13 Hot Solar Stocks For Your Portfolio

A number of factors are set to drive the solar energy industry for decades to come. The world's middle class is growing rapidly. Humanity's impact on the Earth's climate has shifted the momentum away from fossil fuels and solidly toward renewable energy options like solar. Technical improvements and massive manufacturing scale have combined to drive costs down to the point where solar can be as cheap as fossil fuels in many parts of the world. Simply put, investors who are ignoring or avoiding solar stocks are missing out on a generational opportunity to invest in one of the most important parts of the world's energy industry.

Discovering that the solar stock opportunity exists is easy. The tougher part is identifying the best solar stocks that make sense for your financial goals and your portfolio. A broad swathe of companies are involved in solar, ranging from huge multinational manufacturers to small, pure-play solar panel installers, with a litany of combinations in between.

To help you get your footing in the solar industry, keep reading for a breakdown of the various kinds of companies that fall under the “solar stock” description, what makes them unique, and a brief description of the 13 biggest solar stocks that trade on U.S. stock exchanges.

Here are the 13 biggest solar stocks

These are the 13 companies trading on U.S. stock exchanges that are heavily involved in the solar industry, sorted by market capitalization (a company's total shares outstanding multiplied by the stock's market price).

MARKET CAP AND REVENUE AS OF LAST-REPORTED COMPANY RESULTS AND MARKET DATA FROM OCT. 7, 2019.

As the table above shows, a wide range of companies of various sizes are involved in solar, ranging from small, pure-play solar panel installers to large, diversified global companies that count on solar as only part of a much bigger business.

What is a solar stock?

A solar stock is a company that counts the solar industry as a significant portion of its current business, is quickly growing its solar business, or its solar business plays a major role in the solar industry. This is why you'll see companies ranging from Tesla, which generated $25 billion in sales in its trailing four quarters, to tiny Vivint Solar and its $301 million in revenue over the same period, pegged as solar stocks. On the one hand, Tesla's solar installation business is a very small part of its overall results. But within a few years, its solar panel manufacturing and energy storage systems business units could prove to be far bigger. Moreover, even though it's a small part of Tesla as a whole, its solar and energy storage segment is much bigger than Vivint's entire business.

Add it together, and you'll find a wide array of companies in the 13 we have identified. Moreover, their diversity can make a big difference in what kind of investor each company is suitable for. Here's a closer look at the kinds of solar stocks out there and what makes them unique.

The different kinds of solar stocks

The solar energy business is dynamic, with companies filling a variety of roles across manufacturing, installing, maintaining, and operating solar panel systems. There are also different niches within solar, including distributed solar on residential and business rooftops — utility-scale solar systems that generate power for the grid. The big takeaway is that not all solar stocks are the same, and what makes for a good fit for one investor may not be ideal for someone else.

(For your reference, here's a guide for how to invest in solar energy stocks.)

Solar panel manufacturers

Solar panel manufacturers design and make solar cells that are then assembled into the solar panels you see on rooftops or in solar farms. In general, solar panel makers focus on delivering the most-efficient panel possible at the lowest possible cost. Two important terms you'll see used by solar panel makers are efficiencyand cost per watt. Efficiency — shown as a percentage measure — describes how much sunlight a panel can convert into electricity, so higher is better. Cost per watt is a more important metric, because generally, the more efficient a panel is, the more expensive it was to produce. That creates a higher cost per watt. And at the end of the day, most solar panel buyers — whether residential, business, or utility companies — want to get the most power production for their money.

Of course, cost isn't the only driver behind which panels are the best choice. For instance, higher-efficiency panels can be the best choice in certain space-limited applications, such as rooftops. In those cases, paying a premium to get more power from a smaller space might make sense. Additionally, how much power a panel will generate over its lifetime is an important consideration. Solar panels gradually lose efficiency over time, and different operating environments can affect output as well. Some of the top panel manufacturers differentiate themselves by making solar panels that work better in extreme temperatures or maintain higher efficiency over their usable life.

Solar system installers

Solar installers are the companies that work with residential and business customers looking to buy solar panels. Solar installers help customers design a system that meets their power needs, sell the solar system to the customer (or otherwise help them lease or finance it), and play a role in providing service and maintenance during the life of the system.

