This Renewables Theme Is Down Despite Many Tailwinds. Time To Buy?

Our theme on Solar Stocks – which includes solar panel manufacturers, systems installers, and component suppliers –  has declined by about 1% year-to-date in 2023, almost in line with the S&P 500 which has remained roughly flat over the same period. Although the theme hasn’t fared too well, there have actually multiple positive developments for the 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. The incentives have resulted in a considerable amount of new clean-energy project announcements. Moreover, fourth-quarter earnings from many solar players have been pretty strong. For instance, solar micro inverter maker Enphase Energy (NASDAQ:ENPH) saw revenue top estimates, rising by 75% year-over-year to $724.65 million, while solar panel manufacturer First Solar (NASDAQ:FSLR) too beat earnings estimates. Supply chain snags that hit most industries have also been easing this year and this could help solar companies. There are some other macro factors that could help the renewables theme. Inflation has been cooling. For the month of March, the Cleveland Fed projects inflation at 5.37%, down from about 6.4% in January and a recent peak of almost 9% in June 2022. The Federal Reserve has also scaled back on the pace of its interest rate hikes. The most recent hike stood at 0.25%, down from multiple rate hikes of 0.75% last year, and it is unlikely that there will be a hike in March. Although the federal funds rate is at a multi-year high, a slower pace of rate hikes is a net positive for renewable project financing.

Within the theme, First Solar has been the strongest performer, with its stock rising by 42% year-to-date. On the other side, SunPower (NASDAQ:SPWR) has been the weakest performer, with its stock declining by about 19% year-to-date. NextEra Energy (NYSE:NEE), one of the largest U.S. utilities by market cap and the single largest owner of solar generation capacity outside China, also fared poorly, with its stock down 13% year-to-date.

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[1] Month-to-date and year-to-date as of 3/13/2023
[2] Cumulative total returns since the end of 2016

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