I would have titled this article "Did President Donald Trump Just Say What I Thought I Heard Him Say," but that's too long of a title. Suffice to say, I almost fell out of my computer command chair when I saw this:

If President Trump is seriously starting to change his tune on solar, maybe he's listening to Ivanka or Elon more, then that could be the shot in the arm the whole solar industry has needed all year. Maybe he's just mad that China has taken the lead in solar development. Seriously, solar has taken it on the chin since the election and if President Trump is really becoming pro-solar, then we could see many solar stocks move back to their 2-year highs pretty quickly.

Why Might The President Have Been Complimentary to Solar?

The most obvious reason is that in order for the United States to become truly energy independent anytime soon, the country will need to incorporate solar and wind into the energy system in a much larger way. While the idea of expanding coal again appeals to a small minority of the population, most people realize that coal is dirty, toxic and dangerous to use more than we already do and that we probably need to get rid of it altogether in the next decade or two for climate reasons.

I know I uttered the "climate change" idea and I'm not sorry. Whether you or I or anybody believes in climate change science is besides the point. 197 nations believe that man made climate change is a problem and are trying to do something about it via the Paris Climate Agreement. Ultimately, when that many nations are behind something, it's going to have an impact. The switch to alternative energy is coming whether your climate views are consistent with that or not. Keep that in mind when picking investments.

Maybe President Trump, after having a few months to get a lot of input from people like NASA scientists and the Pentagon who views climate change as a real threat, he is beginning to see things differently than how he campaigned. Maybe talking about solar in a little bit of a silly way, was just the icebreaker for what might come next. Energy Secretary Rick Perry did just tell Congress that the U.S. would pursue an "all-of-the-above" energy policy reminiscent of President Obama's administration.

Afterall, although we have "pulled out" of the Paris Climate Agreement, the President has said there is room for negotiation. What if he negotiates bigger carbon concessions from China and India that are more binding? That would be awfully good for some American solar and energy transmission companies.

The Size of the Solar Pie

Solar, according to the IEA, is currently only about 1.5% of all power generation globally, although the growth rate turned dramatically up in 2016 thanks to China and the United States.

Solar Growth 2016

In China, according to their National Energy Administration, only 1% of energy production comes from solar while 66% comes from coal. One Chinese government report has suggested that 86% of China's energy come from renewables, primarily solar, by 2050.

In the U.S. only 1% of electrical generation was from solar in 2016 according to the EIA. While that number is rising, it is still from a small base. In March of this year, solar touched 2% of generation.

Overall energy consumption, not just electricity generation, in the U.S. is right now only 10% of total, with 6% of that being solar, or a total of .6% of energy consumption. These numbers include the energy used for cars, hence the 37% allocated to petroleum. What we learn here is that if we do in fact move towards EVs in the next decade or two, then there is going to have to be a huge uptick in other energy sources. Certainly we won't power the grid with oil. Coal is also on the way out. Natural gas has a role as a base energy provider at least for many decades. 

Energy Consumption By Source

To produce solar at scale, the United States would have to undergo a massive transformation beginning with solar utilities at the local and regional level. Let's presume the battery problem is solved (it almost is, but that's for a different article). If President Trump has decided to go down this path, the replacement of about half of all energy consumption, replacing a lot of the petroleum and coal, plus accounting for new energy consumption, by solar is a real possibility over the next few decades. That's a monumental investment opportunity. Already, about 80% of new energy consumption is being filled by alternatives.

Who Wins in Solar?

Well, the usual suspects should be looked at.There are companies all around the world that have a role in the growth of the massive market. Here in the United States there are four that I keep a close eye on. Here is a summary of my thoughts.

Tesla (TSLA) with their EV plus solar combination packages could certainly do well. Over the long haul this is probably a company to own if you can get shares at a reasonable valuation. The problem is that the stock is very expensive based on expected earnings over the next five to ten years. It is important to remember that not everybody who buys an EV though can get solar though. They might not have the roof or yard for it. Certainly most urban residents would not be candidates to install solar even if they make a lot of sense for Evs. There are a lot of headwinds, not the least of which is currently cheap oil, to Tesla meeting sales and revenue goals. At some point you would have to think this impacts investor sentiment no matter how strong "the Force" is with Elon Musk.

There is a narrative out there being spun by shorts that Tesla will go bankrupt. That's highly unlikely. While the company is burning through cash as it ramps up, it has no shortage of options to raise capital. Both China and India have expressed an interest in having Tesla factories in their nations. They are also both motivated to move away from gasoline powered vehicles for environmental reasons. TenCent already bought a portion of Tesla and that is not likely to be the last dilutive event over the next few years as Tesla continues to build for and change the future.

Because I expect Tesla shares to get diluted by between 20-40% in the next few years and the extremely high valuation assigned to the stock right now, I rate Tesla shares a sell at the moment. That could change, but right now, if you own Tesla, sell and take your gains. You can buy back later if (when) the stock is trading in the $200s again.

