Solar Verticals and “Balance of System” Valuations

Garvin Jabusch

Tom Konrad has kindly provided an opportunity for me to contribute a response to his recent piece “Inverter Stocks: A Value BOS Play on Solar.” I’m grateful for the opportunity because it gives me the chance to discuss these stocks and along the way to clear up some misconceptions it seems may exist regarding Green Alpha’s portfolios and our vision of the next economy.

Tom wrote, for example, that “Garvin… has been making the case that the solar sell off is irrational on this blog since June, but his consistent bullish stance on solar has made me nervous of his recently disclosed solar holdings in the Sierra Club Green Alpha portfolio CSIQ, FSLR, JKS, LDK, WFR, and YGE.” It’s true that in various posts I have disclosed that Green Alpha ® Advisors is long all of these positions, and we are. However, when I disclose that “Green Alpha Advisors is long” a given stock, I mean to imply we hold it as a firm, across all our various portfolios, not solely in our Sierra Club Green Alpha Portfolio (SCGA). And while we in aggregate do hold all the solar names Tom listed, the SCGA in fact contains only two of them, and in composition is actually just a shade over 12% invested in solar manufacturers.

Our primary goal with our portfolios is to provide investors a well diversified basket of different technologies and approaches addressing civilization’s emerging concerns around warming, constrained resources, and growing populations and affluence. Providers of these solutions exist all across economies in sectors from water to materials to green building to, yes, renewable energy. Here’s the formal SCGA sector breakdown:

Tom’s conclusion that the SCGA may have been concentrated in solar is certainly understandable; my holdings disclosures have not been portfolio specific and I have been writing a lot about solar recently, to the point where it could appear that I don’t think about much else! As the allocation chart above shows, though, we believe in and practice a diversified form of green investing. We invest this way because we believe that in the next economy, all sectors and industries will need to be represented, so our investment approach is to select diverse companies that already work in our next economy models.

So I was a little concerned when Tom’s conclusion that the SCGA was essentially a solar portfolio led him to suggest that purchasing a solar-themed ETF would be simpler, since that advice could have the unintended consequence of driving folks from a diversified, well-balanced portfolio into a single solar silo, which of course would tend to be much more volatile. If your investment strategy is to hold a large basket of solar stocks, then in fact I agree with Tom, a solar ETF may be more efficient and inexpensive. But for those with a more broad goal of investing in green economy solutions across industries, a Green Alpha portfolio would be more appropriate.

[TK Note: My thought was actually that I’d prefer to hold a solar ETF to a basket of six solar stocks in order to gain exposure to solar in a larger portfolio.  But if I did not make that clear to Garvin, I’m sure I did not make it clear to other readers as well.  I agree that a diversified portfolio is far superior to a focus on solar stocks.]

To address the topic of Tom’s piece directly, we do like power conversion devices as an industry, and we do hold Satcon Technology Corp. (SATC) and two other inverter makers, across portfolios. On the risk side, we agree that inverters, while critical, are not big value-add products and that manufacturers could suffer from competition as a result of relatively low barriers to entry. But the world will need more inverters (and lots of them), so for us this segment of the renewables story is about scale, or which firm is making these devices at lowest cost. The other key risk, and here we again agree with Tom, is that China may decide to add this piece to its repertoire and link together the entire renewable energy chain in-country. But this risk may also provide opportunity if the Chinese decide to make these firms available to foreign investors via ADRs, as has occurred with many of their renewable-related firms. I also see the possibility that the larger solar PV manufacturers will buy or build inverter making divisions in house, thus ensuring supply, prices, and some margin control, making their value propositions that much better in the long run. And acquired companies, of course, usually receive a premium above spot. 

With renewables of all kinds growing rapidly worldwide, there clearly is a growing demand for components that can render useful the electricity derived from them.  And generally, we like Tom’s “balance of system approach,” and we share it. With respect to solar, we look for the bargains in companies all along the value chain from raw polysilicon providers, to panel encapsulate makers, to inverter makers (which are also used in stationary fuel cell power systems, a la Bloom Box) and others. We like SATC both because of its price competitiveness and its preferred status among many utilities. SATC recently announced, e.g., that they have provided over 100 MW of inverter to capacity to California utilities, including 75% of all Southern California Edison’s inverter orders, more than any other provider.

With solar as a power source growing rapidly worldwide, it makes sense to own the best companies along all verticals, including inverters. But in my opinion, at this moment, the solar PV manufacturers themselves represent the best overall value: of 14 comfortably profitable solar PV stocks we track very closely, nine are trading for less than cash.   In a word, they’re ‘oversold.’

In case you’re curious, I still absolutely think solar valuations are irrational. One of the two Sierra Club Green Alpha Portfolio solar names, Canadian Solar (CSIQ), is both profitable and growing, and, according to Thomson-Reuters, it has $16.04 in cash per share on hand, yet is trading at $3.53, or only 22% of cash. Effectively, that means one can buy that business for nothing right now. A profitable, growing company, in the world’s fastest growing industry, that will provide a nearly 5-fold return if it merely appreciates to cash? Yeah, I stand by my conviction that it’s crazy not to own that.
Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha’s Next Economy.”