These are the four solar stocks to own for the long term

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Solar stocks have burned some short-term investors, but they represent a long-term opportunity for those who expect a successful transition to a clean, sustainable source of electricity for homes and businesses.

To illustrate how volatile the industry can be, the Invesco Solar ETF TAN,
-0.80%
is up 42% this year. But it was down 37% through the end of September from its 52-week intraday high set on January 25. The ETF readjusted 473% for five years,

In an interview, Andrew Wetzel, portfolio manager at FLPutnam Investment Management Co., discussed six stocks, including four solar coins and a utility company playing a leading role in building solar panels.

FLPutnam Investment Management Co. is headquartered in Wellesley, Massachusetts, and manages $ 4.1 billion in assets. Wetzel, the company’s chief sustainability officer, manages three related strategies:

  • A low carbon ‘core’ strategy across all industries and market sectors, typically holding 45 to 55 stocks.

  • An environmental opportunity strategy, which includes start-ups and Special Purpose Acquisition Companies (SPAC). Wetzel called this the concentrated strategy; it can contain between 30 and 60 shares.

  • A “diversified environmental strategy” combining the first two.

Discussing the “big picture” for investors interested in solar energy, Wetzel pointed out NextEra Energy Inc. NEE,
+ 0.41%,
which he called “the largest builder or one of the largest builders of solar and wind assets in the United States”, and NextEra Energy Limited Partners LP NEP,
+ 0.70%,
which owns solar and wind assets that NextEra Energy Inc. has developed and is designed as an income vehicle, with a current distribution yield of 3.15% on partnership shares.

NextEra’s total return over the past 10 years has been 722%, making it the best utility sector performance of the S&P 500 for the period.

Four solar stocks

Wetzel discussed four actions with a narrow focus on solar: Sunrun Inc. RUN,
-3.75%
and Sunnova Energy International Inc. NOVA,
-0.82%,
who install equipment and organize customer financing; and Enphase Energy Inc. ENPH,
-0.92%
and SolarEdge Technologies Inc. SEDG,
+ 0.35%,
who manufacture solar inverters and monitoring systems.

Here are the consensus sales estimates (in millions of dollars) for the calendar years through 2025 among analysts polled by FactSet, along with the expected compound annual growth rates (CAGRs) for sales, for all four:

Society East. sales – 2021 East. sales – 2022 East. sales – 2023 East. sales – 2024 East. sales – 2025 CAGR of sales estimated over two years Three-year estimated CAGR of sales Four-year estimated CAGR of sales

Sunrun Inc. RUN,
-3.75%

$ 1,561

$ 1,815

$ 2,057

$ 2,511

$ 2,777

14.8%

17.2%

15.5%

Sunnova Energy International Inc. NOVA,
-0.82%

$ 241

$ 343

$ 478

$ 656

$ 797

40.8%

39.7%

34.9%

Enphase Energy Inc. ENPH,
-0.92%

$ 1,368

$ 1,893

$ 2,383

$ 2,829

$ 3,452

32.0%

27.4%

26.0%

SolarEdge Technologies Inc. SEDG,
+ 0.35%

$ 1,970

$ 2,562

$ 3,104

$ 3,543

$ 5,021

25.5%

21.6%

26.4%

Source: FactSet

These are expected double-digit growth rates. In comparison, the expected two-year sales CAGR is 5.8% for the S&P 500 SPX,
-0.35%
and 11.1% for the Nasdaq-100 index (followed by the Invesco QQQ Trust QQQ,
-0.69%
), which is as far as FactSet’s index estimates go.

Wetzel described Sunrun and Sunnova as “very complex businesses that involve outside funding”.

Rising interest rates can hurt these stocks for short periods of time. Then again, even when the Federal Reserve begins to allow a hike in short-term interest rates and reduce its bond purchases to allow for a hike in long-term rates, borrowing costs could remain relatively low, as they have been doing so since the 2008 financial crisis.

Andrew Wetzel, portfolio manager at FLputnam Investment Management Co.

Bill truslow

Sunrun provides solar installation and maintenance services primarily in the consumer / residential space, while Sunnova “is more of a reseller model,” Wetzel said.

He says the two companies “will do very well in the current configuration, assuming the macro environment remains comfortable enough,” doubling their customers every two years. He only owns the Sunnova shares out of the two in the concentrated strategy because he expects more operational leverage.

Enphase and SolarEdge manufacture inverters that convert DC electricity generated by solar panels into AC.

“Traditionally you have one inverter for a panel array, but if a panel goes missing, it reduces the output. Enphase makes a small inverter to sit in each panel, ”Wetzel said. This gives the company a technological advantage.

SolarEdge is able to monitor what each solar panel is doing. “The hit to their technology is that if one inverter fails, you lose more than one panel,” Wetzel said, adding that SolarEdge’s inverters are cheaper.

Converting homes and businesses to solar

When examining the big picture for solar conversion, Wetzel said consumers and businesses should consider the incentives when looking at the cost. At energy.gov website, the US Department of Energy describes tax credits of 26% for solar power systems installed in 2021 or 2022, and 23% for those installed in 2023. There are also state incentives and other financial arrangements with local utility companies.

Wetzel said there is a “huge addressable market” for homes and businesses with a good rooftop location, with solar conversion penetration still in single digits. There is a mandate in California for single family homes or newly constructed multi-family homes up to three stories high to have solar power generation systems. Ideally, a home could generate more electricity than it needs, allowing the homeowner to sell the electricity back to the utility – another incentive to convert.

Again, there may be changes to this configuration.

“The California Public Utilities Commission is evaluating the utilities’ ideas – they want to lower the rates they pay solar customers for net metering,” Wetzel said.

Otherwise, utility customers who generate excess solar power and sell it to utilities may end up paying nothing to maintain the power grid.

So there is always a risk that regulatory changes will harm solar energy providers and their actions, as well as economic risks, including the aforementioned interest rates and the health of the wider economy.

Wetzel also said that the further development of solar storage batteries for homes is of critical importance, because “if you can get residential solar power, have a battery, with software to manage the storage, you can essentially disconnect from the network. “Tesla Inc. TSLA,
-11.99%
has a home solar battery system called Powerwall.

The solar industry is changing. But the source of free energy is beckoning, technology keeps improving, and support for clean energy continues to grow.

Two solar ETFs

The main solar-focused exchange-traded fund is Invesco Solar ETF TAN,
-0.80%,
which has $ 3.3 billion in assets under management. When asked if the TAN would be appropriate for investors who can engage in solar for the long term, Wetzel replied, “Yes, Enphase is the number one position at 12.5%, with SolarEdge at a little. more than 11%. So a quarter of the exhibit would be two companies that we really value for long term exposure to clean energy through residential solar power. “

Wetzel added: “The risk with any targeted ETF is the level of concentration and potential volatility, so while this is a reasonable way to gain exposure, these types of funds should not be more than ‘part of an investor’s portfolio. “

The Global X Solar ETF RAYS,
-0.70%
is a new competitor of TAN, created in September. It has less than $ 3 million in assets under management. RAYS adds an ESG (environmental, social and governance) component to its stock selection process. Its top two positions are also Enphase and SolarEdge, which together represent 17% of the portfolio.

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