Deep Dive: These are the four solar stocks to own for the long run

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 “middle strategy” combining the first two.

When discussing the “big picture” for investors who are interested in solar, Wetzel pointed to NextEra Energy Inc.
NEE,
+0.57%,
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
NEP,
-0.11%,
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.
RUN,
-2.10%
and Sunnova Energy International Inc.
NOVA,
-4.96%,
which install equipment and arrange financing for customers; and Enphase Energy Inc.
ENPH,
-2.83%
and SolarEdge Technologies Inc.
SEDG,
-2.18%,
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:

Those are high expected double-digit growth rates. In comparison, the two-year expected sales CAGR are 5.8% for the S&P 500
SPX,
+0.27%
and 11.1% for the Nasdaq-100 Index (tracked by the Invesco QQQ Trust
QQQ,
+0.39%
), 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.

He says both companies “stand to do very well in the current setup, assuming the macro environment stays pretty comfortable,” doubling their customers every two years. He holds only Sunnova’s shares among the two in the concentrated strategy because he expects more operating leverage.

Enphase and SolarEdge make inverters that convert the DC electricity generated by solar panels to AC.

“Traditionally you have one inverter for an array of panels, but if one panel goes, it reduces the output. Enphase makes a small inverter to sit within each panel,” Wetzel said. This gives the company a technology advantage.

SolarEdge is able to monitor what each solar panel is doing. “The knock on their technology is if the inverter goes down, you lose the array,” Wetzel said, adding that SolarEdge’s inverters are cheaper.

Converting homes and businesses to solar

When discussing the outlook for solar conversion, Wetzel said consumers and businesses need to factor-in incentives when considering the cost. At the energy.gov website, the U.S. Department of Energy describes tax credits of 26% for solar electric systems installed in 2021 or 2022, and 23% for those installed in 2023. There are also state incentives and other financial arrangements with local utility companies.

Wetzel said there is a “huge addressable market” for homes and businesses with good siting for roof tops, with solar conversion penetration still in the single digits. There is a mandate in California for newly built single-family homes or multifamily homes up to three stories high to have solar power generation systems. Ideally, a home might generate more power than it needs, enabling the owner to sell electricity back to the utility — another incentive to convert.

Then again, there may be changes to that setup.

“The California Public Utilities Commission is evaluating ideas from the utilities — they want to lower the rates they pay to solar customers for net metering,” Wetzel said.

Otherwise, it is possible that utility customers generating excess solar power and selling it to the utilities might wind up paying nothing to maintain the electric grid.

So there is always a risk that regulatory changes can hurt solar providers and their stocks, as well as economic risks, including the aforementioned interest rates and the health of the broader economy.

Wetzel also said the continued development of solar storage batteries for homes is critically important, because “if  you can get residential solar, to have a battery attached to it, with software to manage the storage,  you can, essentially, disconnect from the grid.” Tesla Inc.
TSLA,
-1.25%
has a home solar battery system called Powerwall.

The solar industry is in flux. But the free energy source beckons, the technology keeps improving and support for clean energy continues to grow.

Two solar ETFs

The dominant solar-focused exchange traded fund is the Invesco Solar ETF
TAN,
-2.91%,
which has $3.3 billion in assets under management. When asked if TAN would be appropriate for investors who can be committed to solar long-term, Wetzel said: “Yes — Enphase is the number one position at 12.5%, with SolarEdge at a little over 11%. So a quarter of the exposure would be two companies we really like for long-term exposure to clean energy through residential solar.”

The Global X Solar ETF
RAYS,
-3.78%
is a new competitor to TAN, established in September. It has less than $3 million in assets under management. RAYS adds an ESG (environmental, social and governance) component to its stock-selection process. Its top two positions are also Enphase and SolarEdge, which together make up 17% of the portfolio.

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