The majority of investors, when considering stocks to buy, have given up on solar companies.
That's mostly due to a two-year beat-down of the sector and plenty of bad publicity from the demise of federally subsidized Solyndra.
But while the sector continues to suffer—more solar companies will likely go under in 2013—a choice few are positioned to benefit from a rebound that will start this year.
One sure sign of better days ahead is that the sector has recently attracted interest from one of the world's most respected investors, Warren Buffett.
Just within the past month MidAmerican Energy Holdings Co., a subsidiary of Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), announced a deal to pay SunPower Corp. (NASDAQ: SPWR) between $2 billion ($2B) and $2.5 billion ($2.5B) for two California solar projects.
That followed MidAmerican's purchase of a 49% stake in an Arizona solar plant jointly owned by NRG Energy Inc. (NYSE: NRG) and First Solar Inc. (NASDAQ: FSLR), as well as the $2B purchase of a planned solar farm in San Luis Obispo, Calif., also from First Solar.
Here's why Buffett has taken an interest.
Why Solar Stocks Will Bounce Back
Solar power has continued to grow in popularity even while solar companies have struggled.
According to the Solar Energy Industries Association (SEIA), U.S. solar installations grew from about 1.9 gigawatts (1.9 GW) in 2011 to 3.2 GW in 2012. SEIA projects growth to nearly 4 GW in 2013 and nearly 8 GW by 2016.
Such growth hasn't helped solar stocks because oversupply of photovoltaic (PV) technology, which converts sunlight into energy, has kept prices falling, eroding profits.
That situation figures to improve in 2013.
"Prices will stabilize by the middle of next year," Glenn Gu, a senior PV analyst on price analysis for IHS Solar solutions, wrote in the IHS Solar Whitepaper for 2013.
He attributed the improvement "to a moderate cut in production" among top PV suppliers and "because some excess capacity in China—from ingot to cells—is also expected to leave the industry by mid-2013."
Chinese overproduction figures to fall this year because Beijing is growing weary of pouring money into its struggling solar industry. A few weeks ago, the State Council, China's cabinet, said it would encourage mergers and acquisitions among its solar companies by using "market pressure mechanisms."
In addition to the prospect of less Chinese competition, U.S. companies stand to benefit from rising demand here in the United States, particularly utility-scale projects.
The U.S. Department of the Interior in October finalized a program designed to encourage development of utility-scale solar projects on public lands in six Western states, several of which already have strong solar incentives.
Meanwhile, the drop in solar costs has made it more competitive with other forms of energy, adding to its inherent appeal versus fossil fuels as a "green" source of energy.
Taken together, it means now there are some solar stocks to buy—the better-run survivors that finally will begin to see some benefit from their endless efforts to cut costs and improve efficiencies.
Solar Stocks to Buy
Here are three solar stocks to buy that have an excellent chance to ride the coming rebound in solar:
- MEMC Electronic Materials Inc. (NYSE: WFR): The solar portion of this Missouri-based silicon wafer company, a subsidiary called SunEdison, is about 60% of its business. The SunEdison unit notched big gains in the second quarter and helped the company report a slim profit in the third quarter, something not common among solar stocks. SunEdison just sold two utility-scale projects to Canadian Solar Inc., with an option to buy three more in the future. Another positive sign: Two company insiders, one of them the CEO, bought stock in November. MEMC stock had a rocky 2012—at one point it was down more than 50% for the year—but has bounced back lately. In the past month it's up over 25%, trading at about $3.63. MEMC has a forward P/E of 17.43; it does not pay a dividend.
- SunPower Corp. (NASDAQ: SPWR): A vote of confidence from Warren Buffett never hurts, but California-based solar panel maker SunPower has another, bigger backer: French oil major Total S.A. (NYSE ADR: TOT) owns a majority of the company. What's more, SunPower's panels are considered among the most efficient available, which should prove an advantage in selling to utility-scale projects, especially in the United States, where the company does most of its business. SPWR did report a loss last quarter, but cut the loss in half from the previous quarter while revenue rose 9%. This week Lazard Capital Markets upgraded SPWR to "Buy" from "Neutral" with a price target of $11, helping drive the stock from $7.21 to about $8.75. The company pays no dividend.
- NextEra Energy Inc. (NYSE: NEE): While not a pure solar stock, this Florida-based power-generating company is focused on clean energy sources and is dramatically increasing its solar-generating capacity, already the highest in the United States. If its McCoy solar energy project on public land in California is approved, NextEra's total megawatt generation will increase from 320 MW to well over 1,000 MW. NEE trades at about $70.77 with a reasonable P/E of 13.74. This stock also has a dividend yield of 3.5%.