While many solar installers are small, local operations, there are a growing number of larger publicly traded solar installers that are steadily expanding their operations across the country.

Solar component and accessory manufacturers

In addition to solar panels, there are specialized components that are used to optimize the power and to convert — technically invert — the direct current (DC) electricity from solar panels into the alternating current (AC) power that the grid operates on. There are a few small, pure-play companies that focus on these products, as well as related components for charging electric vehicles and energy storage systems.

Yieldcos and utilities

Yieldcos are the companies that own and operate utility-scale solar power plants. Typically, they are the subsidiary of a larger company (in some cases a utility), but often a larger organization that may own and manage other large infrastructure assets. While some yieldcos own regulated utility assets, they also may operate independently, making money by selling “wholesale” electricity to utility operators that use that electricity to meet customer demand.

The “yield” part of the yieldco name comes from the way these businesses are structured, which is to generate a generous dividend yield for their investors. Those dividends are covered by the predictable cash flows they generate from their utility operations or long-term contracts to supply electricity to power companies. Like utilities, a high-quality yieldco should also be a relatively recession-resistant investment; people and businesses still rely on electricity no matter the state of the economy.

Does that sound similar to a utility company? Well, it should, because they have comparable business operations. The difference is, utilities are stand-alone entities while yieldcos have a sponsor company that is usually a majority investor. The other possibility is when the yieldco is structured as an LLC or limited partnership and has a controlling interest, such as being the general partner. The important part to remember is that, with yieldcos, investors would do well to understand not just the yieldco but also the company behind it to make sure you have aligned interests and to ensure that the sponsor has a track record of solid business performance.

Without further ado, let's take a look at the baker's dozen of solar stocks above, grouped by category.

The biggest solar panel manufacturer stocks

First Solar

The biggest solar panel maker by market capitalization, First Solar's main business is making and selling solar panels that are used in utility-scale projects. The company also develops and builds utility-scale solar projects and then typically sells them after they are brought on line, though it recently announced that it would exit the engineering, procurement, and construction business. This move is intended to help First Solar focus more narrowly on the two things in which it has been a leader: making solar panels for utility-scale applications and developing utility-scale projects.

First Solar has two important competitive advantages that make it a compelling business.

First, its thin-film solar panels give it an advantage over the crystalline silicon panels its competitors make, particularly in the high-growth utility-scale solar market. First Solar's thin-film technology generates more consistent power output across a varying range of temperatures. Since utility-scale solar installations are often located in places with extreme temperatures, power producers need to know they can predict the amount of power a solar farm generates. First Solar wins a lot of business because its panels will often outperform crystalline silicon panels that may have similar efficiency or cost-per-watt ratings.

Second, First Solar has — by a wide margin — the strongest balance sheet of any publicly traded solar panel maker. Through the second quarter of 2019, the company had $2.1 billion in cash and investments and $481 million in debt. Carrying more than four times as much cash as debt gives First Solar a number of advantages over its competitors, including more resources to deploy to improve its products (which it consistently has) and a much bigger margin of safety to ride out the ups and downs of solar panel demand.

The combination of a dominant technology in utility-scale solar and a super-strong balance sheet is why First Solar is worth $6 billion as of this writing, more than the other three solar panel makers listed here combined. That's true, even though JinkoSolar ($4 billion) and Canadian Solar ($3.2 billion) generated significantly higher revenue than First Solar's $2.5 billion in sales over the past year.

SunPower

While First Solar is a leader in solar panels for utility-scale applications, SunPower's high-efficiency solar panels give it some competitive advantages in residential and commercial applications. Over the past decade, few solar panel makers have come close to matching the efficiency levels of the company's panels. Simply put, SunPower's panels generate far more electricity on a size-for-size basis than anyone else.

Unfortunately, this technological advantage hasn't translated into big gains on the bottom line. SunPower's high-efficiency panels cost more to produce on a cost-per-watt basis than lower-efficiency panels from competitors that compete on cost, and the advantages of higher-efficiency panels simply haven't been enough to justify a higher selling price. This has caused the company to regularly generate some of the lowest gross margins in the space.

