Credit: Shutterstock photoThe solar majors are releasing their Q4 earnings numbers soon, but there are a number of macro factors that have played the spoilsport in the renewable space, for solar companies recently. These include plunging crude oil prices, decelerating economic activities in Japan and China along with political unrest in the Euro zone to name a few.
The latter half of 2014 turned out to be a nightmare for solar stocks in the wake of plunging oil prices that began in Jun 2014 and continued into 2015. It created a lot of confusion among investors eyeing the impact on renewables, particularly solar photovoltaic ("PV"). The decline in oil prices has made renewable energy stocks unattractive, dragging down both U.S. and Chinese solar stocks on the whole.
However, a rebounding U.S. economy supported by the IMF and World Bank outlook that the U.S. economy will sustain its winning trend this year. The U.S. solar industry is enjoying a host of feeders: low PV prices, new emphasis on greenhouse gas reductions, a U.S. President with a pro-green energy agenda along with superior utility understanding of its grid benefits.
In this context, investing in solar could be nothing but well timed as President Obama's 2016 budget proposes an over 7.2% increase in clean energy funding. This is good news for renewable stocks, especially solar, which have been a little under the weather in the aftermath of the oil price carnage. The proposed budget also seeks to permanently extend the 30% investment tax credit ("ITC") for solar systems, which is otherwise slated for expiry by 2016 end.
As per the Solar Energy Industries Association or SEIA, 36% of all new electric capacity installed through the third quarter of 2014 came from solar. The U.S. is on pace to complete its one millionth installation in 2015. Much of 2014's growth came from the utility market (61%). Meanwhile it was also the first year that residential additions exceeded 300 MW in a quarter.
Robust International Outlook
The U.S. solar industry has a lot to look forward to in 2015, but so do its counterparts in China, Japan, India as well as Africa.
China − the world's prime manufacturer of solar panels − announced several new policies as well as incentives to encourage local governments to promote more solar installations on home and business rooftops, and ground mounted plants. China has a declared target of 35 gigawatt ("GW") of installed solar by 2015.
Japan's feed-in tariff will spur new solar capacity growth. The country is going to be a key energy market with the government setting up a target of installing 28 GW of solar energy power by 2020.
India intends to increase its renewable energy share to at least 15% from the current 6% by 2020. Presently, India's solar power capacity is below 2.7 GW. Recently, the Modi government in India raised its solar investment target to $100 billion by 2022. This has kindled the interest of the global solar players in this market.
The case for investing in solar stocks looks good in the light of the above arguments. Consequently, it is a profitable strategy to zero in on a handful of solar names that are poised to beat earnings estimates this quarter. An earnings beat should help these stocks gain investor confidence, paving the way for strong price appreciation.
Picking the Right Stocks?
Picking the right stocks for your portfolio could appear to be a daunting task given the wide range of companies in the solar space. One way to confine the list during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP . The combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP is usually an indication of an earnings beat.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance of pulling a surprise in the next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted three solar stocks that may stand out this season.
First Solar Inc. ( FSLR )
This company, with a Zacks Rank #3 (Hold), is busy building solar plants for the major U.S. power companies instead of just supplying the panels. The company booked 521 megawatt ("MW") of new power-plant orders in the third quarter of 2014, bringing the nine-month figure to 1.7 GW. In a recent move, it has joined forces with Apple Inc (AAPL), under which the later will invest $848 million to build a solar farm with the company.
While First Solar has seen a medley of earnings beats and misses in the past year, it has an Earnings ESP of +2.60%. The company is scheduled to report its fourth quarter 2014 results on Feb 24. The Zacks Consensus Estimate for the fourth quarter is pegged at 77 cents.
JinkoSolar Holdings Co. ( JKS )
This Zacks Ranked #3 China-based company specializes in low-cost production and supply of solar panels with operations spanning across Europe, North America and Asia. A vertically integrated firm with a global focus could be a great pick in the solar space. JinkoSolar is strategically poised to take advantage of China's flourishing solar industry as well as other emerging solar nations.
The company currently has a Zacks Earnings ESP of +11.11% and we see another beat round the corner. The expected earnings growth is 15%.
The company is scheduled to report its fourth quarter 2014 earnings on Mar 2, 2015.
Canadian Solar Inc. ( CSIQ )
Ontario, Canada-based solar product manufacturer Canadian Solar is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S.
Recently, the company announced that it will acquire Recurrent Energy, LLC, a leading North American solar energy developer. The transaction is expected to significantly expand the scale of its development platform making it one of the foremost solar energy developers in the world.
This Zacks Rank #3 company has been posting strong results for the past several quarters. It reported positive earnings surprises in three out of the last four quarters, delivering an average beat of 20.53%.
It has a Zacks Earnings ESP of +15.44% and is scheduled to report fourth quarter results on Mar 5, 2015.
To Sum Up
Renewable energy is gradually transforming the way we produce and consume energy globally. It is evident that demand for renewables is strengthening at a rapid clip. However, the critical question is to choose the right solar stocks before they release their earnings numbers. Let's not forget that the space is gradually widening boding well for all global players and instilling confidence in the industry over the long term. The contagion effect has also been seen to be very strong in this dramatic corner of the energy space.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
JINKOSOLAR HLDG (JKS): Free Stock Analysis Report
CANADIAN SOLAR (CSIQ): Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
