Is Uncle Sam About to Inflate These Stocks?

The easiest way to make money in the market is to find a stock the big investors are about to load up on and buy it first. You take your position early and enjoy the ride as big-money investors drive up the price…

Well, speaking of big money… Nobody has deeper pockets than Uncle Sam.

And in the State of the Union speech last Tuesday, President Obama may have tipped Uncle Sam’s hand regarding its investment in a strengthening and investible trend.

Consider the quote from last week’s speech:

“Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year — let’s drive down costs even further. As long as countries like China keep going all in on clean energy, so must we.”

As I see it, the Federal government needs to promote the solar industry for three primary reasons:

• Job creation.

• Striving for energy independence.

• Preventing China from dominating a very large opportunity over the next 50 years.

We’re already seeing investment capital return to this industry over the past six months — the first time since the peak in 2008. Solar stocks began to rebound from multi-year lows in early 2012, to the point where a prominent IPO took place in December… And not only did it hold its IPO price, it rose 50% from the first day’s closing price.

Since Jimmy Carter was an advocate of solar energy and the industry was in its panic growth phase in 2006 to 2007, we’re clearly not at the ground floor of a new industry. But we may be at the ground floor of the industry’s resurgence.

As we went through the internet bubble popping in 2002, the future leaders emerged battered but not dead. Amazon (Nasdaq: AMZN) is up 18 times its 2002 price, and Google (Nasdaq: GOOG) is up eight times 2003′s.

Three ways to profit

There are a few ways an individual investor can profit from a resurgence in the solar industry. Here are three:

1. Pick the winning panel vendors.

2. Buy the public distributor.

3. Buy an ETF and let the vendors fight it out.

FSLR, SPWR: Highest risk, highest potential

As usual, the most dangerous way to invest is also the most profitable. Picking the winning panel manufacturers will provide the greatest amount of growth, but it’s also the riskiest path. The two strongest domestic companies are First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWR). Both may make solar panels, but the business models are very different.

First Solar focuses on large-scale installations projects that range from corporate campuses to utility-level solar arrays. First Solar uses a substance in its panels called cadmium telluride (CdTe), which is cheap and efficient, to offer the fastest payback on a project in the industry. The downside is this substance is poisonous and requires a large physical area for its panel arrays. First Solar’s solution is more focused on business installations than home use.

CSI isn’t just a primetime drama. It’s also the basis of SunPower’s competitive edge. SunPower separates itself from the pack by producing the highest-efficiency panels using monocrystalline silicon (c-Si). This allows the company to reach efficiency levels of 22%, which makes these panels much more suitable for distributed, urban deployment. It also explains why SunPower was under considerably more pressure as the floor fell out of the bottom of the housing market.

SCTY: Less business risk, higher earnings risk

SolarCity (Nasdaq: SCTY) does everything but build the panels. It provides the engineering, design, installation and monitoring services for both residential and commercial vendors. Working with a partner like SolarCity is important because it adds credibility to the project and simplifies locking up financing. The concern with SolarCity is its own financing, not its customers. Analysts are projecting a loss for 2013, which could make the share price volatile.

The company has a unique competitive advantage that allows it to partner with companies like eBay (Nasdaq: EBAY) and BASF (OTC: BASFY) while providing custom home designs. This competitive advantage virtually assures its place in the industry, but the path to profitability could be a rocky one.

ETFs: Safer but expensive

The primary solar ETF is managed by Guggenheim Partners. Its name? Guggenheim Solar (NYSE: TAN). It’s a diversified instrument including Chinese panel manufacturers, materials companies and the leading U.S.-based manufacturers. Recently, there’s been a strong correlation with First Solar, but it’s also easy to see the performance lag:

The expense ratio of TAN is reasonable at 0.65%, with its top 10 holdings making up 62% of the portfolio. If you’re an investor who doesn’t want to be involved with quarterly earnings fluctuations, this ETF could be the right balance between volatility and diversification.

David Eller is part of the research team at InvestmentU.com.