Today we’ll look at a sector that I’m not actually that fond of: the cheapest solar stocks in the stock market.

Solar stocks have never been one of my “must-own” stocks. Yes, energy is a critical part in everyday human life, but those needs are almost exclusively met by fossil fuels.

The lack of widespread adoption – in terms of percentage of the world’s energy generated by solar – is what has always concerned me. This, in spite of the lip service paid to it by governments, and the hype of solar advocates.

Solar energy only produces 2% of the energy in the U.S. That’s just one of the many problems I have with solar.

That being said, some readers may want to find the cheapest solar stocks and examine them. So let’s see what I can find that will be of interest.

The Cheapest Solar Stocks For 2019

If you’re in a hurry, below are our picks for the lowest priced solar stocks as of this writing.

1. First Solar: Solid financials and strong back orders.
2. SolarEdge Technologies: Residential stronghold with great pedigree.
3. iShares S&P Global Clean Energy Index ETF: Diversified across the solar sector.

Keep reading and you’ll find out more about these inexpensive solar stocks and my thoughts on each.

What Are Solar Stocks?

By solar stocks I refer to companies that are involved in the manufacturing, production or distribution of solar power. To that end, they more or less do the same things but each do them differently.

But if you don’t understand the technology behind solar, you shouldn’t be involved in trying to find the cheapest solar stocks. So let’s get this part down so you understand how to distinguish the players.

A solar cell is a photovoltaic (PV) unit that converts sunlight into electrical energy. That’s because solar cells are known as “semiconductors”. They are partial conductors of electricity, and that conductive element is silicon. Solar companies will obtain silicon from mining companies, or perhaps they have their own captured mining unit, and then that silicon is literally melted. Yep, they melt rock to crystallize the silicon into a wafer.

That wafer is set into layers along with a conductive metal base under it, then comes the silicon, a conductive metal contact is added on top, and then comes the protective glass.

Sunlight is absorbed by the cell, which then excites electrons, and that’s what conducts electricity.

However, most of the sunlight hitting the cell is reflected, not absorbed. Not all cells are silicon-based. Some have Cadmium Telluride or Copper Indium Gallium Selenide.

How Do You Determine What Qualifies As The Cheapest Solar Stocks?

The cheapest solar stocks have at least two of these three characteristics:

1. Debt service covered by cash flow
2. Free cash flow beyond debt
3. Growing earnings

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Covered debt service

This is the trick with finding the cheapest solar stocks: finding ones that aren’t being killed by interest payments on debt. In the early years of solar, and to a certain extent this is still true, the government was throwing tax credits at solar companies to incentivize them.

As a result, knowing this cash flow would bolster operations, solar stocks took on lots of debt. Now those credits are being reduced or are vanishing. If that legacy debt is still on the books, the debt service could torpedo the company long-term.

You must keep an eye on that line item first before you even look at the rest of the company.

Free cash flow

There’s another problem with solar stocks that comes after debt: cash flow. Solar is a capital intensive business. That’s because it takes money (and ironically, a lot of fossil fuel) to blast silicon out of the ground, slam it with enough heat to melt it, and then fashion the wafers.

Of course, much of this work is done in China, so its cheaper. However, the dirty little secret of solar is that the instant sunlight hits those cells, they begin to degrade. That’s right, solar cells become less and less efficient from the first moments of life. That means they have to be replaced.

That’s good in the sense that solar users have to pay for the replacement. However, with so much competition, prices are more likely to decline.

So the cheapest solar stocks will be generating a lot of free cash flow to keep the business going, and to conduct R&D to improve their products.

Earnings growth

Because solar is a commodity, a company must be growing earnings. That usually tells us that they are gaining market share. If earnings are contracting on a regular basis, they are losing the price and market share wars.

Here’s a video that provides some additional information on how solar panels are manufactured.

https://www.youtube.com/watch?v=cfi_HFd01OI

First Solar

What is it?

First Solar has two divisions: Components and Systems. The Components division designs, manufactures, and sells cadmium telluride solar cells, mostly to integrators and operators.

The Systems division is comprehensive: it offers turn-key photovoltaic solar power systems. They handle everything from project development and engineering, to construction, operating and maintenance services to all form of system owners.

What makes it a cheap stock?

We’re off to a good start looking at First Solar’s balance sheet: $2.7 billion in cash is offset by a mere $469 million in debt. It has a negative net interest expense, which means the revenue it takes in from interest income exceeds the expense. That’s great news.

I’m not crazy about the free cash flow situation, but it’s passable. It was a sizable $826 million in 2017, but negative $100 million over the past twelve months.

Earnings are growing into this year, but visibility isn’t clear beyond that. Still, $2.53 of earnings in 2019 means First Solar trades at 17x earnings. That’s not unreasonable.

100% of its capacity is already booked for this year. In fact, the company said it is sold out of product….until late 2020. The backlog is incredible.

With its huge cash surplus, it can handle the $900 million it expects to spend this year in capex. It also has a tech advantage over competitors, having been around longer. It can produce a solar panel just about every 1.2 seconds.

First Solar is well-positioned going forward if solar is your thing.

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SolarEdge Technologies

What is it?

SolarEdge is more of a component play than a solar cell manufacturer. The company has something called a “DC optimized inverter solution”. It altered the way that energy gets collected and dolled out within PV systems. This lowers the cost of the produced energy.

It offers its products directly through all the major markets: residential, storage, commercial, backups, grid services, and power plants. It has shipped out 9.6 GW of its systems, and three-quarters of a million PV sites have its products.

What makes it a cheap stock?

How’s that debt looking? Great! There is none! What could be better than a company with no long term debt? A company with $450 million of cash and investments. That means that a bit under 25% of the company’s market cap is cold, hard cash.

Free cash flow has also been steadily growing. From breakeven in 2015, to $37 million in 2016, $61 million in 2017, and $115 million in 2017.

Analysts don’t cover earnings growth, but net income has been on a strong uphill trend, from a mere $3.6 million in 2014 and hitting $84 million in 2017. Even better, the company brought in about $135 million in the past twelve months.

SolarEdge is winning the solar fight because of its proprietary system.

Its record revenues and fat profit margins of 36% give it a major advantage. Yes, expenses are increasing, but those expenses are still less than 20% of toral revenue.

These power inverters/optimizers are not going to be proprietary for long. Others will enter that market, but SolarEdge has the edge with its first-mover advantage.

iShares S&P Global Clean Energy Index ETF

What is it?

This ETF reflects an index that iShares put together of companies that operate in the clean energy sector. Its top ten holdings are:

COMPANHIA ENERGETICA MINAS GERAIS

VESTAS WIND SYSTEMS

SIEMENS GAMESA RENEWABLE ENERGY SA

MERIDIAN ENERGY LTD

CONTACT ENERGY LTD

CHINA EVERBRIGHT INTERNATIONAL LTD

ORMAT TECH INC

PATTERN ENERGY GROUP INC CLASS A

VERBUND AG

FIRST SOLAR INC

These holdings account for 53% of the index, with 38 others constituting the remaining half. They are diversified across the world, with 36% of the holdings here in the US, 22% in China, and 10% in New Zealand.

What makes it a cheap stock?

The ETF is not outrageously priced for a sector that can be subject to exuberance.

The P/E ratio of the fund is only 14, and it offers a 3% yield to boot.

I like the diversification, with 32% in renewable electricity, but its got some “regular” companies represented by 19% in electric utilities, 16% in heavy electrical equipment companies, and the rest across six other sectors.

The other element that makes it somewhat cheap is that it trades a hair below its net asset value. That’s not always the case. Given the excitement over solar going forward, that could be considered a bargain.