FSLR GROSS PROFIT MARGIN (TTM). DATA BY YCHARTS.

The company is working to innovate its way out of this low-profit pattern. SunPower's A-Series panels are its most efficient ever, while also offering a number of other benefits that make them, according to the company, cost-competitive with its commodity-focused competitors. SunPower has completed a number of major investments in its global manufacturing footprint that have started paying off in 2019, but investments to bring A-Series to market at scale are planned in 2020.

SunPower is also a leader in energy storage, with its Equinox system for residential users, and Helix battery system for commercial energy users. This should help the company remain the leader in the U.S. in commercial solar, where it has the No. 1 market share position, and to continue taking share in residential, which it counts on for about one-third of its sales. SunPower's $1.67 billion in annual sales is easily the smallest of these four companies, but its strong position as a leader in the U.S. residential and commercial markets, along with the prospects of its A-Series panels and energy storage products, makes it one of the most-valuable solar companies in the world.

Canadian Solar

Canadian Solar has some of the biggest manufacturing scale of any publicly traded solar panel manufacturer in the world. Through the second quarter of 2019, it had more than 12 gigawatts (GW) of solar panel assembly capacity, and 9.3 GW of solar cell assembly capacity. Moreover, its scale has paid off. The company expects to ship 8.4-8.5 GW of solar panels in 2019, helping drive its profit margins steadily higher as its operating leverage increases.

Founded in Canada but with most of its manufacturing capacity in China and Southeast Asia, Canadian Solar has taken a decidedly different approach than its two peers discussed above. It is building massive manufacturing scale and focusing on developing the lowest-cost panels it can make. The result are panels that operate at lower efficiency levels than those of SunPower or First Solar but compete with anything else on the market on price. Coupled with the company's project development business, and Canadian Solar is a global behemoth in utility-scale solar that should generate close to $4 billion in sales in 2019.

JinkoSolar

JinkoSolar is the only other publicly traded solar panel manufacturer that rivals Canadian Solar in manufacturing scale, with almost 13 GW of solar panel manufacturing capacity. However, it's even more vertically integrated than Canadian Solar, with about twice the wafer (a key part of the solar cell) manufacturing capacity than its rival, which uses suppliers for more of these components.

That higher level of vertical integration pays off during high periods of demand. As the chart shows below, JinkoSolar's operating results improved substantially from 2018 to 2019, as demand ramped up and the company's business model helped it achieve higher operating leverage.

JKS REVENUE (TTM). DATA BY YCHARTS.

On the other side of the coin, weak demand in the past has caused JinkoSolar's results to deteriorate rapidly because of the high fixed costs of operating such a massive, integrated manufacturing operation. However, the solar panel manufacturing space has undergone a lot of consolidation in recent years, in large part due to weaker competitors getting put out of business. This should result in a healthier market for the biggest companies to compete across the demand cycle.

The biggest solar installer stocks

Tesla

Best known for its popular electric vehicles, Tesla is also a major player in several parts of the solar industry. To date, its biggest business has been installing residential and commercial solar systems following its acquisition of SolarCity. But since acquiring what, at the time, was the largest solar installer in the U.S., the company has drastically reduced the size of its sales and installation business in what has proven a relatively unsuccessful attempt to integrate solar panel sales with its Tesla retail operations.

While it's been shrinking the solar installation business, Tesla has made major investments in solar panel manufacturing. The company is promising a product it is branding as the “solar roof,” which would act as both the solar panel and roofing material, replacing conventional shingles, tile, or metal slats. But like its efforts to change its other parts of sales and marketing in this industry, the solar roof has been very slow to reach commercial development.

Thus, we have a large installer business that's shrunk substantially since Tesla acquired it, and a solar panel manufacturing business that's yet to deliver the commercial products promised. There's a solid case to be made that, pending some major development that changes the trajectory of these businesses, Tesla's solar business could be hurting the company more than it's helping.

So, while it has a bigger market cap than Sunrun or Vivint Solar, Tesla's actual solar business is now smaller than both of its two installer competitors, and the panel manufacturing business has yet to prove it can add value at scale so far.

