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 stocks that manufacture inverters for solar power systems, which convert solar power from modules into electricity required by electric grids.
The U.S. solar market installed 2.7 gigawatts direct current of solar photovoltaic capacity, reflecting the strongest Q1 in the industry’s history, per the latest Solar Market Insight Report published by Solar Energy Industries Association (SEIA).
Here are the three major industry themes:
- Impressive installation trend in the solar market coupled with unexpected rapid growth in the states of Florida and Texas has lately boosted growth expectations for the U.S. solar industry. Wood Mackenzie Power & Renewables now projects more than 13 gigawatts (GW) of solar capacity additions in 2019, indicating 25% growth year over year. Notably, increased solar procurements and shifts in the market have led Wood Mackenzie to increase its forecast for 2019 utility-scale installations by 1.2 GW and by 5.1 GW for the 2019-24 period. Such solid projections should make investors confident about the growth prospects of U.S. solar stocks.
- Oversupply of power in the grids has become a major challenge for the solar industry lately. Thanks to this, the market for solar power storage is booming. According to Wood Mackenzie, this market is expected to witness CAGR of 45% through 2023. In order to make the most of this opportunity, some of the industry participants are now innovating products that will integrate storage technology into their existing solar solutions.
- 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 megawatt of commercial solar installations generate 10.7 million megawatt-hour (MWh) of electricity annually, enough to power 1.4 million homes. 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 #89, which places it in the top 35% 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 encouraging 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 due to an optimistic earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s loss estimates for the current fiscal year have gone down 27.5% to 40 cents since April 2019.
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 as well as its own sector over the past year. The stocks in this industry have collectively gained 34.8% while the Oils-Energy Sector has lost 19.1%. The Zacks S&P 500 composite has gained 6.6% in the same timeframe.
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 23.62X compared with the S&P 500’s 11.22X and the sector’s 4.88X.
Over the last five years, the industry has traded as high as 23.62X, as low as 3.56X, and at the median of 7.43X, as the charts show below.
There’s no denying the fact that Trump’s imposition of the import tariff on solar products dealt a major blow to the solar industry last year. However, the industry has recovered from that setback and has been rallying since the start of this year, buoyed by factors like plummeting price of solar modules and panels, increase in the number of states that made it mandatory to adopt 100% clean energy in the next few years, and a significant spike in corporate investments.
On Jul 25, U.S. Senate and House representatives introduced bills that call for the extension of the solar investment tax credit. The legislation is expected to generate more infrastructural investment and jobs in the U.S. solar space .
Considering the solar industry’s favorable rank and ability to outperform the broader market over the last year, we are presenting three solar stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) that investors may want to add to their portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
Enphase Energy, Inc. (ENPH): For this solar microinverter manufacturer, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 420%. It came up with average positive surprise of 31.67% in the trailing four quarters. It sports a Zacks Rank #1.
Azure Power Global Ltd (AZRE): For this solar energy developer, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 35.6%. It came up with average positive surprise of 75.14% in the trailing four quarters. It carries a Zacks Rank #2.
Canadian Solar Inc. (CSIQ): For this solar panel manufacturer, the Zacks Consensus Estimate for current-year earnings improved 2.1% over the last 90 days. It came up with average positive surprise of 51.66% in the trailing four quarters. It carries a Zacks Rank #2.
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