Here Comes the Sun

05/19/2006 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

"It's a new problem to have to decide which are the best solar stocks to own; a year ago, there wasn’t even a choice," notes Ian Wyatt and Peter Henig in The Growth Report . Here, they sort through the rapidly growing sector and highlight a pair of favorites in photovoltaics.

"Now, with at least three to four major pure-play solar companies public, several larger energy companies playing in the space, and even a few small and micro-cap alternative energy stocks dancing around the margins, investors have a smorgasbord of solar to invest in. As the euphoria among alternative energy stocks settles down, it's important for investors to start paying closer attention to company financials.

"Moreover, as more solar companies enter the public markets and Wall Street analysts start to pick and choose their more reliable favorites, investors should be wary of the fallout from high-flyers not making their numbers or one-time market stars suddenly hit with downgrades. Photovoltaic companies currently topping the list of our favorites include SunPower Corp. (SPWR NASDAQ), a maker of high efficiency solar cells spun out from Cypress Semiconductor, and Suntech Power Holdings (STP NYSE), a low-cost Chinese maker of PV cells and modules.

"SunPower has clearly had a hot hand in the stock market ever since its blockbuster IPO in late 2005, and a share price that now gives the company a $2.4 billion market cap. The shares have nearly doubled over the last four months and the company recently released earnings that showed it swinging to a first quarter profit, significantly ahead of its $7.2 million loss in the year ago quarter. The company also increased its 2006 revenue guidance to $220 million from $210 million.

"Suntech has attracted a unique amount of attention given its selling point as the low-cost manufacturer in the market with its base in China and its ability to generate margins far ahead of its competitors. Suntech's gross margins of 28% in the fourth quarter of 2005 secured its position as the sectors most profitable player. Toss in its near tripling of production capacity and its ready access to the Chinese market and some argue it could be the 'best buy' among the top publicly-traded solar firms.

"Yet, here's where investors have to make their own judgment call given that nearly all alternative energy stocks are trading at multiples that most rational observers would hardly deem a 'best buy.' Suntech Power currently trades at roughly 31 times forward earnings and SunPower trades at an even richer 57 times earnings. Nevertheless, despite high valuations, these are less speculative–relatively speaking–than other stocks in this sector.

"One other alternative for conservative investors is to look at the larger energy companies such as British Petroleum (BP NYSE), that at least have some depth, certainty, and predictability in terms of future earnings. Not that the overall outlook for the sector doesn't call for more sunny days ahead, indeed it does; yet it might be wise for sophisticated alternative energy investors to prepare for shifting weather patterns once much of the market euphoria begins to cool off."

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