But if there's a segment of the solar business (in fairness, it's bigger than just solar) where Tesla has established itself as a leader, it's in energy storage. Tesla makes the Powerwall residential battery system and the Powerpack and Megapack commercial and utility battery systems. For Tesla, energy storage is a natural fit. The company is already one of the biggest lithium battery makers in the world as part of its electric-vehicle manufacturing business. Producing storage systems that can meet applications ranging from a residential property with a handful of solar panels to a utility-scale project that can power thousands of homes is an excellent fit within Tesla's core strengths.

Whether the company can find a winning approach to return its solar panel installation business to growth or make something profitable from a solar panel manufacturing business that's yet to deliver meaningful returns remains a big unknown. But even if those businesses don't pan out, Tesla's role as a battery supplier will likely play a major role in solar's growth in the next decade.

Sunrun

Unlike the much-bigger Tesla that only counts on solar for a small — and, unfortunately, shrinking — part of its business, Sunrun is a pure-play solar installer. The term “solar installer” is a bit of a misnomer because it only covers part of what Sunrun does and how it makes money.

Sunrun's business is to provide homeowners and businesses with multiple ways to acquire a solar system. The company sells solar systems to buyers who plan to purchase it outright or to use a third party for financing, but the bulk of its business comprises long-term contracts called power purchase agreements, or PPAs. With a PPA, Sunrun actually maintains ownership of the solar system, selling the customer the power it generates on a long-term contract that's generally 20% or more cheaper than buying power from the local utility. These contracts are typically 20 years in length, require no money down, and make it more feasible for many buyers to go solar.

There are advantages to the PPA model. The first and most obvious one is that it makes solar more accessible to more homeowners since it requires no up-front cost and the homeowner will see an immediate payoff in the form of lower energy costs. Additionally, PPAs have the potential to be more profitable. Not only can the company realize a higher price for the power sales (often with annual increases) than it gets by selling panels directly, but it also retains the substantial federal tax credits as the owner of the solar system.

The thing is, it takes a lot of capital to operate this model. The solar panels, mounting hardware, and other components have to be purchased, installers have to be paid, Sunrun has to cover all its other operating expenses, and it has to make a profit. And since the stream of cash flows from PPA customers comes over 20 years, Sunrun must come up with a lot of cash up front to cover its expenses and pay for the solar equipment it installs for customers.

To do this, the company sells the tax credits and other tax benefits to other companies and takes on a substantial amount of debt.

RUN TOTAL LONG-TERM LIABILITIES (QUARTERLY). DATA BY YCHARTS.

The result is a balance sheet that can look more like that of a utility company than what you'd expect of a company that sells and installs solar panels.

But over the long term, the expectation is that Sunrun will benefit from signing more and more PPA agreements, as the recurring cash flows it earns from electricity sales gets bigger and bigger over time. To help demonstrate the value of these expected future cash flows, the company reports what it says is the retained value of these future cash flows, in a metric it calls net earning assets.

Net earning assets, in short, are a combination of the stream of payments it has contracted, plus estimates for revenues it will earn from contract renewals, minus its debt and certain other future obligations. Through the most recent earnings report, the company said it held $1.4 billion in net earning assets or $12 per share.

However, investors should consider that number with some caution: Only $300 million of that total is cash flows that will be generated from existing contracts. The $1.1 billion balance is based on the company's estimates for contract renewals. The risk here is that those solar systems will be 20 years old come renewal time, and most will generate far less electricity than they did when they were new. There's a lot that can change between now and two decades away to potentially undermine that $1.1 billion figure.

That doesn't mean investors should avoid Sunrun. On the contrary, it's well run and one of the biggest and best-known solar installers with a solid business model. The biggest takeaway is that investors should factor Sunrun's valuation heavily into their investment decision.

Vivint Solar

There are a lot of similarities between Vivint Solar and Sunrun. Both have similar business models, helping customers design and acquire a solar panel system and then installing it and maintaining it. Both will sell you a solar system but count on PPA agreements and operating leases for the majority of their sales and cash flows (both current and future). Moreover, Vivint's business model is also predicated on the use of a substantial amount of debt and tax equity to fund operations today while building up a multibillion-dollar stream of cash flows that will roll in over the coming decades.

