Clean Energy Stocks Making Progress on Wall Street

They call it the solar roller coaster: the long history of solar stocks rallying in one renewable energy renaissance after another. The rallies collapse, again and again, as the industry butts into a glut of Chinese solar panels here, a natural gas price collapse there.

But going into 2019, the consensus held that the solar industry had changed. Leading utilities and corporations had begun crowding into large solar energy projects as profit scenarios grew compelling. Some of the world's largest institutional investors were paring oil exposure and pouring billions of dollars into renewable energy assets. At the same time, new sources of financing were spurring demand for both residential and community solar projects.

The 16 solar energy stocks in IBD's Energy-Solar industry group rebounded 30.7% in the first quarter, after losing 24.9% of their value in 2018 as tariffs and pricing issues rattled the market. The gains continued in the second quarter. As of Thursday, solar stocks held a year-to-date gainof 77.3%. The industry group ranked No. 3 among the 197 industry groups tracked by IBD.

Among the U.S.-based leaders, First Solar (FSLR) is up 54.6% since the start of the year. Sunrun(RUN) has a 73.5% gain. SunPower (SPWR) started below 5 and has soared 106.6%, while Enphase (ENPH) — one of the group's biggest winners in 2018 — is up 324.5%. Enphase stock is working toward its seventh-straight monthly advance. Israel-based SolarEdge (SEDG), which declined in 2018, recovered with an 80.2% gain.

How much upside is left? Growth among the solar industry's three major market segments is shifting but, overall, is intact. Analysts who follow solar power stocks see strength continuing well into 2020.

Best Solar Stocks 2019

Company Symbol IBD Composite Rating 2019 Gain (YTD)* 2019 EPS Growth Est.* 2020 EPS Growth Est.*
SolarEdge (SEDG) 98 80% 0% 16%
Enphase (ENPH) 95 325% 410% 31%
Jinko Solar (JKS) 89 57% 20% 24%
First Solar (FSLR) 72 55% 79% 47%
Sunrun (RUN) 74 74% 113% 41%
Canadian Solar (CSIQ) 68 40% -31% 18%
SunPower (SPWR) 64 107% NA 200%
*As of July 25, 2019
See IBD Stock Checkup for more fundamental and technical data on each company. 

Volatility Of Solar Companies

Cowen & Co. analyst Jeff Osborne contends the solar roller coaster may be turning onto a smoother track where solar energy stocks may provide a less gut-wrenching ride for investors.

“We see the solar complex shifting from an erratic, heavily subsidized sector toward a maturing industrial growth market with more predictable cash flow and profitability profile,” Cowen wrote in a July 12 report.

Solar power has ranked as the first- or second-largest source of new power generation capacity installed in the U.S. in each of the past six years, according to the Solar Energy Industries Association, or SEIA.

The U.S. solar industry operates in three basic markets: residential, nonresidential and utility-scale. Utility-scale represents about two-thirds of the industry, both in terms of new projects and installed capacity. Residential and nonresidential weigh in at around 15% apiece.

In 2018, the industry installed 2.4 gigawatts of residential solar, 2.1 GW of nonresidential and 6.1 GW of utility-scale power capacity, according to senior solar analyst Michelle Davis with Wood Mackenzie. A gigawatt is 1,000 megawatts. One megawatt can power around 750 homes.

The nonresidential market, also called the distributed market, has two segments. Commercial nonresidential is essentially power plants or units providing backup power for specific companies or facilities. The other nonresidential market is community solar. These tend to be larger projects, more than 1 MW, set up to serve communities or collectives of residential and business consumers.

Markets Served by Solar Stocks 2019

Different solar energy stocks serve different portions of the market. SolarEdge and Enphase make inverters that transform the DC power produced by solar panels into AC power. Enphase does not sell products to the utility or commercial markets. SolarEdge has moved into commercial but is not yet in the utility market.

Osborne expects a utility-scale inverter from SolarEdge in the first half of 2020. Both solar stocks likely will benefit from rising sales of solar-plus-storage systems, which Osborne says could drive Enphase's average sales ticket per home from its current $2,000 level toward $10,000.

First Solar specializes in high-efficiency thin-film solar panels used mainly in utility-scale and some commercial installations. SunPower's energy-services unit designs, sells, installs and maintains solar power systems in residential and commercial settings. The company's technologies unit makes solar panels, components and systems, and includes a project-development business, which handles large-scale solar systems.

