Solar has been a difficult sector for investors for more than two years. The largest solar exchange traded fund, Invesco’s Solar ETF (ticker: TAN), is down more than 23% for the year to date through 9/15/2024. This compares to a 19% positive total return for the broader stock market as measured by the S&P 500 Index year to date. Since its peak in early 2021, the TAN has declined more than 65% versus a more than 50% total return for the S&P 500 Index over the same time period.
First, we want to highlight that Essex’s Global Environmental Opportunities Strategy (“GEOS”) invests far more broadly than just solar and renewable energy. In fact, solar stocks typically account for less than 10% of our portfolio. Many solar stocks are trading vehicles rather than long term investments; the industry is highly competitive with little differentiation in products leading to sub-par returns on capital. In our GEOS portfolio, we invest across eight other environmental themes besides renewable energy, including efficient transport, power technology, agricultural productivity, clean water, environmental finance, etc.
Having said that, we do find some solar stocks more attractive than they have been in some time. Clearly, the group is highly out of favor and is under owned by most generalist portfolio managers. Our opinion is that much of the bad news has been priced into the some of the solar stocks and many of the headwinds the industry has faced are dissipating.
We believe that the sharp underperformance of solar stocks over the past several years is due to a plethora of issues that have impacted the industry’s growth and profitability:
- Increasing interest rates
- Inflationary pressures
- Changes to state and local “net metering rules” which determine the rate at which home owners with solar panels can resell excess electricity to the grid
- A glut of panel supply from China which has led to irrational pricing
- Geopolitical tensions which has led to tariffs on solar panel imports
- Permitting delays and related power equipment shortages which have caused grid connection bottlenecks at utility scale solar projects
- And most recently, concerns around the repeal of the Inflation Reduction Act (IRA) which contains a number of positives for solar energy
Looking at this list, we believe that many of the issues are clearing up:
- Interest rates have moderated and are expected to fall
- The residential solar market is digesting and adapting to the changes to the net metering rules
- The backlog in utility scale permitting and interconnection is starting to clear up.
- We think the repeal of the entirety of the IRA is unlikely, regardless of the Presidential election outcome
Most importantly, we are all realizing that power demand is rising due to a number of drivers: the growth in energy-intensive data centers with the boom in AI, the on-shoring of manufacturing, and the increasing penetration of electrical vehicles (despite the near term slowdown in growth).
In our view, solar, renewable energy and the entire clean energy topic has become too politicized. As noted in our first list above, one of the most significant issues right now for solar is the upcoming election and the pervasive fear about the future of the IRA. We think full repeal is unlikely as many aspects of both solar project development and domestic equipment manufacturing are positive for job creation and have bipartisan support. The areas most likely to face repeal are Electric Vehicle incentives and off-shore wind subsidies, which will not impact solar stocks. This polarization is creating some interesting investment opportunities. Ironically, despite the strong “pro-environmental” rhetoric from the Democrats, solar stocks and clean energy stocks have actually performed better under the Trump administration than the Biden administration. It is time to sharpen your pencils and dig into solar stocks.
Disclosures:
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.
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