Tom Konrad CFA
Green
2014 image via BigStock
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 seemed 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.