Why the massive sell-off in solar stocks seems exaggerated

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Contractors installing Sunrun solar panels on the roof of a new home in Sacramento, California.

David Paul Morris / Bloomberg

Solar stocks fell sharply on Tuesday after California proposed new rules that would make it more expensive to generate electricity from panels on their rooftops for homeowners. But an analyst believes the sell-off was too strong and shares of solar developers now reflect a future that looks too bleak.

The California Public Utilities Commission has proposed that homeowners who install solar roofs pay a monthly grid fee that could run up to around $ 40 for the average roof. And the payments solar owners would receive for returning electricity to the grid when they weren’t using it would decrease.

Overall, the value proposition of owning solar power would become less attractive, and several analysts said homeowners might be hesitant to add panels. Solar developers


Sunrun

(ticker: RUN),


SunPower

(SPWR) and


Sunnova Energy International

(NOVA) all fell more than 10% on Tuesday, and fell again – albeit less sharply – on Wednesday.

But JP Morgan analyst Mark Strouse says Sunrun and Sunnova are attractive buys at current levels as investors no longer give them much credit for their growth prospects. (He rates SunPower at Underweight, noting that the company’s performance has been patchy in the past.)

“We are reviewing the valuation of Sunrun and Sunnova relative to their existing portfolio of operating assets,” Strouse wrote. “For both stocks, the multiple is now around 25% lower than last year’s average. In other words, excluding the value of existing operating assets, stocks attribute about 50% less value to future growth than the one-year average. We believe California accounts for about 40% of Sunrun’s growth and about 20% of Sunnova’s, so a 50% drop in the estimate of future growth seems exaggerated, even in the worst-case scenario for the California market. . “

Solar stocks have fluctuated widely, sometimes due to government policies. Sunrun is down 50% this year and Sunnova is down 36%, but both stocks have more than quadrupled in 2020. Strouse believes Sunrun can hit $ 86 from $ 35 recently, and Sunnova can climb to $ 66 against $ 29 recently.

One of the reasons Strouse thinks investors shouldn’t be so gloomy is that the California proposal might not pass as it’s currently drafted. Indeed, the commissioner who issued it leaves before the end of the new year, and a replacement could be more favorable to the industry.

“We also expect a media blitz from local politicians and solar industry participants, which could lead to a final decision with more favorable terms,” Strouse wrote.

He also believes homeowners can bend the rules, perhaps by adding battery storage to their solar systems to disconnect from the grid. Battery systems are one of the biggest growth opportunities for solar companies.

Write to Avi Salzman at avi.salzman@barrons.com

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