Over the past two years or so, the clean energy sector has been a major laggard with investors giving it a wide berth. The iShares Global Clean Energy ETF (ICLN), a catch-all bet on clean energy, is trading 36% below its January 2021 all-time high after a major rally fueled by ESG optimism drove many stocks in the sector to record highs and stratospheric valuations.
The renewable energy sector is having to contend with yet another formidable foe: rising interest rates. Renewable energy projects tend to be sensitive to high interest rates due to their high upfront costs and long useful lives, in effect meaning they can be financed for decades. Rising interest rates makes future cash flows less valuable thus lowering the value of renewable energy projects. That’s a big reason why renewable energy stocks have continued performing poorly.
That said, there’s a standout industry in this sea of mediocrity: the solar sector. Solar stocks have been on steady climb from their May lows after the sector received a series of positive catalysts.
First off, news emerged in July that China is considering a $220B stimulus package to shore up its sluggish economy followed shortly by the U.S. and Canada announcing a memorandum of understanding that would lift tariffs on Canadian solar products. But the biggest and most important development was the passing of the historic climate bill dubbed the Inflation Reduction Act in August.
According to the American Clean Power Association, IRA could more than triple clean energy production, cut emissions by 40% by 2030, and create 550,000 clean energy jobs. A major goal of IRA–the largest federal government spending increase on alternative energy in U.S. history–is to strengthen energy independence, reduce dependence on Chinese imports, and reinvigorate the industrial sector.
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The solar sector in particular has grown red-hot after a White House statement said the U.S. is on track to triple domestic solar manufacturing capacity by 2024: First Solar Inc. (NASDAQ: FSLR) stock has soared 56% since the IRA passed muster; Enphase Energy (NASDAQ: ENPH) has climbed 34% in that time, SunPower Corp. (NASDAQ: SPWR) has jumped 66%, Canadian Solar (NASDAQ: CSIQ) has gained 29% while Sunrun Inc. (NASDAQ: RUN) has surged 48%.
In fact, solar is now the top-ranked sector: IBD’s “Energy-Solar” industry group holds the No. 1 spot out of 197 industry groups tracked. IBD industry groups are a combination of companies in the same business.
Key to the passage of the IRA bill was the Solar Energy Manufacturing for America Act. The new act creates fresh tax credits designed to rapidly expand domestic solar production and also bring key solar supply chains online. According to Abigail Ross Hopper, president and chief executive of the Solar Energy Industries Association, the bill intends to accelerate the transition to clean energy..
“The act will immediately spur private investments in production capacity across the solar supply chain, including batteries, helping to create thousands of manufacturing jobs and support our energy independence,” Hopper said in written remarks after the act was passed.
The act also “includes important incentives that will, over time, lead to a renaissance in American solar manufacturing. As a direct result of the IRA, we expect to see significant new investments in domestic solar module, tracker, inverter and racking capacity within the next 2-3 years, followed by new investments in solar ingot, wafer and cell capacity within 3-5 years,” according to the solar energy association.
Key beneficiaries of the IRA bill include First Solar, which manufactures solar modules for residences and businesses worldwide.
“For the first time, solar manufacturers would benefit from a durable, long-term industrial policy designed to revitalize and expand domestic manufacturing and innovation at scale,” First Solar CEO Mark Widmar has declared in a written statement.
Guggenheim has raised FSLR stock to Buy from Neutral with a $135 price target while J.P. Morgan has upgraded it to Overweight from Neutral with a $126 price target, up from $83. FSLR stock was trading at $127.18 in Tuesday’s intraday session.
“Of all the names in our coverage, we believe First Solar appears positioned to benefit the most from the provisions of the Inflation Reduction Act that passed the Senate. Investors have not fully digested how transformational the IRA could be for FSLR’s business,” Guggenheim’s Joseph Osha has written in a note to clients.
Meanwhile, Needham has picked First Solar and Sunrun Inc. as the biggest beneficiaries in the near term and added that Enphase Energy Inc. and SolarEdge Inc. (NASDAQ: SEDG) will also benefit from higher government spending and more solar adoption.
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Meanwhile, analysts at Piper Sandler have upgraded Array Technologies Inc. (NASDAQ: ARRY) shares to Overweight from Neutral with a $28 price target, good for 67% upside, saying they foresee an improved forward outlook for the renewable energy firm.
The analysts say they believe the company’s $1.9B order book, along with historical book-to-bill ratios, lay the foundation for a strong revenue and EBITDA growth going into CY 2023. The analyst also sees the solar tracking systems manufacturer as a beneficiary of domestic content requirements and manufacturing credits in the IRA.
Array Technologies designs and manufactures solar ground monitoring systems. The company went public in October 2020 and managed to surge 45% on its first day of trading despite its upsized IPO pricing. The IPO valued the company at about $2.79 billion, but the scorching rally nearly doubled that to $5B. Unfortunately, missed profit expectations have seen ARRY shares fall out of favor with the investing universe and the company now sports a market cap of just $2.6B.