Renewable Favorites: Two Plays on Solar Tech

06/15/2020 5:00 am EST

Focus: INDUSTRIALS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Renewable energy is the future. And the best renewable energy stocks are worth your consideration, asserts Timothy Lutts, growth stock expert and editor of Cabot Stock of the Week.

So what are the best renewable energy stocks to invest in to take advantage of this trend? In my view, the best prospects today are a couple of firms that make key electronic components for the solar modules.

Located in sunny California, Enphase (ENPH) is the world’s leading supplier of microinverters, which convert direct current (DC) energy from solar modules into alternating current (AC). Its products are used all around the world (U.S., Europe, Australia), though it’s notably weak in the Chinese market.

First-quarter results saw revenues of $206 million, up 105% from the year before and earnings of $0.38 per share, up 375% from the year before. That‘s great growth, but that’s not all. A big reason why Enphase’s growth story still has plenty of upside is its Encharge battery system, which will allow homeowners to generate, store and control energy in a single system.

All told, the firm believes its target markets will nearly quadruple in size by 2022; given the solar industry’s ups and downs, that’s not a sure thing, but there’s no doubt the potential is huge if things go right. The stock has a market cap of $7.3 billion, and the forward P/E ratio is 59, which is high, but lower than the growth rate!

The stock, it’s been public since 2012, and it’s had a lot of bull phases since then, interrupted by major pullbacks as the industry has been through boom and bust phases. But it’s been very strong since the March bottom, breaking out to new highs two weeks ago and extending the move last week.

SolarEdge (SEDG), which went public in 2015, has a market cap of $6.7 billion and a forward P/E ratio of 45, so it’s definitely in the ballpark with Enphase.

The company has invented a smart string inverter solution that’s a game-changer in harvesting power and managing it in a solar photovoltaic (PV) system for residential and commercial use. The company also makes power optimizers, which are electronics that attach to the back of solar panels.

In a SolarEdge DC system each PV module is connected to the intelligent power optimizer electronic chip that maximizes energy from that module individually. This means if one module is messed up, dirty or covered with snow, the others run unaffected.

Think of it like a system that lets any given bulb in a Christmas light strand break, without affecting how any of the other lights perform. The company’s string inverter system is more expensive than more simple string-array systems, but more cost effective than micro inverter systems, which require an inverter for every PV module.

Big picture, SolarEdge should grow as the rooftop and distributed solar market grows. Industry analysts see rooftop and distributed solar as the fastest-growing area of the market due to declining technology costs, increasing efficiency, wider use cases (i.e. electric vehicle charging) and ease of use for first-time buyers, remote locations and emerging economies.

Just to point to two examples, California has mandated that all new residential homes include rooftop solar systems as of the beginning of 2020, and Texas is ramping up solar use because it is now the lowest cost source of electricity in the state. Revenue was up 59% to $431 million in the first quarter, while EPS was $0.95 per share, up 48% from the year before.

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