Sunrun and Vivint (VSLR) both sell and lease solar installations to residential customers.

Smart Money In Solar Energy Stocks

Institutional investors have become a driving force both in solar stocks and the industry itself, part of a massive movement into renewable energy.

In June, Norway's $1 trillion sovereign wealth fund — Government Pension Fund Global, one of the largest in the world — got clearance to pare more than $13 billion from oil, gas and coal-related investments. It plans to up its stakes in renewable energy projects and companies to as much as $20 billion. Some $14 billion of that reportedly is earmarked for solar investment and wind power.

The fund, founded on dollars earned from North Sea oil and gas, had stakes of around 1% in Anadarko Petroleum (APC), Occidental Petroleum (OXY) and EOG Resources (EOG). It plans to keep some investments in downstream oil and gas operations.

In March, Saudi Arabia's Public Investment Fund sold what was reportedly its only oil-related asset, chemicals producer Saudi Basic Industries, for $69.1 billion. The fund, with assets of more than $300 billion, joined Norway's fund, the Abu Dhabi Investment Authority and Qatar Investment Authority in agreeing to the One Planet investment framework. The initiative makes climate change considerations a priority in directing investment capital — a positive sign for the wind and solar industries.

Saudi Arabia has since tendered proposal requests for solar projects totaling 3.1 gigawatts. That is in addition to a project underway with Japan's SoftBank (SFTBY) to build a $1.2 billion solar project in Saudi Arabia. The Saudis also cranked up their renewable energy target to 27.3 GW of the country's total energy capacity by 2023, up from an original target of 9.5 GW. They set a goal of 58.7 GW by 2030.

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Other Solar Investment

In the U.S., BlackRock announced July 17 that its $50 billion Real Assets unit is buying 80% of the General Electric (GE) solar business and breaking it off as a separate company named Distributed Solar Development. Distributed Solar will focus on “solar and storage solutions for the commercial industrial and public sectors.”

In 2018, private equity funds with sovereign wealth investors poured $5.81 billion into renewable energy.

The sovereign wealth funds invest largely through other funds, Osborne says. Insurance companies also have piled into solar investment, primarily through banks or other asset managers. Also important in the industry are other independent asset managers, like Capital Dynamics, “which is a big one that First Solar deals with in particular,” Osborne said.

More solar investment is coming from large utilities. Florida-based NextEra (NEE) has said it won't build gas-fired facilities after 2020. Plans call for pairing all of its renewable assets with very large scale batteries.

New York's Consolidated Edison (ED), North Carolina-based Duke Energy (DUK) and Virginia-based Dominion Energy (D) have all become big names in solar energy.

Community Solar Projects

One solar market has grown rapidly in recent years but faces a slowdown in 2019: community solar facilities.

Community solar projects look very much like a utility-scale project, generally 1 to 5 MW, says Shawn Rumery, director of research at the Solar Energy Industries Association.

“The difference is, instead of having one electricity off-taker like a utility, they will have multiple off-takers, sometimes several hundred or upwards of a thousand,” Rumery said.

Those off-takers are typically residential homeowners or commercial businesses. The projects don't exist in every state. Massachusetts, New York, Minnesota and Colorado are the four leading states for community solar projects. Supporting legislation is in place in 15 more states.

“These are not necessarily incentives,” Rumery said, “but the creation of a market. The state or utility needs to basically say: We're going to do this before that market can exist.”

But after several years that ramped total community solar capacity across the U.S. to 1,357 MW, “2019 is going to be a year when commercial solar actually slows down,” said Davis at Wood Mackenzie. Many of the largest state programs are expiring or phasing down. This has added pressure to this year's outlook for some solar stocks, such as SunPower.

New Commercial Solar Demand

Another piece of the nonresidential market served by solar stocks — commercial installations — is set for stronger growth.

The segment had a banner year in 2018. A “corporate solar renaissance” drove 2.4 GW of installations during the year, more than all prior years combined (1.6 GW).

Over the last decade, retail chains with vast rooftop real estate like Walmart (WMT) and Target(TGT) moved to adopt solar.

“But the shift that we've seen over the past two or three years is very large corporates like Amazon (AMZN) or Apple (AAPL) or Google (GOOGL) finding ways to make investments in utility-scale projects,” Rumery said.

Apple And Amazon Renewable Energy Projects

Also in the commercial market, in April last year Apple announced it had installed enough renewable and other capacity to declare that the company was 100% powered globally by clean electricity. The facilities include solar power, wind and emerging technologies like biogas fuel cells, micro-hydro generation systems and energy storage technologies.

