SunPower Corporation (SPWR), First Solar, Inc. (FSLR): Will the Sun Ever Set on Solar Energy Stocks?

Factor #2: Supportive legislation

Incentives for solar-panel installations are huge. Recently, the Obama administration issued permits for 10 gigawatts of renewable energy on public land, with the focus on a 200% increase in renewable energy generation by the year 2020. In addition, congress has also widened the 30% federal investment tax credit to residential and commercial solar installations up till 2016. As per the American Reinvestment and Recovery Act (ARRA), the U.S. Treasury Department had also adopted a program to give cash grants to make up for investment tax credit for renewable energy projects.

Substantial risks going forward

The industry, as a whole, is over-dependent on government subsidies. Without any help from the government, each and every solar company turns immediately into a money losing proposition. You should remember that this course of events can happen very quickly. In addition, prices have become hefty. Aside from First Solar, Inc. (NASDAQ:FSLR), which trades at book value and at a P/E of only 9 times earnings, other rivals are pretty expensive. Investors are willing to pay almost 3 times book value for SunPower Corporation (NASDAQ:SPWR), and more than 15 times (!) book value for SolarCity. It seems that all the bright (and sunny) future has already been priced in.

My Foolish conclusion

Hopes for a sunny future are always welcome, but they must be supported by solid fundamentals. In light of the fast and furious rise in the share prices of solar companies, and considering that the future of the solar industry is highly uncertain, I believe that you should wait for the industry to mature. This way, you’ll know whether investors’ lofty projections play out into the future or not. Invest accordingly.

The article Will the Sun Ever Set on Solar Energy Stocks? originally appeared on Fool.com.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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