Where the two are a little bit different is in their estimates of future cash flows from renewals. Through the second quarter of 2019, Vivint reported $2.12 billion in gross retained value. Of that amount, $532 million — or 25.1% — is in renewal estimates. Sunrun, on the other hand, has a bigger $3.3 billion in gross earning assets (its name for retained value), but $1.1 billion of that — 32% — is from renewal estimates.

In other words, a much bigger portion of Sunrun's net retained value is based on projecting a higher percentage of its customers will keep their 20-year-old solar systems than Vivint Solar is projecting. Simply put, there's more risk baked into Sunrun's math.

Additionally, Vivint seems to be creating more retained value with less leverage. Through the second quarter of 2019, Sunrun says it will retain 43% of its gross earning assets, while Vivint Solar will keep more than 55% of its gross retained value. In other words, Vivint Solar's net retained value metric is a more conservative number, and it is likely to hold on to an even larger portion of gross retained value after paying other obligations.

Put it all together, even though Sunrun is the bigger solar installer, Vivint is doing a better job of creating long-term shareholder value.

The biggest solar component and accessory makers

SolarEdge

SolarEdge has established one of the strongest footholds in the solar industry, supplying inverters and power optimizers that help solar users generate the most consistent, reliable, and cost-effective electricity from their solar installations. Its technology has helped it to establish itself as a market leader, with more than 13 million power optimizers and a half-million inverters over the past 12 months. Sales are up 122% since 2017 on the back of the compelling performance/price offering that its power optimizers and inverters bring.

The company isn't just winning business on price. Even as its sales have grown at double-digit rates, SolarEdge sports some of the best gross margins in the industry, well above 30% in recent quarters. Management has kept the business strong with an enviable balance sheet that features far more cash than debt and its operations generate strong operating cash flows.

One of the most compelling things about SolarEdge, frankly, is that its management isn't just resting on its laurels as a major solar component supplier. The company has made major investments over the past several years to expand its business into differentiated, but related segments of the renewable energy industry. This includes acquisitions in the electric-vehicle drivetrain market, EV recharging systems, and battery backup and energy storage system manufacturing.

While not all directly related to solar energy, there is substantial overlap in all of these markets, and management is counting on the company's expertise and the overall growth of renewable energy demand to help it leverage the total renewable energy opportunity in the years to come.

With a strong core business, a great balance sheet, and an excellent track record of execution by its executives, SolarEdge is positioned for many more years of growth.

Enphase Energy

Like SolarEdge, Enphase has established itself as a leader largely by being very good at one thing and leveraging that to command as much market share as it can. In Enphase's case, that one thing is microinverters. These devices set the standard for on-panel electronics that deliver the most reliable and efficient output for a solar installation. Since the start of 2018, Enphase has seen its sales grow 41% on strong demand for its microinverters, particularly for distributed residential solar.

Enphase's growing market share is helping improve the bottom line. In the first half of 2019, its gross margin increased from 28% to 34% through a 60% jump in revenue, and it generated $25 million in operating incomeand $32 million in operating cash flows. The two operating measures improved from a loss in the former and a 327% increase in the latter.

Enphase is also taking a play from the SolarEdge playbook to some extent, if in a much more focused way. The company has made energy storage a key part of its plans for the future, in both distributed residential and small-scale commercial solar. Enphase is betting big on this space and plans to leverage its already-dominant share of the microinverter market to be a big player in residential energy storage. Battery prices have fallen dramatically over the past five years, and the percentage of home solar installations that include battery storage is accelerating rapidly.

Just how big is the U.S. residential solar opportunity alone? In the first four decades of residential solar's existence, approximately 2 million solar systems were installed. Most estimates say it's only going to take four years to install the next 2 million residential solar systems. For Enphase and its peers, the best is yet to come.

The biggest solar utilities

NextEra Energy

One of the largest utility companies on earth (and easily the biggest company on this list worth well over $100 billion), NextEra Energy is the dominant electricity provider in Florida through its Florida Power and Light and Gulf Power subsidiaries. The utility's NextEra Energy Resources subsidiary, which produces and sells power to other utilities, is the biggest producer of solar and wind energy in the world. Simply put, NextEra is a behemoth in renewables, including solar.