Apple also said nine of its manufacturing partners agreed to a similar goal. The SEIA reported July 24 that Apple is the largest corporate adopter of solar power in the U.S., with almost 400 MW of installed capacity.

In February, Amazon pledged to report its progress on renewable power by the end of the year. The company previously set plans to power 100% of its infrastructure with clean energy, and to make half of its retail deliveries carbon neutral by 2030.

The newer corporate solar projects are weighing in at sizes as large as 200 MW. Generally, projects of that scale have utilities as “off-takers.” The new corporate users point to an expanding area of demand, particularly for solar stocks such as First Solar and SunPower, and to a lesser degree, Enphase.

“It also represents kind of a shift in the buyer in that marketplace,” Rumery said. “It puts corporates in a position where they can hopefully advocate more effectively on behalf of renewables.”

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Solar Panel Tariff

Solar stocks should see a broad rebound in their markets in the second half of 2019, after being hit by U.S.-China trade tariff concerns in 2018.

“In 2018, the market for utility-scale solar was basically flat, because there were a lot of projects put on hold because of the section 201 tariffs,” Davis said.

The U.S. Trade Representative's office imposed a 30% tariff on imported solar cells and modules in January 2018. The tariff came in response to complaints filed by U.S. manufacturers Suniva and SolarWorld Americas. (SunPower acquired SolarWorld in October.)

A first round of exclusions from the tariffs, which took effect in September, exempted many of SunPower's panels from the duty. The tariffs are typically based on certain types of technologies and materials. SunPower said it had been paying $1.5 million to $2 million per week due to the tariffs. SunPower stock spiked 17.8% the week of the exemption announcement.

The second round of exemptions, announced in June and which the USTR promised would be the last, eliminated tariffs on bi-facial modules. The two-sided panels are a small, but fast-growing market. The bi-facial panels generate power from both faces. Most are made overseas. Longi, LG, Trina and Yingli are among the top producers.

Solar Tax Incentives

Now, the uncertainty over the 201 tariffs is past. Solar energy stocks look forward to a likely sharp rise in panel sales to utility, commercial and residential solar customers in the second half of 2019 and beyond. Buyers will be motivated to lock in steep tax benefits as the solar investment tax credit prepares to ramp down.

Buyers of solar panels currently receive a 30% tax credit, enacted in 2006. The credit steps down to 26% in 2020 and 22% in 2021.

Solar customers that aren't ready to build projects or install systems can lock in the benefit by buying the systems ahead of the ramp-down date.

But one twist of the tax credit is in its final stage. The credit shifts to zero for customer-owned systems in 2022, so buyers who pay cash or take out loans to buy their systems will receive no benefit. Third party-owned systems, however, will still enjoy a 10% credit. This benefit extends indefinitely.

This “has interesting implications for the financing landscape for residential solar, because companies (that finance residential customer systems) like Sunrun, Tesla (TSLA) and Vivint will actually be able to take advantage of an extra 10% in the ITC,” Davis said, even though their customers won't be eligible for credits.

Another twist arose Thursday, when lawmakers in both the U.S. House and Senate introduced companion bills seeking to extend the full 30% solar ITC for five years.

California Solar Energy Mandate

One more factor driving upbeat forecasts for solar stocks is California's new residential solar mandate. Starting in 2020, every new home built in the state must have a solar system.

The California Energy Commission and California Building Standards Commission approved the law in late 2018. It “represents a far-reaching and one-of-a-kind requirement for solar,” according to a June 17 report from Goldman Sachs.

California is — by a long shot — the largest U.S. solar market. It represents about 40% of solar sales. The state saw 80,000 single-family home starts in 2018, and the California Energy Commission estimates the total opportunity in 2020 to be 130,000 units. The mandate applies to all single-family homes less than three stories high, and includes low-rise multifamily residences.

Goldman estimates the new rule could mean an additional 350 MW to 700 MW of residential installations per year. It projects demand will start to materialize for those 2020 projects in the current quarter. The larger question for solar power stocks is whether states will follow California's lead.

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Solar Power Battery Storage, Grid-Scale Potential

Solar-plus-storage systems are another positive for solar stocks. The fast-growing industry segment provides a new market for manufacturers and installers. It also moves solar into a position to compete directly with traditional utilities supplying power to the grid.

