The Zacks Solar industry can be fundamentally segregated into two sets of companies. While one group is involved in the designing and production of high-efficiency solar modules, panels and cells, the other set is engaged in installation of grids and, in some cases, entire solar power systems.
The industry also includes a handful of companies that manufacture inverters for solar power systems, which convert solar power from modules into electricity required by electric grids.
Per a report by Solar Energy Industries Association (SEIA), solar accounted for 40% of all new electric generating capacity added to the grid in the United States in 2019. This was more than any other energy source and the highest in the industry's history.
Here are the three major industry themes:
- No doubt, the novel coronavirus outbreak is hurting all sectors across the board, and the U.S. solar industry is no exception. Per the latest report by SEIA, the solar industry stands to lose half of its jobs, which implies that 125,000 families will no longer receive a paycheck. Abigail Ross Hopper, president and CEO of SEIA, said that the pandemic has started to impact delivery schedules and might also affect solar demand as well as the industry’s ability to meet project completion deadlines, partly on account of new labor shortages. This is a cause of concern for solar investors.
- Impressive installation trend boosted the U.S. solar market throughout 2019. Notably, the country witnessed 13.3 gigawatts (GW) of solar photovoltaic (PV) capacity and 77.7 GW of total installed capacity last year. COVID-19 and the resulting economic slowdown are likely to have an impact on renewable energy generation in the next few months. However, per the U.S. Energy Information Administration’s (EIA) latest short-term energy outlook, renewable energy will be the fastest growing source of electricity generation in 2020. As far as solar energy is concerned, EIA expects that the electric power sector will add 19.4 GW of wind and12.6 GW of utility-scale solar capacity in 2020. Although this indicates a 10% decline from the earlier outlook, the fact that the prospects of the U.S. solar market still remain positive should boost investors’ confidence in this industry.
- Rapidly increasing corporate investments in solar energy have been boosting the U.S. solar market lately. From rooftop systems for local hardware stores to solar parking canopies supporting corporate headquarters to large solar installations powering data centers, solar installations are as diverse and varied as the companies offering them. Falling prices, and flexible financing and procurement options have led to rapid growth in off-site corporate solar adoption, which made up for more than a third of all commercial solar activity in 2018. Per SEIA’s Solar Means Business 2018 report, the 7,000 megawatts of commercial solar installations generate 10.7 million megawatt-hour (MWh) of electricity annually, enough to power 1.4 million homes. Thus, the outlook for the U.S. solar industry remains optimistic in view of these encouraging numbers.
Zacks Industry Rank Indicates Bright Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #82, which places it in the top 32% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is the result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few solar stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Solar industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 12.3%, while the Oils-Energy Sector has lost 46.2%. The Zacks S&P 500 composite has dropped 4.3% in the same time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 20.75X compared with the S&P 500’s 10.23X and the sector’s 3.83X.
Over the last five years, the industry has traded as high as 30.97X, as low as 15.72X, and at the median of 22.92X, as the charts show below.
Undoubtedly, the novel coronavirus outbreak — which has dealt a major blow to almost all industries across the board — is expected to hurt U.S. solar stocks for the time being. However, solar investors should remain optimistic, considering the fact that even after taking the impact of the pandemic into consideration, analysts’ estimates indicate positive growth for the industry in the near term.
In particular, factors like plummeting price of solar modules and panels, increase in the number of states that have made it mandatory to adopt 100% clean energy in the next few years, and a significant spike in corporate investments are keeping the industry buoyant.
Considering the solar industry’s ability to outperform its sector and the broader market over the last year, along with its impressive rank, we are presenting three solar stocks with a favorable Zacks Rank that investors may want to add to their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enphase Energy, Inc. (ENPH - Free Report) : For this solar microinverter manufacturer, the Zacks Consensus Estimate for earnings for the current year indicates a solid year-over-year improvement of 26.3%. It came up with average positive surprise of 34.2% in the trailing four quarters. The company currently carries a Zacks Rank #1.
SolarEdge Technologies, Inc. (SEDG - Free Report) : For this solar inverter developer, the Zacks Consensus Estimate for 2020 earnings indicates year-over-year improvement of 18.2%. It came up with average positive surprise of 10.3% in the trailing four quarters. The company currently carries a Zacks Rank #2 (Buy).
SunPower Corp. (SPWR - Free Report) : For this solar panels and cells manufacturer, the Zacks Consensus Estimate for 2020 loss indicates a year-over-year improvement of 89.7%. It came up with average positive surprise of 182.5% in the trailing four quarters. The company carries a Zacks Rank #2, at present.