Our theme on Solar Stocks – which includes solar panel manufacturers, systems installers, and component suppliers – has declined by about 30% year-to-date in 2023, compared to the S&P 500 which has gained about 18% over the same period. While solar stocks fared well through the coronavirus pandemic driven by government stimulus and easy monetary policy, surging interest rates appear to have put the brakes on growth. Higher rates have made financing rooftop solar projects more expensive and less viable versus energy from the grid. This has been particularly true in states with low electricity costs, such as Arizona and Texas. Moreover, policy-related headwinds, namely the changes to the net metering policy in California – the U.S. state with the largest solar installations – appear to have impacted stocks that are dependent on the residential market. The lull in the residential rooftop solar market has translated into tough earnings and mixed short-term outlooks for players such as SunPower (NASDAQ:SPWR), Enphase Energy (NASDAQ:ENPH) and SolarEdge (NASDAQ:SEDG) . For example, Enphase Energy has guided that it expects sales for Q3 to come in between $550 and $600 million, marking a decline of about 20% from $711 million in Q2.
Notably, SPWR stock had a Sharpe Ratio of 0.4 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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 in August 2022 and carries about $370 billion in subsidies and credits for clean energy investment. For example, First Solar (NASDAQ:FSLR) will emerge as a big beneficiary of the U.S. efforts to encourage domestic renewables production, with the panel maker expecting to receive as much as $710 million this year in subsidies. 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. 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.
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Within the theme, First Solar has been the strongest performer, with its stock rising by 28% 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 60% year-to-date.
|S&P 500 Return||0%||18%||102%|
|Trefis Reinforced Value Portfolio||1%||32%||580%|
 Month-to-date and year-to-date as of 9/3/2023
 Cumulative total returns since the end of 2016