Bright Ideas for Small-Cap Solar Plays

Joel Anderson |

Solar power isn’t some pie-in-the-sky dream for ecofreaks anymore. In just the last few years, it has progressed into a sun-in-the-sky reality for a wide swath of potential customers. Whether it be utility-scale installations around the world or residential roof-top arrays, the economic benefits of solar power are starting to build in a very real way.

If you, like me, are pretty confident that this future isn’t some sort of heat-stroke induced mirage, the next question for any investor would likely be “How do I play this?” Great question. And in all honesty, I don’t know…there are a lot of options. Including options, I suppose.

I’ve gone with the very broad approach, buying into the Guggenheim Solar Trust (TAN) , an ETF that tracks the entire industry. The returns there are somewhat limited, as I’m getting both the strongest and weakest solar companies in there, but it’s a relatively safe way to play the industry trend without exposing myself to any one company too much.

That said, there are a lot of other ways to do it. Stocks that hold much greater inherent risk but also offer the potential for huge rewards. The most opportunity in solar right now may not reside in the biggest players -- companies like First Solar (FSLR) , SunEdison (SUNE) , or SolarCity (SCTY). In those cases, you’re looking at well-known companies that already have a lot of attention. In fact, the biggest returns may come from investing in the margins. Finding the small-cap plays that have flown under the radar up to this point.

Major solar panel manufacturers are one thing, but what about the service providers? What about the companies building components for the arrays? In a lot of cases, dipping into the small-cap market can ultimately provide a way to play a rapidly growing industry that can squeeze the most value possible out of an investment.

As such, here are four American small-cap companies that are working in the solar industry and have started showing traction in the last six months to a year. Whether they’re the ticket to turning solar power into stock market gold is far from certain, but they could be a good place to start looking.

Solar3D (SLTD)

Solar3D is a company primarily focused on solar technology, most notably a new panel technology that is intended to dramatically improve efficiency by reducing the amount of light reflected from a normal 2D panel.

While Solar3D doesn’t have their next-generation panels on the market yet, they are continuing research into what could be a game-changing technology while acquiring companies SUNWorks and MD Energy in the last year. That gives them a potentially major tech development in the pipeline with short-term revenue generation coming from solar projects. The company reiterated its guidance of 2015 revenue of $40-$45 million (more than double 2014’s $20 million) and positive EBITA for the year, prompting a more-than 10% spike in stock price.

Solar3D is clearly an exciting play, and its stock has nearly tripled in value in the last year. Any company with a value that hinges on a technology that has yet to be translated into a marketable project is clearly a big risk, but the company’s still gotten some real interest from investors already and appears to have real potential to keep growing.

Solaredge Technologies ($SEDG) and Enphase Energy (ENPH)

A lot of the biggest solar companies are in the business of either manufacturing solar panels or installing them. Some, like First Solar, are focused on utility-scale installations. Others, like SolarCity, are firmly entrenched in the small-scale residential/commercial market. Still, though, they’re essentially in different parts of the same game.

The huge uptick in solar activity, though, should have much broader implications. For every major solar cell manufacturer or company selling rooftop installations to home owners, there are dozens of smaller players building the technology that makes all of that actually work.

Inverters, for example, are a key piece of the residential solar industry. Solar panels generate DC electricity that needs to be turned into AC current before it can be used by a home or business owner. On the whole, the technology that will allow millions of different, small-scale solar installations generate electricity and then efficiently integrate that into the home’s electrical system and the power grid is a pretty essential piece of the puzzle. Especially so if you consider a future where an energy storage system featuring lithium-ion batteries is also included.

If America’s solar companies are really going to expand residential solar on the scale they seemingly intend to, it’s going to require a lot of smart grid technology. That’s why providers like Solaredge and Enphase could be especially intriguing plays. Both are in the business of providing microinverters, an essential piece of the process for any small-scale solar system. The two companies are competitors, with Solaredge IPOing just a month ago.

Both stocks have shown impressive growth of late. Solaredge has gained nearly 50% from its IPO price in just a few weeks while Enphase is up over 65% in the last year. It’s impossible at this point to say which of these two will perform better in the long run, but both are large enough at this point to suggest that one of the two will probably be the market leader in a segment that looks to be poised for major growth in the next five years.

Nextera Energy Partner ($NEP)

For all of the technological innovations that have driven industry growth, the financial innovations may be just as important. Power purchase agreements (PPAs) and yieldcos have played an essential role in making the value of solar tangible, quantifiable, and investable.

It also presents yet another intriguing investment opportunity: solar financial companies. In much the same way that oil and gas investors often look to MLPs rather than specific oil companies, investing in the financial products produced by solar companies could make for a great alternative method for solar investing.

A company like Nextera Energy Partners is focused there. Nextera Energy Partners is a yieldco that was spun out of energy giant NextEra Energy (NEE) . A yieldco, for those not in the know, is a company created solely to hold energy projects that have a steady revenue stream. It’s popular with solar companies because it means that they can spin their steady, revenue-producing projects off into a single, profitable company. It’s a way to separate the business of building and maintaining a utility-scale solar plant.

NextEra Energy Partners IPOed in late June of last year and has proven a strong performer ever since, more than doubling in price since that point.



Correction 4-28-15: This article initially overstated the gains made by SolarEdge's stock price since it's IPO and has since been corrected.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
ENPH Enphase Energy Inc. 1.16 0.01 0.87 756,733
NEP NextEra Energy Partners LP representing limited pa 28.72 0.14 0.49 314,621
SCTY SolarCity Corporation 19.99 -0.54 -2.63 2,783,618
SEDG SolarEdge Technologies Inc. 14.73 -0.05 -0.34 937,970
SLTD Solar3D Inc n/a n/a n/a n/a
SUNE SunEdison n/a n/a n/a 0


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