Solar stocks had a rocky year in 2021. Overall, the solar stocks market ended the year with a loss of 27% following a jump of almost 240% in 2020. Over the last few weeks, I've been researching the top solar stocks to buy in 2022 and I've found three that I think are a really, really good pick.

Canadian Solar (CSIQ)

The name probably makes it obvious that this is a Canadian company which specialises in solar panel engineering, production and construction. Founded in 2001, Canadian Solar has grown steadily over the years. In fact, they have one of the biggest solar panel manufacturing capability in the world right now. They are vertically integrated and produce everything from ingots and wafers to cells and complete solar modules. Currently, they have a module production capacity of 22.1 gigawatts and that is expected to increase to 32 gigawatts by the end of 2022. However, you should know that all of their manufacturing is based in China so they can be a bit vulnerable if US-China relations become worse. Still, one trend that is visible in the solar industry is that the top 5 manufacturers are getting more and more market share and Canadian Solar is in the top 5! The other really great thing about Canadian Solar is their focus on battery storage projects. Solar-and-storage projects is what is currently driving the solar industry. These projects include both solar panels and the batteries necessary to store the energy output of those panels. Canadian Solar currently has roughly 21 gigawatts hours worth of battery projects across the world in their construction phase or just in the backlog. Plus, Canadian Solar have a total of 24 gigawatts peak of solar projects around the world, spread between North America, Latin America, Europe and the Middle East, China and the Asia-Pacific region.

One of the best things with Canadian Solar is that their projects are worldwide so they are relatively protected from specific geopolitical tensions although that also means that shipping costs are a big factor with the company. In fact, shipping costs and rising commodities costs is what drove Canadian Solar down in 2021. Key materials went up between 120% and 338% while shipping costs went up 159% during 2021 resulting in overall module manufacturing costs going up by more than 40%! This exposed one of Canadian Solar's weaknesses which is its low profit margin which makes it especially vulnerable to rising prices. However, this also means that Canadian Solar will benefit a lot more from stabilising or falling prices. If we see that, Canadian Solar could shoot up in price. Also, part of Canadian Solar's strategy is to keep parts of its solar projects and sell the power instead of selling the whole farm. That way, the company will have some steady income to balance out its earnings, which is really great and will make them much more financially resilient! Right now, the solar stock trades with a PE ratio of 29.3 and a forward PE ratio of 7.51! Their price-to-earnings-growth ratio is also just 0.6 which is extremely good value! Canadian Solar does have a lot of debt, roughly $2.2 billion dollars which comes up to a debt-to-equity ratio of 107.4%, but it also has a cash pile of $867 million so their financial situation is relatively stable. In my opinion, Canadian Solar is one of the top solar stocks to buy right now although you need to keep in mind that this solar stock is volatile and is correlated to shipping and materials costs so you need to keep an eye on them.

First Solar (FSLR)

Unlike Canadian Solar, First Solar is an American company with American-based manufacturing (Americaaa, fuck yeaaah!). In fact, that is one of its main competitive advantages over companies like Canadian Solar. First Solar is less susceptible to hikes in shipping prices although the majority of materials necessary for solar panel production do come from China so First Solar does have some exposure to that. The other competitive advantage that First Solar has is the type of solar panels that it produces. First Solar produces solar panels that are better suited for utility-scale solar farms. Their solar panels are also more resistant to weather and have a better production consistency although their maximum efficiency is slightly lower than the panels of competitors like Canadian Solar and Jinko Solar. Still, this makes First Solar a very competitive choice for large-scale solar projects, especially US-based projects. Similar to Canadian Solar, First Solar has a lot of projects in the backlog with a 26.2 gigawatts worth of solar module shipments backlog as of now. With a current manufacturing capacity of 8.4 gigawatts, First Solar has enough projects for the next 3 years! Still, the company is expanding their manufacturing with new factories in India and the US and should reach a production of 15.8 gigawatts by the end of 2024. This does highlight a potential problem though. If First Solar is not able to keep up with the demand, they could start losing business to companies like Canadian Solar which have a much higher production capacity. To me, it seems like First Solar is trying to do a controlled expansion, which is good for their finances, but it can cost them their leadership in the market.

