the earlier articles in this series.
Shawn Kravetz is the solar expert on my panel. He is President of Esplanade Capital LLC, a Boston based investment management company one of whose funds is focused on solar and companies impacted by the emergence of solar. Last year, he had the top pick of all my panelists, Amtech Systems (NASD:ASYS), which was up 160%.
This year, Kravetz says “Finding extreme values is challenging” but he still was able to find two that he considers “quite compelling.”
His first pick is Meyer Burger (Swiss:MBTN), a “Leading solar equipment manufacturer whose business has finally troughed.”
Kravetz thinks the company’s business is about to make a “substantial turn” for the better, but the stock has hardly advanced despite the large increase in price for other solar stocks. Even after a strong 2013, Kravetz says “Global solar installations will likely grow 20% in 2014. With demand finally nearing an equilibrium with cost efficient supply, this will drive leading players to modernize and expand. The hangover of the solar nuclear winter and a poorly timed acquisition of competitor Roth & Rau is ending, leaving Meyer Burger extremely well positioned for 2014.”
His second pick, Renewable Energy Trade Board Corporation (OTC:EBODF) is not for the faint at heart. He calls it the “Highest risk but highest reward of our three picks.” (The third pick was Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), see here.)
The risks with EBODF are liquidity and lack of information. Kravetz says,
It is tiny and thinly traded. They have not reported financials recently. With those caveats, it is actually quite a simple sum of the parts story that is likely worth nearly 5x its current stock price, if not more. Their value stems from cash on their balance sheet and a substantial stake in a major solar project developer Goldpoly New Energy Holdings Limited (HK:686). We believe EBODF is potentially worth at least $12.00 per share.
The other manager to pick solar stocks was Garvin Jabusch. Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, and is co-manager of the Shelton Green Alpha Fund (NEXTX), and the Sierra Club Green Alpha Portfolio. Green Alpha Advisors and I are currently putting the final touches on a fossil-free equity income strategy for separately managed accounts, which I believe will be an excellent complement to the growth-focused green strategies which are currently available.
Jabusch’s two solar picks were both strong performers in 2013, so they took me by surprise. He says,
It might seem a little crazy, but I like First Solar, Inc. (NASD:FSLR) again in 2014.
2013 saw several developments that have laid the groundwork for accelerating medium and long term growth. By partnering with General Electric (NYSE:GE) (which had been FSLR’s only serious competitor in the thin film PV space) FSLR acquired both GE’s portfolio of thin film patents and its manufacturing capabilities. Moreover, FSLR gained access to GE’s sales channels and distribution capabilities via the deal.
Effectively, FSLR has realized a near monopoly on large-scale thin film (CdTe) PV. First Solar will also capture market share because it has very competitive costs, as low as $0.49 per watt of installed capacity, which could make it the clear leader for the utility-scale market. That might be part of the reason FSLR has a large backlog of approximately 2.2 times 2013 revenues. So the growth story is certainly still there.
On the value side, as I write this, FSLR is trading at just 3.8 times cash on the balance sheet, and the latest pullback in share price has brought the company back down to near its book value. Thus, if FSLR merely appreciates to eight times cash or to double book value, the stock could have a 100% year in 2014 on that basis alone.
Beyond 2014, FSLR looks like a good holding for the long-term. Critics will note that guidance for 2014 EPS is less than that for 2013, but this misses the long term advantage point that revenues though not EPS are expected to grow next year, and that the decline in EPS reflects additional investments back into the firm in multiple areas. This is the right approach for a firm in one of the fastest growing industries in the world, particularly if that firm, as is the case with FSLR, is carrying very little debt.
His second pick is also a well-known name: SolarCity Corporation (NASD:SCTY). He does not consider it a “solar” pick- rather a power producer or distributed utility, since it makes its money from power generation and electricity sales. I agree with him that SolarCity is in a fundamentally different business than First Solar and Meyer Burger, and occupies a different place in the value chain, but I include it here because I expect most of my readers would consider it a solar stock.
Jabush has written extensively about SolarCity in his blog, and he highlights this sample:
SCTY seem
ed brilliant to us: not truly a solar company, but an electricity utility installing both distributed and centralized power generation capacity that, once installed, will earn ratepayer checks indefinitely with very little additional capex required on the part of the company. Think about that: what if you could build a huge coal burning plant and sell the electricity for 20 or more years, get the income from that, but never have to pay for the coal, only need a fraction of the workforce, and not have to worry about GHG or toxic emissions? The thing would just sit there and print money. SCTY is all of that, plus, they’re not exposed to the additional risks inherent in the panel manufacturing business – they just buy the best value panels they can from their preferred manufacturers. Every installation SCTY completes is a 20+ year revenue stream. So, they’re installing as fast as they can, forgoing profits now for much larger profits later. Honestly, we were a bit shocked when they IPO’d at only $8/share. And if you’re worried about their negative EPS today, don’t be; every dollar they spend installing now is going to result in a decades-long income stream. If they wanted to show positive EPS now, today, they could, simply by slowing expansion and collecting the revenue from their existing installments. But they know that’s not the way forward, and so do we.The new piece about SolarCity is that they have managed to securitize debt financing of new solar power projects. Their new bonds are moving project financing forward, and give credibility to both SCTY and the industry. Wall St. has embraced the debt, giving the new bonds a BBB+ rating, meaning SCTY’s cost of capital can be relatively low. This innovation also means there are good new sources of income for sustainability-oriented investors and managers.
The only material risk we foresee for SCTY is the political backlash (primarily in the U.S.) caused by their success at stealing market share from traditional utilities and fossil fuels companies. Sen. Jeff Sessions’ attempts to discredit the company is one example. But his overreach in comparing SolarCity to Solyndra reveal a profound failure to understand either firm’s business model, the industry, or the energy markets in general.
He also highlights some specific risks for SolarCity in 2014. He worries that the trends he sees may not be recognized by the markets before the end of next year. SolarCity is “investing every dollar it can into growing market share for future profitability, it will not earn positive EPS any time soon.” He feels the markets’ focus on positive and growing earnings per share may prevent investors from appreciating the company’s long term value. That said, he does not know when the market will come to appreciate this value, so he thinks it’s better to buy now and hold rather than chance missing the share price breakout he expects.
Conclusion
Long time readers know I tend to avoid solar because I prefer sectors which get less attention and where it is easier for me to gain an informational advantage.
Keeping in mind that I’m not a solar expert, I find the arguments for Meyer Burger, Renewable Energy Trade Board, and First Solar much more convincing than that for SolarCity. Call me old fashioned, but I’m one of those investors who likes positive earnings or a substantial discount to a company’s net assets. I would not bet against any of these stocks, but I have to wonder if SolarCity’s break-out year was 2013. After all, it has risen to seven times its IPO price in the last year, and over 4 times since the start of 2013.
On the other hand, Jabusch’s mutual fund (NEXTX) is up 43% from its launch in March, and I’m not the solar expert. The final arbiter will be the market, and I’m personally hoping all these stocks are up. If solar stocks turn in another repeat of 2013, it will be because the solar industry has once again surprised the skeptics. That would definitely be a good thing.
This article was first published on the author’s Forbes.com blog, Green Stocks on December 20th.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
