Sunday, September 6, 2009

Sustainable Investing: Solar Energy

Growing up in the 80s and 90s in Canada, I experienced first hand how environmental consciousness was starting to catch on. We saw our first blue boxes (curb side recycling bins) in the late 80s. The schools were also really focused on education about the ozone layer, acid rain, and global warming. I even did a project on hydrogen as a fuel for cars. Environmental consciousness was really engrained into our minds.

For my current job, I typically travel a few times a year to the US, and I find it really suprisingly that most cafeterias don't have recycling bins or curbside recycling is almost non-existent south of the border. Most of my customers I speak with are embarrassed by this lack of initiative by their governments and it was then that I realized that without some form of legislation, it would be very difficult for any country to adopt a more environmentally conscious mindset. For example, you would think Germany would not be a very good country for solar energy generation. However, if you ever fly over some cities in Germany, you would see rooftops upon rooftops of solar panels. It's because the German government has provided subsidies for solar panel installations.

After watching Al Gore's Inconvenient Truth (I recommend the movie to anyone!), it became apparent to me that there's a real urgency in the matter. We are definitely on the path of destruction if we (the world) continue to use fossil fuels the way we do today. Recall my first post on the concept of stewardship ( The Lord has granted us this world in its entirety for our benefit, but we also need to care for it. The earth is not ours, but the Lord's, and we are not the owners, but merely stewards. Therefore, it is our responsibility to sustain the earth.

Sustainable Investing

As an investor, how can I help sustain the earth? I call it sustainable investing. It is simply investing in companies whose products or services promote the sustainability of the planet. Companies providing technology for renewable energy is a perfect example. In particular, I will talk about solar companies in this post.

The biggest growth in the renewable energy sector could arguably be photovoltaics (PV or solar panels). A large number of public solar companies have or are in the process of ramping up their production significantly. For example, First Solar had a revenue of $134 million in 2006. For 2008, that number increased to $1.25 billion, growing almost tenfold! This type of growth rate is not unique to First Solar, but is similar across the board.

As production ramps up, the cost of each solar panel will decrease. We are at a point where solar panels will soon become cost effective even without government subsidies. With Obama's push to pass the environmental bill, the cap-and-trade system will greatly benefit companies like First Solar. What exactly is a cap-and-trade system? To put it in simple terms, the government places a limit (a cap) on the amount of greenhouse gases that can be emitted in the country. Companies and institutions are given a certain number of emission credits. If the company emits less than the credits it has in its possession, it is free to sell them (trade) to other companies that emit more than their credits allow.

The cap-and-trade system is technology neutral. It means the laws of economics will allow for various renewable energy technologies to flourish. The ones that are most successful will eventually replace the ones that are not, purely based on economics, and not whether the government decides to provide subsidies. This system encourages creative development of new technologies.

The Players

There are a plethora of PV manufacturers that are publicly traded in the various American stock exchanges. Some of the notable ones include First Solar (ticker: FSLR), Sunpower (ticker: SPWRA), Evergreen Solar (ticker: ESLR), and Suntech Power (ticker: STP). For a more comprehensive list of solar companies, check out the holdings of a Solar ETF by Claymore (ticker: TAN). This ETF invests in most of the major solar players out there. So, if you are lazy in picking companies, but would like exposure to the industry, this ETF may be your solution. As always with funds, you need to do a lot more homework to make sure all of its holdings do not engage in any questionable practices (see my post on ethical investing).

One of the leaders in the industry is First Solar. It makes solar cells out of cadmium telluride, which is a more cost-effective material than traditional silicon, but is also less efficient. Ever since its IPO in the end of 2006, it has been profitable. It's IPO price was $24 and it has never looked back ever since. Its stock price peaked at around $300 before the great crash of 2008 and is now sitting at around $120. By Rule #1 standards, it is a wonderful company! Its growth is spectacular and the profits rise along with it. In my opinion, the company is very undervalued and I hope to add it to my holdings in the near future.

The only solar company in which I have a long position right now is Evergreen Solar. It differentiates itself from others with its String Ribbon technology, where it uses up to 50% less silicon than do traditional technologies. In contrast to First Solar, it has seldom been profitable since its IPO in 2001. However, that may be a plus. Hear me out. According to Yahoo Finance, Evergreen's book value (value of the company) is $2.81 per share. Its share price is at around $1.70 at time of writing. What does this mean? If you are familiar with some of the ratios that are thrown around, you will have heard of the Price-to-Book ratio, which is widely used by value investors. The book value of a certain company indicates how much the company is worth according to its "books" (e.g. its buildings, equipment, cash, and other tangible assets). Therefore, if the company were to be liquidated, the book value is about the amount of money that the company would be worth.

Investors have been so depressed about Evergreen that the share price is now lower than its book value per share. The P/B ratio is 0.61. Let's take a look at some of the other solar companies' P/B ratios. First solar: 4.44, Sunpower: 1.90, Suntech: 1.55, Trina Solar: 1.49, Canadian Solar: 1.50, LDK Solar: 1.80, and the list goes on. To a value investor, this P/B ratio of 0.61 is definitely a call for attention.

Evergreen has a good product, but are in growing pains right now. It is trying to ramp up production, build factories, and make a profit all at the same time. It is definitely not easy. However, they have a big backlog of orders and a secured supply of silicon. The only things they need to do are to control costs and turn a profit. One catch is that they have $317 million of debt and only $86 million of cash, while still burning cash every quarter. It is definitely not a stock I would recommend to everyone, but if you understand the risks involved, there is little downside to this stock at a share price of $1.70.


So, should you invest in the solar industry? In terms of sustainable investing, it is definitely at or near the top of the list. According to, only 0.3% of the power generated in May 2009 in the US was from solar sources. I can see that number easily grow by 10-30 times. This is a great opportunity for investors. I believe we are on the cusp of a major shift in power generation, and here is an opportunity to take part in it. Imagine 30-50 years later, as you talk to your grandchildren or great-grandchildren about the early 2000s, they will look at you in awe when you tell them that we used to produce power by burning coal and oil. They will also look at you in great respect as you tell them that you were one of the first investors to embrace sustainable investing, to help the world become the faithful stewards that God had wanted us to be in the beginning!