Solar Stocks Dim This Year After Luminous 2020

It was only a few months ago that investors and journalists were touting the strong performance of solar energy stocks like SolarEdge NASDAQ: SEDG, SunPower NASDAQ: SPWR and Enphase Energy NASDAQ: ENPH.

Late last year and early this year, solar stocks were all the rage as investors were optimistic about the Biden administration implementing alternative energy policies and subsidies.

While it’s still true that the president’s $2 billion infrastructure bill could benefit alternative energy companies, the road toward greater reliance on solar is likely to be bumpy. 

For example, news outlets are reporting that solar panel manufacturing, much of it done in China, may rely on forced labor from the Uyghur people, as well as other groups, in the Xinjiang region.

In April, the U.S. Solar Energy Industries Association published a 40-page guide to help solar manufacturers identity supply chain inputs and track items’ movements through the chain. 

That’s not the only hurdle the industry is facing. Reports of supply-chain shortages are rampant in many industries now, and you can add the solar industry to that list. 

The well-publicized chip shortage is having an effect on solar panel shipments, despite growing demand for renewable energy at homes and businesses worldwide. 

As a group, solar stocks are down 41% since the end of January, far exceeding broader market weakness. 

The Invesco Solar ETF NYSEARCA: TAN, which tracks the MAC Global Solar Energy Stock Index, is down 30.60% year-to-date and down -38.36 over the past three months, as it chips away at its 233.95% gain from 2020. 

So far in May, it’s down 16.58. 

Its most heavily weighted components are Enphase, SolarEdge, SunPower. These three stocks, which comprise more than 25% of fund assets, so their performance will have an outsized effect on the fund’s return. 

Enphase reported its first quarter on April 27, and immediately gapped down 14%, despite growth of 47% on both the top and bottom lines. It’s now down 14.96% for the month of May, and 32.51% year-to-date. 

Demand remains strong, but supply chain constraints sent the stock lower. In the earnings call, CEO Badri Kothandaraman said the company is expanding its manufacturing capabilities in Mexico and India. 

“We remain supply-constrained for Q2,” he said. 

He added that component availability is improving, but not at the rate of growth in demand.

“We're obviously pleased with the overall demand but we are cautious about the supply situation, which is not very predictable today,” he said. 

SolarEdge also gapped down following its earnings report, dropping 15.95% on May 4. This month, shares are down 17.28%. 

The decline follows a one-year return of 81.01%. 

In this case, the company cited yet another supply-chain constraint: Higher shipping costs. In the earnings call, CEO Zvi Lando said ocean freight costs more than doubled over the past several months. 

First-quarter earnings came in at $0.98 per share, up 3% year-over-year. Revenue was $405.5 million, down 3% from the year-ago quarter, but topping analyst estimates. 

Analysts expect earnings to decline this year, to $3.82 per share, down 7% from 2020.  

If you’re sensing a theme here when it comes to the recent performance of solar stocks, you’ll notice that it holds true with SunPower. The stock is down 14.39 % year-to-date, and 49.67%  in the past three months. 

The stock’s downward trajectory was well underway by the time the company reported its first quarter early this month.  In the earnings call, the company cited strength in the quarter. It briefly acknowledged cost increases in freight and materials. 

The company offered revenue guidance for a range between$295 and $345, with analysts’ consensus estimate being $334.15 million. 

Earnings per share in the quarter came in at $0.05, up from a loss of $0.09 per share a year ago. 

While the long-term prospects for the solar power industry certainly appear bright, these stocks are not ripe for purchasing at this point, as they appear to be continuing their downward slides. It’s best to wait until they have clearly begun a fresh rally, ideally in tandem with a strong marketwide uptrend.