The recent rally in some solar stocks has gone a little too far, providing “good exit points” for investors ahead of Election Day, according to UBS analyst Jon Windham.
“In our view, current valuations in the [alternative energy] sector offer an unattractive risk/reward opportunity given election uncertainty and the likelihood that even a Blue Wave election would result in less-than-priced-in policy support over the next year,” Windham wrote in a note to clients.
He cut his ratings on four stocks he covers to sell from neutral. With those downgrades, shares of JinkoSolar Holding Co. /zigman2/quotes/207601099/composite JKS -7.47% tumbled 9.4%, SunPower Corp. /zigman2/quotes/200243424/composite SPWR -8.37% slid 6.5%, SolarEdge Technologies Inc. /zigman2/quotes/207754270/composite SEDG -7.73% dropped 5.2% and Sunrun Inc. /zigman2/quotes/205021014/composite RUN -7.32% shed 1.7%.
Despite the declines, JinkoSolar’s stock has still nearly tripled (up 190%) over the past three months and SunPower shares have more than doubled (up 120%), while SolarEdge shares have rallied 43% and Sunrun’s stock has run up 30%. In comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX -2.45% has gained 4.9% over the same time.
Windham said the main risk is that current valuations seem to reflect campaign platform optimism, if former Vice President Joe Biden is elected president, more than the reality of policy implementation over the next four years.
“It appears the residential solar stocks are not only discounting a Biden win, but also the campaign platform becoming actual policy,” Windham wrote. “Federal policy implementation mechanisms remain unclear, and we expect a more muted ‘policy reality’ given the high level of local (net Federal) control of electricity regulation and subsidies.”
He reiterated his neutral ratings on Canadian Solar Inc. /zigman2/quotes/205481506/composite CSIQ -6.44% , Ormat Technologies Inc. /zigman2/quotes/207188294/composite ORA -13.09% and Hannon Armstrong Sustainable Infrastructure Capital Inc. /zigman2/quotes/201124237/composite HASI -5.98% , and kept his buy ratings on TPI Composites Inc. /zigman2/quotes/207797536/composite TPIC -6.53% , First Solar Inc. /zigman2/quotes/209356097/composite FSLR -7.53% and Generac Holdings Inc. /zigman2/quotes/208144117/composite GNRC -2.18%
Investors can expect the election to create some near-term volatility in solar stocks, Windham said, and therefore prefers “cautious positioning” given the elevated valuation levels.
Despite those near-term valuation concerns, Windham believes demand for home energy resiliency and investor demand for environmental, social and governance (ESG) stocks will be long lasting, leading to higher price targets on the stocks he covers, by an average of about 37%, including on the stocks he downgraded.