Best stocks are solar according to experts
After many months of weak performance, solar stocks are turning around. For the rest of 2021, Wall Street analysts have selected their top selections.
After several days of volatile trading, the Invesco Solar exchange-traded fund, which trades under the ticker TAN, finished the week flat. In June, the fund gained nearly 13%, snapping a four-month losing streak and posting its best month of the year.
Shares are still down more than 14 percent for the year, but this follows TAN’s eye-popping 233 percent gain in 2020 as investors piled into clean energy plays.
Stretched valuations, rising rates, and supply chain issues have all been cited as reasons for this year’s weakness.
“I believe a healthy correction is generally regarded as a good thing,” said Rene Reyna, Invesco’s head of thematic and specialty product strategy. “Investors are seeing a longer-term opportunity here. This isn’t a one-year success story. This is potentially a multi-decade transition that will occur. So, in general, I believe investors are recognizing that.”
Amid the recent rally in solar stocks — Enphase Energy, Shoals Technologies, Sunnova, First Solar, and Sunrun are all up by double digits in the last month — combed through the holdings of the Invesco Solar Fund to find the stocks most favored by Wall Street analysts.
Each stock on the list has a buy rating from more than 60% of analysts who cover it, as well as a 10% upside to the average price target. The list is based on FactSet data.
Sunnova, based in Texas, is one of the companies on the list, with 80 percent of analysts rating the stock as a buy. Last Wednesday, Raymond James upgraded the stock from outperform to strong buy, arguing that investors’ concerns about the potential impact of rising interest rates are exaggerated. According to analyst Pavel Molchanov, the company has secured better financing terms this year compared to the previous two years, and the stock’s drop this year is due to “irrational underperformance.”
Raymond James has set a $50 price target on the stock, which is approximately 37% higher than the stock’s Friday closing price.
Sunrun and Sunnova stock
Goldman Sachs is even more optimistic, predicting that Sunnova will reach $57. The solar company is also on the firm’s conviction buy list.
According to analyst Brian Lee, valuations for residential solar companies such as Sunnova are conservative given the growth opportunity ahead. “We believe valuation based on 3-5 years of growth for an opportunity as early-stage and long-term as rooftop solar appears quite conservative,” he wrote in a recent note.
Along with the majority of Wall Street analysts, Goldman is bullish on Sunrun, another residential solar company. According to FactSet, 84 percent of analysts rate the stock as a buy. The average price target is just under $77, or roughly 46 percent higher than where the stock ended the week.
Sunrun and Sunnova were recently named by JPMorgan as top picks for the second half. In a note, the firm stated, “We turn incrementally positive on the global alternative energy sector into H2′21.” “We see numerous positive catalysts between now and the end of the year that, in our opinion, will support the alternative energy sector’s share price performance.”
Meanwhile, Morgan Stanley dubbed Sunrun the “most compelling clean energy stock” in its clean energy coverage.
“Sunrun benefits from several megatrends, including rising utility costs and falling clean energy and storage costs, grid reliability impacts from climate change, and consumer demand for clean energy,” the company recently stated.
Shoals Technologies is another name on Wall Street that is expected to perform well in the second half, with 75% of analysts rating the stock as a buy. In the United States, the company offers electrical balance of system (EBOS) solutions for solar energy projects, which include components such as cable assemblies, junction boxes, and transition enclosures.
Piper Sandler initiated coverage on the stock with an overweight rating, stating that it is well-positioned to benefit from increased solar adoption.
“We view SHLS as a core holding for energy transition investors, with best-in-class operating margins, best-in-class growth, and limited competition,” analysts led by Kashy Harrison said. He has a $43 price target on the stock, implying a 22 percent increase from Friday’s closing price.
Guggenheim is also bullish on the stock, stating that the company is on a “stable growth path with peer leading visibility,” and that the effects of supply chain disruptions should be minimal. The stock has a target price of $46 set by the firm.
Analysts believe Hannon Armstrong, which finances carbon-reduction and clean-energy projects, is another good bet for the second half. Sixty percent of Wall Street firms rate the stock as a buy.
Cowen recently named the company its top idea among small and mid-cap companies, citing its flexible business model and “strong moat in niche energy efficiency and renewable financing.” “Yields for the investment portfolio have continued to rise, and we see the company’s cost of capital declining at a rate that can mitigate rising interest rates,” said analysts led by Jeffrey Osborne.
The company’s current yield is 2.49 percent, and the stock, which has risen nearly 200 percent in the last three years, is one of the few names in the clean energy sector for income-seeking investors.
According to VanEck portfolio manager Shawn Reynolds, the stock has been a profitable bet for the firm. “They’re really good at finding great projects…they’re not interested in growth for the sake of growth — they invest for returns. That’s all there is to it,” he explained.
A public-private partnership to upgrade and operate the University of Iowa’s energy and water infrastructure with emissions-reduction technologies is part of the company’s investment portfolio.
Analysts on Wall Street are also optimistic about international companies such as Grenergy Renovables, Hanwha Solutions Corporation, and Xinyi Energy Holdings Limited.
“At some point, the market will recognize that perhaps the selling has been overdone,” said Reyna of Invesco. “This is just a minor hiccup in the road, if you will, and we should see recovery and then your longer-term positive growth trends in this space.”