When the world's largest petrostate decides to bet on clean energy, it's time to pay attention.
Saudi Aramco, Saudi Arabia's massive state-owned oil company, is gearing up to sell a small stake to the public. Just 5% of this $2 trillion firm would equate to a $100 billion IPO, four times larger than Alibaba's (BABA) 2015 IPO, which currently stands as the biggest new stock issue ever.
However, here's where things get even more interesting: Saudi Aramco has telegraphed its long-term direction. The company has tasked a team of global investment banks with lining up a portfolio of solar energy firms primed for acquisition. According to Bloomberg, $5 billion is available for this spending spree, which should help Saudi Aramco meet its goal of generating 10 gigawatts of power from renewable energy sources by 2023.
Make no mistake, this is likely just the first warning for OPEC and the oil majors. While firms such as Royal Dutch Shell have made tentative moves toward embracing clean energy in recent years, the economics of solar power are improving so quickly that oil exploration may soon be a losing proposition.
Until now, solar power has depended on a series of global tax credits. Yet, falling solar panel prices mean that solar is now cheaper than coal in many countries. And the World Economic Forum predicts that by 2020 "solar photovoltaic is projected to have a lower [levelized cost of electricity] than coal or natural gas-fired generation throughout the world."
With most solar stocks now priced far below their all-time highs, M&A by fossil-fuel firms should serve as a clear catalyst for a rebound.
And there are three investment opportunities on which smart-money investors should be focused right now.
8Point3 Energy Partners
First, although the timing of the M&A spree is uncertain, investors looking to get paid right now should consider 8Point3 Energy Partners (CAFD) , which is the joint yield vehicle for First Solar (FSLR) and SunPower. This firm operates a broad range of solar power installations for utilities, and its prodigious cash flow enables it to offer a dividend yield in excess of 7%. Shares currently trade for 30% below the stock's August 2016 IPO price, making it an intriguing play for investors.
Guggenheim Solar ETF
Second, exchange-traded funds (ETFs) can offer extra profit opportunities due to their diverse nature. To be sure, there's a broad spectrum of solar firms, from deep value plays to strong balance sheet plays. Rather than picking a specific winner, the ETF approach may work best.
While the Guggenheim Solar ETF (TAN) has lost value during six of the last seven years, it surely represents better value than ever. The average holding in the fund trades for just 0.55 times book value and around 1.5 times trailing cash flow, according to Morningstar.
Third, First Solar itself has always sought to be a technology innovation leader, but its stock has been dogged by a price curve that keeps bending downward faster than it can keep up. Its shares now trade for around 10% of First Solar's 2008 peak and also remain more than 50% off its 52-week high.
Acknowledging just how brutal this price curve has been, First Solar recently announced that it will scrap a planned technology upgrade for 2017 and will instead focus on major solar panel efficiency advances slated for 2018.
While First Solar's share price sentiment is washed out right now, investors should start looking ahead to 2018, when revenues should rebound modestly, with operating earnings gaining a robust 40%, to $463 million, according to Merrill Lynch.
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