Still, First Solar is one of the most profitable companies in the sector precisely because of their approach. In fact, First Solar had a profit margin of 16% in 2021 and currently have a PE of just 15.9. However, they are anticipating reduced earnings in 2022 due to their expansion plans, but we are expecting to see a jump in EPS in 2023. Their forward PE for 2022 is only 29.15 although that is based on an estimated EPS of $0.41 dollars. The company's guidance for 2022 is an EPS between $0 and $0.6 dollars so their forward PE will probably be very volatile. This is also why I think First Solar may see another dip before the end of the year if they keep seeing increased costs. On the other hand, lower costs will be very beneficial for the stock price. Basically, you are taking a bit of a risk here with material costs. If you think that they will go up, then maybe wait out. If you think they will go down, then First Solar is a good pick. Overall, I think the company will do really well in the next 3 to 5 years. They are a leader in the solar field, they have good operations, they have a net cash position of $1.6 billion dollars on a market cap of $8.1 billion. As long as they manage to keep up with demand and control their expenses, the stock price of First Solar will keep going up.

Enphase Energy (ENPH)

Founded in 2006, Enphase Energy focuses on designing, developing, manufacturing and selling solar energy solutions in the US and internationally. Enphase Energy's main product is the microinverter which converts DC to AC energy at the solar panel so that the energy can actually be consumed by the end user. In addition, Enphase Energy offer a storage battery in two configurations, 10.1 kilowatt-hour and 3.4 kilowatt-hour. They also offer a portable energy system which is used off-grid and offers huge possibilities in the Indian market. They are also developing Electric Vehicle chargers and fuel cells which are two new, but rapidly growing markets. Overall, Enphase Energy is a leading pure-play solar company with a high-quality product offering and a massive addressable market. In terms of manufacturing, Enphase Energy's main operations are in Mexico and India which was a strategic move to avoid being affected by US and China trade relations and possible tariffs. I think that was a really smart play on their side and shows real foresight from the management. Most solar companies have operations in China because you get cheap labor and easy access to the necessary key materials, but obviously it brings other issues. Enphase Energy's CEO has actually shown really good business understanding and strategic thinking over the last few years and that is really, really important.

Now, unlike Canadian Solar and First Solar, Enphase Energy is actually classified as a growth company. Over the next few years, analysts are expecting an average of 32.9% earnings growth and 20.8% revenue growth which is much, much higher than the rest of the industry and higher than its closest competitor, SolarEdge. Enphase's management is also focused on their 35/20/15 business model which stands for a target of 35% gross margin, 20% operating income and 15% operating expenses. Currently, their operating expenses are a bit higher, standing at 24% overall for 2021 although they have dropped to 16.5% for the last quarter of 2021. However, their operating profit is also higher at 25.4% for 2021 so that's okay. Plus, their gross margin has been steadily improving and currently stands at 40.2%, 5% above their target. Still, that model shows Enphase Energy's long-term plan and it's good to see they have such a plan in place. This is also something that a lot of investors like. Everyone loves predictability when it comes to investing. Enphase Energy is also less affected by commodity price increases and shipping costs than Canadian Solar and First Solar so that's another positive for the company. Still, Enphase Energy is trading at a premium because of its expected growth. Their current PE is 150.7 with their forward PE for 2022 being 50 or 56.8, depending on your source. Their price-to-earnings-growth ratio is 1.41 which is actually a bit lower than the sector median of 1.44, but it's still relatively high. Enphase Energy also has a net debt of $20 million dollars which is tiny given that their market cap is $23.9 billion. Overall, I think that Enphase Energy is a solid bet for the next 3 to 5 years. However, the price is a bit steep right now and doesn't really offer a big margin of safety. Also, given the fact that we have multiple expected interest rate hikes this year, growth stocks like Enphase Energy are likely to be hit with a lower valuation. Basically, my personal opinion which is not financial advice is that I would only buy a small amount of this solar stock and I would look for opportunities to add to my position over this year. Again, I am very, very bullish on Enphase Energy, mainly because of their Indian solar market bet. There are not a lot of companies that are targeting it and it is massive so Enphase Energy have a huuge opportunity there. But, again, I would be wary of going all-in on Enphase right now.

Alright, so that's it, those are my 3 top solar stocks to buy or watch right now. What do you think? What are your favourites?