Here’s Why You Should Jump On Solar Bandwagon Before It’s Too Late

Solar energy stocks are on a roll today with the Guggenheim Solar ETF inching up by over 1% and four stocks, namely Canadian Solar Inc. (NASDAQ:CSIQ), Sunedison Inc (NYSE:SUNE), First Solar, Inc. (NASDAQ:FSLR), and SolarCity Corp (NASDAQ:SCTY) also registering small gains on large trading volumes, with Canadian Solar leading the trend with an appreciation of over 2% so far today. Analysts have recently reaffirmed their bullish ratings on all four stocks, but smart money have been betting on them for a while. Taking into account that all four stocks are still deeply undervalued for a bunch of reasons, here’s why you might consider taking long positions in them before they set out on their rebound path.

The main metric that we use in identifying stocks that make it into our small-cap strategy is hedge fund sentiment. Through extensive research, we have determined that one can actually benefit simply by following the hedge fund industry into its most popular ideas. Our backtests that covered the period between 1999 and 2012, determined that hedge funds’ top long picks have slightly underperformed the market, by seven basis points per month, mainly because these companies are less risky and more price efficient. However, the expertise of hedge funds is best put to use to identify small-cap stocks that are poised to explode, with the backtests showing that the 15 most popular small-cap ideas among hedge funds beat the market by around 95 basis points per month. Since it went live in August 2012, our strategy has generated returns of some 118%, beating the S&P 500 ETF (SPY) by over 60 percentage points (see more details here).

With this in mind, let’s take a closer look at the four solar stocks. Hedge funds are bullish on all of them, which is understandable, taking into account that legislation endorses solar companies and the use of solar energy. Let’s start with Canadian Solar Inc. (NASDAQ:CSIQ), which has advanced by some 2% today. A couple of days ago, Stifel Nicolaus initiated coverage on the stock, with a price target of $25. The analyst cited Canadian Solar’s low cost products and manufacturing efficiency, which will allow it to benefit from the photovoltaic markets. Overall, Canadian Solar has a consensus price target of around $33 per share, which indicates a potential upside of more than 130%. Hedge funds from our database are also bullish on Canadian Solar Inc. (NASDAQ:CSIQ), as they amassed over 15% of the company’s shares at the end of June, despite the fact that the number of investors fell to 32 from 35 and the aggregate value of their holdings slid to $243.95 million from $303.36 million. Among these funds, the largest stake is held by billionaire Israel Englander’s Millennium Management, which reported ownership of 2.19 million shares of Canadian Solar Inc. (NASDAQ:CSIQ) as of the end of June.

Then there are Sunedison Inc (NYSE:SUNE) and First Solar, Inc. (NASDAQ:FSLR). Earlier today, JPMorgan Chase & Co. reiterated its ‘Outperform’ rating on Sunedison Inc (NYSE:SUNE), but lowered its price target to $19 from $23, which still represents a premium of some 150% to the current price, while last week, Deutsche Bank reiterated its ‘Buy’ rating on First Solar. At the end of June, Sunedison Inc (NYSE:SUNE) was the most popular renewable energy stock among the funds we track, being included in the 13F portfolios of 93 of them, down by one over the quarter. However, the total value of these investors’ holdings surged to $5.68 billion from $4.44 billion during the quarter and amassed a whooping 69% of the company’s outstanding shares at the end of June. Greenlight Capital, managed by David Einhorn, held the largest stake, containing 24.84 million shares (see Einhorn’s take on Sunedison).