U.S. Markets closed

3 Top Solar Stocks to Watch in February

Jason Hall, Travis Hoium, and Matthew DiLallo, The Motley Fool

After an abysmal 2018, solar energy stocks are off to the races so far in 2019, with many up by double digits before the end of January. And while much of the surge so far this year is a combination of buying after last year's big sell-off and speculation that 2019 will be a better year, there really hasn't been much in the way of material news to support the gains. 

But that's set to change in February, with most of the biggest names in solar set to report earnings and give investors an update on the state of the industry. Three top solar stocks investors should be paying attention to this month, according to three Motley Fool contributors, are solar-panel-making giant First Solar Inc. (NASDAQ: FSLR), wind and solar energy producer Pattern Energy Group Inc. (NASDAQ: PEGI), and solar panel power management component maker Enphase Energy Inc. (NASDAQ: ENPH).

Worker looking at solar farm panel arrays.

Following these three companies can give you better insight of the solar and renewable energy industry. Image source: Getty Images.

The U.S. solar bellwether

Travis Hoium (First Solar): Over the next month, investors will learn a lot about how demand is shaping up in the global solar industry and where First Solar fits into the market. On the market side, First Solar has the largest market share in the U.S. and will be able to tell investors if/when the U.S. market will recover. Over 10,000 megawatts (MW) of solar was installed in the U.S. in 2018, but that's down from over 15,000 MW in 2016, and it could be a decade until that level is reached again. In China, installations are expected to fall from 53,000 MW a year ago to 43,600 MW in 2018 as a result of lower subsidies. If either market is doing better than expected, First Solar will be one of the first to know. 

Technologically, the picture is a little more complicated. First Solar's thin-film Series 6 solar panels only convert 17% to 18% of the sun's energy into electricity, lower than commodity mono-PERC technology that's become the industry standard for manufacturers and developers. Being lower efficiency wasn't a problem in 2017 when First Solar had a cost advantage over commodity solar panels, but global solar panel prices have plunged 30% or more in 2018 and that's put First Solar in a tough position. If developers value higher efficiency, there may be better options, and now First Solar may not have a cost advantage, either. 

Investors will be able to read a lot from First Solar's backlog coming out of 2018. In the third quarter, the company added a net of just 400 MW to its backlog as customers turned to competitors' products and global demand for solar panels remained generally weak. Will the trend continue? First Solar will give us a good indication in the next month as it reports fiscal 2018 results. 

It needs more breathing room so it can start growing again

Matt DiLallo (Pattern Energy): While Pattern Energy has focused on owning and operating wind assets over most of its first few years as a public company, it did acquire two solar assets early last year as part of a portfolio that also saw it enter the Japanese market. That foray into solar makes it an interesting renewable energy stock to keep an eye on going forward.

Aside from producing renewable energy, one of Pattern Energy's defining characteristics is that it pays a high-yielding dividend, which is currently at 8.7%. The company had been increasing that payout each quarter. However, it needed to press pause on dividend growth last year because it ran out of breathing room after issuing too much debt and equity to fund acquisitions. 

PEGI Dividend Yield (TTM) Chart

PEGI Dividend Yield (TTM) data by YCharts.

The company is working on improving its financial profile by selling noncore assets and using the cash to pay down debt as well as invest in better opportunities. However, it still has a ways to go before its financial foundation is back on solid ground. Because of that, investors are better off watching this solar stock from the sidelines until its dividend payout and leverage ratios hit the company's target levels, which will allow it to start growing its dividend once again.

This key solar supplier bears watching closely

Jason Hall (Enphase): Solar power management component maker Enphase was one of the few solar stocks to do well in 2018, finishing the year just shy of doubling in price after a big sell-off late in the year. But it's back to the races in 2019, up more than 46% at the time of this writing. Yet even with those big gains, Enphase remains one of my top solar stocks to buy this year, though with its volatility investors might do well to consider making multiple small buys versus going all in at one time. 

ENPH Chart

ENPH data by YCharts.

Why is it worth watching right now? Similar to First Solar, Enphase's position is as a major supplier of module-level electronics, and it's making a big move into energy storage and should report earnings near the end of February. And if you're interested in solar or renewables investing, what its management has to say can be quite informative as to the state of the overall industry, not just for its own results. This is because the company's products are typically bundled with solar panels directly, as Enphase has reached agreements to be a direct supplier to panel makers like SunPower

Lastly, much of Enphase's future prospects are tied to its success in breaking into the battery market. Management expects its supply deals with panel makers to provide a big boost in cash flows in 2019, and it's going to need that extra cash to advance its energy storage prospects. Investors would do well to stay plugged into how those efforts are paying off, and we will get an important update in February. 

More From The Motley Fool

Jason Hall owns shares of First Solar, Pattern Energy Group, and SunPower. Matthew DiLallo owns shares of First Solar. Travis Hoium owns shares of First Solar, Pattern Energy Group, and SunPower. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.