Recently, the company has accelerated its investment in renewables, taking a novel approach to combine both wind and solar together in a single project with energy storage to maximize resources and returns. This includes a facility with 300 MW of wind and 40 MW of solar tied to 30 MW of storage, resulting in both clean and stable electricity for users. It recently went even bigger with a project in Oklahoma, that included 250 MW each of wind and solar, with 200 MW of battery storage. These two recent projects are great examples of where wind and solar, combined with battery storage, can compete with fossil fuels on cost. In these cases, renewables proved to be cost-competitive with natural gas peaker plants to meet high-peak energy demand reliably.

Moreover, NextEra is banking on the operational costs for solar and wind to continue to fall. On the second-quarter 2019 earnings call, CFO Rebecca Kujawa said that the company expects “… firm wind and solar to be cheaper than the operating cost of coal, nuclear, and less-efficient oil and gas fire generation units even after the tax credits phase down early in the next decade.” She went on to emphasize that cheaper renewables, paired with storage, would become “increasingly disruptive” to current fossil fuel generation in the U.S.

Looking into the future, this giant utility is as well positioned to participate in the growth of solar.

The AES Corp.

Unlike NextEra, with its large regulated utility operations, AES makes a living generating power that it then sells and distributes to utility companies and large industrial customers. In some ways, that makes it like a stand-alone version of NextEra Energy Resources. Also like NextEra, AES considers solar a major part of its business. Since the end of 2015, AES has grown renewables from 23% of its generating capacity to 30% at the halfway point of 2019. The company is also on track to generate almost half of its power from renewables by the end of 2022. Solar is going to play a substantial role in that transition; 56% of its renewables pipeline is solar projects.

And that transition isn't expected to come at a cost to investors. On the contrary, the company expects to grow adjusted earnings per share from 7% to 9% per year on average during that period. Combined with a solid dividend, that would result in a total return between 10% and 12% per year.

The biggest solar yieldcos

Brookfield Renewable Partners

While it counts on hydroelectric power for the great majority of its cash flows today, Brookfield Renewable has made both wind and solar its biggest priority for future investment. This transition is a product of the change in the cost curve of these technologies in recent years. In short, Brookfield Renewable changed its strategy when it became apparent that companies could make money generating and selling power from wind and solar panels.

With the backing of Brookfield Asset Management (NYSE:BAM), there's no better endorsement for solar as a viable and profitable endeavor going forward than Brookfield's long history of delivering profits across just about every economic environment.

Over the next five years, Brookfield Renewable plans to spend $4 billion on renewable projects, with solar likely to be featured heavily in that mix. Those investments are expected to generate enormous returns, too. Management anticipates cash flow per unit — partnership-speak for per share — to increase between 9% and 16% annually through at least 2024. Historically, Brookfield Renewable has used cash flow growth to fund dividend increases at a double-digit rate on average. If it reaches the cash flows growth projected, investors should be able to count on similar — or maybe even higher — payout growth in the future.

TerraForm Power

It has already been noted that Brookfield Renewable is savvy at making profitable investments, and TerraForm Power is an excellent example. Since Brookfield Renewable bought a majority stake in TerraForm Power several years ago and made major changes in its management and operations, TerraForm Power has been a real bright spot in the yieldco universe. Not only have its existing operations stabilized, but under new management and with a better-capitalized partner behind it, the company has reinstated its dividend and started growing it cash flows again.

TerraForm Power operates over 4 GW of power generation in North America, Europe, and Latin America, and counts solar as a major part of its business. Since the start of 2019, the company has grown solar from 35% of its capacity to 41%, and projects solar will account for 52% of total revenue in 2019.

Looking at the long term, TerraForm Power, like other Brookfield-owned entities, is likely to generate steady, and regular returns for investors. It aims to grow its dividend payout 5%-8% every year, while keeping its payout ratio around 80%-85% of cash flows. By retaining as much as 20% of cash flows, it can both maintain a solid margin of safety for the payout while also having some capital to fund future growth initiatives.

TerraForm's history prior to Brookfield's involvement isn't great. But as a member of the Brookfield family today, it's likely to be a top solar stock for years to come, especially for investors looking for a reliable high yield and strong prospects for dividend growth.

Read more at The Motley Fool.