By Philip van Doorn
Solar stocks have burned some short-term investors, but they represent a long-term opportunity for those who expect a successful transition to a clean, sustainable source of electricity for homes and businesses.
To illustrate how volatile the sector can be, the Invesco Solar ETF /zigman2/quotes/210041821/composite TAN +3.73% is up 42% this year. But it was down 37% through the end of September from its 52-week intraday high set on Jan. 25. The ETF has retuned 473% for five years,
In an interview, Andrew Wetzel, a portfolio manager at F.L.Putnam Investment Management Co., discussed six stocks, including four solar plays and a utility company with a leading role in constructing solar arrays.
F.L.Putnam Investment Management Co. is based in Wellesley, Mass., and has $4.1 billion in assets under management. Wetzel, the firm’s managing director of sustainable investing, runs three related strategies:
A low-carbon “core” strategy across industries and market sectors, which typically holds 45 to 55 stocks.
An environmental opportunity strategy, which includes early-stage companies and special purpose acquisition companies (SPACs). Wetzel referred to this as the concentrated strategy; it can hold between 30 and 60 stocks.
A “diversified environmental strategy” combining the first two.
When discussing the “big picture” for investors who are interested in solar, Wetzel pointed to NextEra Energy Inc. /zigman2/quotes/200558509/composite NEE +2.17% , which he called “the largest builder or one of the largest builders of solar and wind assets in the U.S.,” and the NextEra Energy Limited Partners LP /zigman2/quotes/203407911/composite NEP +0.75% , which owns solar and wind assets that NextEra Energy Inc. has developed and is designed as an income vehicle, with a current distribution yield of 3.15% on the partnership units.
NextEra’s total return over the past 10 years has been 722%, making it the best performer in the S&P 500 utilities sector for the period.
Four solar stocks
Wetzel discussed four stocks narrowly focused on solar: Sunrun Inc. /zigman2/quotes/205021014/composite RUN +9.36% and Sunnova Energy International Inc. /zigman2/quotes/213414922/composite NOVA +7.19% , which install equipment and arrange financing for customers; and Enphase Energy Inc. /zigman2/quotes/207948472/composite ENPH +4.96% and SolarEdge Technologies Inc. /zigman2/quotes/207754270/composite SEDG +5.03% , which make solar inverters and monitoring systems.
Here are consensus sales estimates (in millions of dollars) for calendar years through 2025 among analysts polled by FactSet, along with expected compound annual growth rates (CAGR) for sales, for the four:
|Company||Est. sales – 2021||Est. sales – 2022||Est. sales – 2023||Est. sales – 2024||Est. sales – 2025||Two-year est. sales CAGR||Three-year est. sales CAGR||Four-year est. sales CAGR|
|Sunrun Inc. /zigman2/quotes/205021014/composite RUN||$1,561||$1,815||$2,057||$2,511||$2,777||14.8%||17.2%||15.5%|
|Sunnova Energy International Inc. /zigman2/quotes/213414922/composite NOVA||$241||$343||$478||$656||$797||40.8%||39.7%||34.9%|
|Enphase Energy Inc. /zigman2/quotes/207948472/composite ENPH||$1,368||$1,893||$2,383||$2,829||$3,452||32.0%||27.4%||26.0%|
|SolarEdge Technologies Inc. /zigman2/quotes/207754270/composite SEDG||$1,970||$2,562||$3,104||$3,543||$5,021||25.5%||21.6%||26.4%|
Those are high expected double-digit growth rates. In comparison, the two-year expected sales CAGR are 5.8% for the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.04% and 11.1% for the Nasdaq-100 Index (tracked by the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ +1.62% ), which is as far out as FactSet’s index estimates go.
Wetzel described Sunrun and Sunnova as “very complex businesses that involve outside financing.”
Rising interest rates can hurt those stocks over short periods. Then again, even when the Federal Reserve begins to allow short-term interest rates to rise and curtails its bond purchases to allow long-term rates to rise, borrowing costs might remain relatively low, as they have since the financial crisis of 2008.
Sunrun provides solar installation and maintenance services mostly in the consumer/residential space, while Sunnova “is more of a dealer model,” Wetzel said.