His second pick is also a well-known name: SolarCity Corporation (NASD:SCTY). He does not consider it a “solar” pick, but 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.
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 percent 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.
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.
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