Buying SunPower (SPWR) & First Solar (FSLR)

Both SunPower and First Solar have become very oversold and are now buys. Retain some dry powder in case the stocks fall another 20-30% and you need to average in. 

The case for solar:

One of the fastest growing industries on the planet. It satisfies all four “check boxes” for investing in a slow growth world.

1. Secular change is benefiting solar. Climate change is a major catalyst for continued shift from fossil fuels to alternative energy.

2. Disruption to energy delivery is apparent. As solar technology continues to improve, fossil fuels cannot keep pace. Already when new energy is needed, solar and wind are the choice in most cases. Soon, solar will be cheap enough to replace existing coal electric generation.

3. Government support for solar is strong. In the U.S. subsidies are extended to 2020. While this has slowed the urgency to switch to solar, it has helped to make in an inevitability. The Paris Climate agreement has had the effect of changing international law making coal development very difficult. 

4. Solar is suddenly value priced. With volatility, this was to be expected eventually. While some downside momentum exists, the oversold condition indicates a reversal is likely in the not too distant future. Given that sometimes these pivots are sharp and sudden, I am recommending starter positions now.

First Solar

The company is one of the top solar companies in the world with very solid balance sheet including $1.67 billion in cash.

Price to book value is below .7 right now. This is monumentally cheap.

Price to sales is below 1. This is monumentally cheap. 

Forward looking earnings for one year is neutral, forward looking for 2-4 years is positive.

The stock is trading 35% below typical valuation.

The company is net debt-free.

They have 3220 MW of contracted projects, however, 810 MW is for 2019, so quite a ways away. My anticipation is that some of the 2019 is moved up to either very early 2019 or even 2018.

When RSI gets below 30, the stock is oversold and generally rallies in short order (like most healthy company stocks).

You’ll see that FSLR is extreme oversold. This generally represents that a reversal is imminent. This is particular true when a growth stock trades at a value multiple – which is very unusual to begin with. 

SunPower

Though the company is carrying some debt, it is backed by and 70% owned by Total the oil major. There is virtually no balance sheet risk. The company is a potential takeover target.

Management failed to warn about projects getting pushed off, to the consternation to the analysts who should have known.  

Revenue of $1.52 billion exceeds market cap of $1.48 billion.

Like FSLR, SPWR is seeing a slow down for 2017 it will need to work through.

Like FSLR, sells projects to CAFD, which means that it can accelerate earnings again as projects finish.

Trading at 30% below historical valuation.

When RSI gets below 30, the stock is oversold and generally rallies in short order (like most healthy company stocks).

Factors affecting both companies

Because utilities loaded up on solar projects before the solar investment tax credit was scheduled to expire at the end of 2015, the have lower demand short-term as they’ve met their short-term quotas. The balance of 2016 will be rough for these companies. Orders ought to pick up again in 2017 with an acceleration of earnings by year-end 2017 and into 2018. Most investors aren’t that patient, hence the sell-off. 

In addition, there are the assets of SunEdison to consider which are hitting the market. Big utility buyers of solar can bid on those, before having to build out more solar electric generation. 

Taking a starter position now is a long-term idea. It is worth doing because we don’t know how low these stocks will go or what new factors will be positive catalysts. There are far more potential catalysts then negative given global ambitions to fight climate change. If Hillary Clinton wins the Presidency, that is very positive. If Donald Trump wins that is negative and would push the timeline out potentially by another couple years. At some point in 2017 we could see a LEAP play develop as demand positions to improve. 

Regardless of timing. Because these stocks jump so high sometimes, I do not want to miss this buying opportunity, so I am taking starter positions in both stocks.

Recommendation

Buy FSLR for 1% or 2% of a portfolio at market. For those who use options to accumulate stock positions and generate income, selling a December $37.50 put for about $4.

Buy SPWR for 1% or 2% of a portfolio at market. For those who use options to accumulate stock positions and to generate income, selling a December $10 put for about $1.25.

For those selling puts, remember, WE WANT to own these stocks, so if the stock is assigned to you, then consider that you simply bought at a discount to today’s price. 

These stocks are intended to be owned 2-4 years plus and only sold after substantial gains. I anticipate both could double to triple in the 2-4 year time frame.

Kirk