In 2017, 3% to 4% of all systems installed in the residential and commercial solar markets were paired with storage, Rumery says. In 2019, the SEIA expects that number to grow to 7%. By 2023, the trade group projects that close to a quarter of all systems will be paired with energy storage.

“It's something that is really going to be a game changer for the market, and for the grid in many ways,” Rumery said.

Solar power, combined with high-efficiency battery storage, allows electricity produced in the day to be stored for use after dark or during peak power periods. Solar panels combined with batteries are nothing new. But advances in battery capacity now mean more power can be stored for longer periods of time.

Tesla's Powerwall and Powerpack products, and Korea's LG Chem currently dominate the market, Osborne says. Another leader, in Europe, is Germany's Sonnen, which was acquired by petroleum giant Royal Dutch Shell (RDSA) in March.

Storage smoothes out the solar supply for homes and businesses, providing the potential to remain entirely off the power grid. But the brass ring for solar-plus-storage operators is to act as suppliers of peak energy power to the grid.

Sunrun in February won a milestone contract, agreeing to provide 20 MW of power to the grid from its Brightbox residential storage systems. Brightbox is based on an LG Chem battery. The batteries collectively managed by the company will act as a peak power plant, on call 24 hours a day, to provide power when needed by the grid administrator. The contract takes effect in 2022. It's worth a little more than $900,000 a year.

“That's sort of where we're going with this whole ecosystem, of solar and storage combined,” Osborne said.

China Solar Industry Dominance

No discussion of solar stocks can get around some mention of China, the country that strategically maneuvered to dominate the global solar trade. The office of the U.S. Trade Representative reported last year that China solar cells grew from 7% in 2005 to 60% of the world's solar cell production. It said that share would hit 71% of solar modules by early 2018.

China continues to install the most solar generation capacity in the world. Its total installed capacity is now more than 174.6 GW, according to the China Photovoltaic Industry Association. That is more than three times that of the U.S.

The country is also the global powerhouse for solar module manufacturing. Upward of 60% of solar modules installed in the U.S. are made overseas, mostly in China.

“In the U.S., we're looking at a projected 13 GW of (annual) installation. And there is nowhere near that module manufacturing capacity to support that in the U.S.,” Rumery said.

China Solar Stocks

Some of the Chinese companies producing those panels trade on U.S. exchanges. Jinko Solar(JKS) and Canadian Solar (CSIQ) are the top names among China's solar stocks. Although it is incorporated in Canada, Canadian Solar was established in China and has nearly all of its operations in China.

Many of the familiar China-based solar stocks that once traded on U.S. markets, like Trina Solar and JA Solar, went private over the past few years. Some, like Longi — one of China's biggest solar players — still trade on markets in China.

Despite its heavyweight title, China slowed its solar installations 18% in 2018. Regulators said the move was an attempt to catch up on a backlog of subsidies, after a boom year of 53 GW of new capacity installed in 2017. An oversupply of solar modules built up, pressuring prices — although the U.S. tariffs ameliorated some of that effect.

Outlook For Solar Stocks 2019 And Beyond

For 2019, China's solar market is slower. U.S. community solar projects are expected to be slower. But the combination of utility-scale, residential and commercial drivers are expected to fuel continued growth for solar power stocks.

“We expect utility-scale solar to grow substantially in 2019 and 2020,” Davis said. “Even though the nonresidential segment is expected to drop this year, in 2019, we expect the market as a whole to grow substantially — about 30%.”

Cowen's Osborne anticipates about 20% upside to share prices across First Solar, SunPower, SolarEdge and Enphase.

First Solar stock is a difficult call because it is backlogged, with its production sold out through 2020. Investors will be looking for potential margin improvement as the company rolls out its new, larger footprint S6 modules. First Solar has not yet announced a Q2 reporting date.

Enphase reports earnings on July 30. The next day, SunPower earnings are due. On Aug. 7, Sunrun plans to report financial results.

Solar Energy Growth Forecast

The larger question for solar stocks is how the industry rally plays out. Is this inflection point different from past up legs of the solar coaster?

Osborne weighs in on the side of solar as a “maturing industrial growth market.”

Rumery says it's not a tipping point, but rather the cumulative effect of consistent and steady growth over the past decade.

“Over that decade, the solar industry has grown by an average annual rate of 50% each year,” Rumery said. “That growth rate is expected to slow over the next decade, because the industry is maturing. Over the next five years, we are still looking at an average annual growth rate of 10%.”

Read more at Investor's Business Daily.

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