Why This Renewables Theme Is Underperforming In A Strong Market

Our theme on Solar Stocks – which includes solar panel manufacturers, systems installers, and component suppliers – has declined by about 16% year-to-date in 2023, compared to the S&P 500 which has gained about 15% over the same period. While solar stocks fared well through the early Covid-19 pandemic driven by the government stimulus and easy monetary policy, they have corrected recently as rising interest rates over the last year or so impacted high multiple stocks. There have also been some headwinds in the residential solar market, given recent changes to the net metering policy in California – the U.S. state with the largest solar installations. Separately Q1 earnings from solar panel majors First Solar
FSLR
and SunPower were mixed, while microinverter major Enphase Energy
ENPH
provided Q2 guidance that was below estimates. This is also likely to have impacted solar as a broader theme. Moreover, despite being a high-growth sector, the solar industry is generally very cyclical.

That said, there are multiple long-term positives for the solar sector. The biggest tailwind for the solar industry comes from the Inflation Reduction Act, which was signed into law last August and carries about $370 billion in subsidies and credits for clean energy investment. Moreover, supply chain snags that hit most industries have also been easing this year and this could help improve supply and margins for solar manufacturers. Inflation has been cooling and the Fed has also paused its interest rate hikes. There also remains a long runway for the uptake of solar as an energy source. A 2021 study by the Energy Department indicated that solar could account for 40% of electricity generation in the U.S. by 2035, up from less than 5% in 2022.

Within the theme, First Solar has been the strongest performer, with its stock rising by 27% year-to-date, as the company’s residential panels cater more to utility-scale projects, which are expected to fare a bit better this year. On the other side, , SunPower, which is largely focused on the residential solar business, has been the weakest performer, with its stock declining by about 44% year-to-date.

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