3 Solar Stocks to Watch for a Possible Unfavorable Decision

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Enphase Energy
ENPH
First Solar
FSLR
ReneSola
GROUND

About the industry

the Zacks Solar Industry can be basically separated into two business groups. While one group is involved in the design and production of high-efficiency solar modules, panels and cells, the other group is engaged in the installation of arrays and, in some cases, complete solar power systems. The industry also includes a handful of companies that manufacture inverters for solar power systems, which convert solar energy from modules into electricity required by power grids. Driven by robust installation trends, solar accounted for 43% of all new power generation capacity added in the United States in 2020, according to a report by the Solar Energy Industries Association (SEIA). This represents the largest share of new solar generation capacity ever recorded. It ranked first among all technologies for the second year in a row.

3 trends shaping the future of the solar industry

Record solar installations boost outlook: With growing demand over the past two quarters, the U.S. solar industry has seen a solid uptick, overcoming the early negative effects of the COVID-19 pandemic. This is evident from the latest installation trend prevailing in the country. For example, as reported by SEIA, the U.S. solar market installed 5.4 gigawatts of direct current (GWdc) of solar capacity in Q3 2021, reflecting a solid 33% increase from Q3 2020 and leading to installations record in the third quarter. We expect to see similar robust solar growth in the US going forward. US Energy Information predicts that solar will account for nearly half of planned 2022 electrical capacity additions in the United States. These impressive projections are indicative of the promising outlook for US solar stocks.

Lack of policy and unfavorable decisions could harm: With the cost of solar installation down more than 70% over the past decade and demand back on its usual path, it is high time for the US government to undertake advanced policies to promote sustainable growth of industry. SEIA report predicts industry will fail to meet targets to reduce CO2 emissions and achieve 100% clean energy by 2035 unless growth policies are adopted and implemented work by Congress. Additionally, in January 2022, the US Department of Justice appealed the US Court of International Trade’s Section 201 ruling that struck down the Trump administration’s efforts to raise solar tariffs. If the Court of International Trade rules in favor of the Department of Justice, it will be detrimental to the solar industry. The increase in the solar import tariff will drive up the cost of installations, thus hampering the growth trajectory of solar stocks.

Corporate investment to boost solar stocks: The rapid increase in corporate investment in solar power has boosted the US solar market. From rooftop systems for local hardware stores to solar parking canopies supporting corporate headquarters to large solar installations powering data centers, solar installations are as diverse and varied as the companies that offer them. Notably, data from the Renewable Energy Buyers Alliance (REBA) shows clean energy purchases by businesses in the United States hit a record 10.6 GW last year. In particular, tech giants are leading the way in terms of corporate investment in clean energy, including solar, with Amazon being the frontrunner. Although the crisis caused by the pandemic initially temporarily halted solar installation activities, the growing demand for carbon-free electricity has again fueled growth. Thus, there is already a gradual recovery in industry trends, which will accelerate once the COVID-19 risk subsides, thereby attracting increased business investment.

Zacks’ industry ranking reflects bleak outlook

The Zacks Solar industry is housed within the larger framework Zacks Oils-Energy sector. It currently carries a Zacks Industry Ranking of #188, which places it in the bottom 26% of over 250 Zacks industries.

That of the group Zacks Industry Ranking, which is essentially the average Zacks Ranking of all member stocks, indicates a bleak short-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of industries ranked by Zacks is due to a negative earnings outlook for the constituent companies overall.
Looking at revisions to overall earnings estimates, it appears analysts have lost confidence in the earnings growth potential of this group lately. Industry earnings estimates for the current fiscal year have fallen 10.5% since Oct. 31.

Before outlining some alternative energy stocks you might consider for your portfolio, let’s take a look at the industry’s recent stock performance and valuation picture.

The industry is lagging behind the S&P 500 and the sector

The solar industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year. Shares in this industry collectively lost 50.8% while the Oil & Energy sector and the Zacks S&P 500 composite rose 27.4% and 19.3% respectively during the same period.

Year-over-year price performance

Current industry assessment

Based on 12-month EV/EBITDA, which is commonly used to value solar stocks, the industry is currently trading at 28.89X compared to the S&P 500’s 15.39X and the sector’s 4.87X.

Over the past five years, the industry has traded as low as 88.30X, as low as 28.89X and at the median of 40.61X, as seen in the charts below.

EV-EBITDA ratio (TTM)

3 solar stocks to watch

Enphase Energy: Based in Fermont, Calif., Enphase designs, develops, manufactures and sells home energy solutions, while microinverters remain the company’s legacy product. At the beginning of the fourth quarter of 2021, the company introduced an all-in-one Enphase energy system with IQ8 solar microinverters for customers in North America. With IQ8 being Enphase’s smartest microinverter to date, this launch certainly broadens the company’s revenue growth prospects in the US.

The Zacks consensus estimate for Enphase earnings in 2022 has improved 15.2% over the past 90 days. ENPH shows a four-quarter earnings surprise of 29.49% on average. The company currently carries a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here. .

Awards & Consensus: ENPH

First Solar: Based in Tempe, AZ, First Solar is a leading global supplier of complete solar PV power solutions and specializes in the design, manufacture and sale of solar electric power modules. The company announced plans to increase its manufacturing capacity by 6.6 GW by building its third US manufacturing facility in Ohio. This should allow First Solar to retain its position as the leading US solar module manufacturer.

First Solar is currently posting a strong long-term earnings growth rate of 10.8%. FSLR has a four-quarter earnings surprise of 19.01% on average. The company currently carries a No. 3 Zacks rank.

Price and Consensus: FSLR

ReneSola: Based in Stamford, CT, ReneSola is a solar project developer and operator, with robust pipeline projects around the world. The United States continues to be an important and lucrative market for ReneSola. As of September 30, 2021, the company had mid-to-late-stage projects of 464 MW in the United States.

Zacks’ consensus estimate for ReneSola’s earnings in 2022 points to a 39% improvement over the previous year’s estimated figure. SOL is posting a four-quarter earnings surprise of 127.50% on average. The company currently carries a Zacks Rank #3

Price and Consensus: SOL

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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