What are we looking for?
According to the Solar Foundation, an independently funded think tank, the U.S. solar industry added workers 20 times faster than the overall U.S. economy last year. This week my colleague Rob Belanger and I thought we would take a look at solar stocks.
The screen
We started with global companies larger than $500-million (U.S.) in market capitalization and we sorted them from the largest to the smallest.
Net profit margin measures how much the company actually keeps out of every dollar of sales. Only companies with positive net profit margins are shown, and we are looking for a high number.
Price-to-sales is a valuation ratio that compares the company's stock price with its revenues. A low ratio may indicate undervaluation.
Sales growth during the past 12 months had to be positive.
Long-term debt divided by total assets (LT debt/TA) indicates how much of a company's assets are financed by debt maturing more than one year out. If a company has a LT debt/TA of 10 per cent, it means it has 10 cents of debt for every dollar of assets. We are looking for a low number.
Research and development divided by sales (R&D/sales) is an indicator of how much R&D expense is related to sales. Since the industry is constantly developing, and R&D drives innovation, we are looking for a high number.
Return on equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. A high number is favoured and only companies with a positive ROE are shown.
What did we find?
The largest company on our screen, First Solar Inc., leads all companies in the LT Debt/TA, and the R&D/sales categories. Based in Arizona, the company is the leading global provider of photovoltaic (PV) energy services.
Headquartered in Guelph, Ont., Canadian Solar Inc. leads in ROE. Besides serving as a leading manufacturer of solar PV modules and provider of solar energy services, Canadian Solar says it has a diversified pipeline of power projects in 18 countries on six continents.
China-based JA Solar Holdings Co., Ltd. is one of the world's largest producers of solar cells with a screen beating 0.27 price/sales.
Investors should conduct further research or contact an investment professional before buying any of the companies listed here.
Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.