Energy Boost: 5 Tips When Investing in Solar Stocks

With Solar Sector Maturing, Investment Opportunities Abound

The outlook for the solar energy sector is a bright one heading into 2018, and that should steer more investors toward renewables, especially as solar continues to grow and become an integral part of the U.S. energy landscape.

According to the Washington, D.C.-based Solar Energy Industries Association, the U.S. installed more than two gigawatts (GW) of solar photovoltaics (PV) in the third quarter of 2017, the eighth consecutive quarter that the solar industry added more than two gigawatts.

The SEIA also notes that four gigawatts of utility-scale PV projects are “currently under construction” in the U.S., with growth especially strong in states like California, Massachusetts, New York, and Minnesota. Additionally, the group estimates that an additional 3.9 gigawatts should be on-line by the end of 2017, which would make 2017 the second largest year ever for solar installations (2016 ranks number one).

The Growth of the Solar Sector

Global growth numbers in solar are also on the rise, as countries warm up to the low costs linked to solar energy installs, which are lower than coal, nuclear energy and natural gas. In Mexico, for example, a recent auction saw a low bid of 1.92 cents per kWh of electricity, the lowest prices recorded in Latin America and across the globe, as well.

Maybe that’s why 40% of all energy installations were solar ones in 2016, according to the U.S. Energy Information Administration.

Industry growth is boosted by more investments in solar-related stocks and funds, and as the number of industry companies begins to thin out, driving up investments on those firms, and more trading activity on solar company stocks.

The benchmark Guggenheim Solar ETF (TAN) is up 48% in 2017, while solar industry stocks boast the highest year-to-date growth rates of any sector, according to Investor’s Business Daily and its ETF Leader’s Index.

How to get in on the action and become a savvy solar investor? Take these five steps before snapping up and solar stocks or funds:

1. Look for Solar Technology Firms With a Proven Track Record

By all accounts, demand for solar energy should growth significantly by 2020, but it’s actually the rear-view mirror where would-be solar investors need to be looking. Job one is to research stocks or solar ETFs for industry firms that have established a track record of success, especially in terms of technological advancement. A tip—closely vet the research and development areas of solar companies, where most of the innovation and investment is occurring.

2. Closely Track Cash Flows

Solar investors need to monitor key financial fundamentals like cash flow, profit and loss, and especially track solar firms with a solid growth path. The unfortunate reality is that most solar energy firms are less than 10 years-old (which is not long in Wall Street terms). Consequently, reviewing financial fundamentals should be a big issue for new solar investors, and checking a company’s cash flow should be a priority.

3. Steer Clear of Heavy Debt

Solar companies, like most new, burgeoning firms, can absorb their fair share of debt to get up and running. In general, heavy debt is a “red flag” on Wall Street, especially with sectors like solar where profits are relatively thin for younger companies. To properly vet the solar sector stocks and funds you’re considering, hone in on debt/equity ratios and avoid any companies or sector funds where that ratio is significantly out of alignment.

4. Take the Long View

While specific investments in solar companies have the potential to pay off quickly (the Guggenheim TAN ETF is a good example of that in 2017), it’s best to have patience when taking the solar route, investment-wise. Most solar companies are just getting off the ground, and have to plow millions of dollars into key business growth areas like equipment, staffing, and office and transportation leases. That takes time and solar investors need to acknowledge the reality that the industry is a long-term growth proposition, in most cases, and needs to be viewed accordingly.

5. Key Stocks and ETFs

The most widely traded solar industry stocks focus on a handful of companies—First Solar, Inc. (FSLR), SunPower Corporation (SPWR), and Vivint Solar, Inc. All are good starting points (but certainly not the only ones) for new sector investors. To better spread the risk around, look to solar ETF’s like Guggenheim’s Solar ETF, Market Vectors Solar Energy (Stock Quote: KWT), and iShares S&P Global Clean Energy Index (Stock Quote: ICLN)

Overall, the solar industry is vibrant, but young. In the past decade, the sector has experienced significant growing pains that have curbed potential growth.

But the industry has since shed its training wheels and is set for a decade of potentially unbridled growth—a scenario that would attract legions of new investors—who’ll need to do their homework first.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.