First Solar (FSLR) has top notch utility scale operations and is poised to be a big winner as the United States and other nations get rid of coal. The company recently went through a slow period and a business transition. It is emerging quickly though as it brings new products to market and expands its margins on the back of refocusing. 

First Solar has always been focused on profitability and it's recent slump is unusual. I chalk it up to the cyclicality of the market and the impact of government. One of my 4 core criteria for picking investments is considering the influence of government policy. With the extension of solar tax credits and then the election of President Trump, First Solar got a sort of double whammy. First, solar projects that were expected in 2016 we not done because the extension of the tax credits. So, the extension of the tax credits is good, but it eliminated urgency to get work done. Owners of potential projects smartly deferred as technology continues to get better. Then, President Trump was elected and the future of the solar tax credits were thrown into doubt. Ouch. 

First Solar's new products are indeed top notch and as solar picks up and eventually hits a more accelerated growth curve in the 2020s (my opinion), the company is set up for success. The company has a nice balance sheet with plenty of cash, but will have to spend some to expand and grow. There are rumors that General Electric (GE), which sold First Solar some of its technology a few years back might be looking to jump back into solar in a bid for growth, possibly through buying First Solar. I'm not sure how likely that is, but it is a rumor that makes some sense.

The current price of the stock seems to imply a full valuation for those who need more immediate gratification. Whether or not to buy First Solar depends on your time frame and willingness to anticipate positive surprises. I think at this point, the likelihood of positive surprises far outweigh negative as those have mostly happened. I rate First Solar a hold for existing owners and a buy for "enterprising investors" which I define as those willing to take a longer-term growth oriented view of their asset allocation and accept significant volatility. 

SunPower (SPWR) which is the darkhorse in this sunny field might have the most upside of any of the companies I follow. The company is 60% owned and financially backstopped by Total (TOT) - the oil major. SunPower is an across the board play with utility scale, commercial and residential solar. They too have been going through a transition similar to First Solar. The company is just emerging from that pitstop.

SunPower is becoming a very agile manufacturer in the solar space. Due to the speed at which technology is getting better, it's become very important that the manufacturing that a solar company does can be adapted. This is not what has been the case until now as most companies had major problems retooling when necessary. SunPower's P-Series solar panels and its utility focused Oasis platform are giving SunPower the ability to grow and adapt as necessary. It's a huge advantage to competitors.

Over the past several years, quite a few solar panel manufacturers and EPC companies have had hard times with several going through bankruptcy. With the thinning of the herd, SunPower, with its vertical and horizontal structure stands a very good chance to not only survive solar volatility, but thrive as the market expands to make solar a much larger part of the energy consumption equation.

The stock has rallied in the past week and there are already cries by traders, many of whom I'm sure were short, to "fade the rally." SunPower is coming off a pretty depressed price though so I don't see much downside. While I got in near $6 per share, I rate SunPower a hold for existing owners and a buy for "enterprising investors" which I define as those willing to take a longer-term growth oriented view of their asset allocation and accept significant volatility.

8point3 Energy (CAFD) which is a new type of pass through security called a yield company. It is designed to be a holding company for alternative energy assets that it buys for the purpose of passing through the income to investors - much like an MLP. While these types of companies have been hammered largely because of the SunEdison debacle and uneven growth, the future looks a lot like how the future of MLPs looked a long time ago - bright. The company is currently sponsored and largely owned by First Solar and SunPower, whom I discussed above.

8point3 is currently trading far below its IPO price of $21 back in the summer of 2015. It's currently down about 30%. Now, that is not reason to just jump in and buy. Some of that discount is deserved because as I described, the timeline has been distorted by government impact and an uneven solar market. Projects with solid fundamentals and good margins have been hard to find for the company. This in turn has thrown its relationship with First Solar and SunPower into turmoil. Both companies are examining strategic alternatives to continuing to own 8point3 Energy.

A lot of investors are staying away from 8point3 because they believe losing First Solar and/or SunPower as sponsors is a bad, or at least uncertain thing. I'm not sure about that. I actually think that the company is very likely to end up in a better place (no, not dead). If a company such as Brookfield Asset Management (BAM) acquires 8point3, investors would get shares and/or cash most likely at a premium. Brookfield is a logical suitor as they recently bought yieldcos to expand its solar exposure. There are other suitors as well.

I expect that this company is going to either be bought outright or get a very strategic new owner and investors with aggressive plans in the space. 8point3 has a good balance sheet and very predictable cash flows due to the projects it currently owns being on 20 year contracts. An acquiring company would be getting a platform for getting into the solar utility business. I rate 8point3 Energy an outright buy at current prices. It is my expectation that there will be capital gains soon enough and while we wait, there's a 7% dividend.

I'll write individual analysis of each of the solar companies I follow over the summer. Ultimately, I believe the solar industry will experience massive growth over the intermediate and long-term, even if the short-term is challenged. In my mind, any long-term investor will need be invested to some extent in the alternative energy space, keeping an eye on the companies I've listed and taking at least starter positions in three could be the first step for those not yet getting into position. For those already starting to get involved, go slow and keep some cash to buy corrections, because there will be some.

Kirk

 

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