Is Shoals Technologies Group (SHLS) A Smart Long-Term Buy?

Baron Funds, an asset management firm, published its “Baron Small Cap Fund” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 2.67% was delivered by the fund’s institutional shares for the Q1 of 2021, trailing the S&P 500 Index, which appreciated 6.17%, and modestly underperforming the Russell 2000 Growth Index which rose 4.88% for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Baron Small Cap Fund, in its Q1 2021 investor letter, mentioned Shoals Technologies Group, Inc. (NASDAQ: SHLS), and shared their insights on the company. Shoals Technologies Group, Inc. is a Portland, Tennessee-based electrical balance of system (EBOS) provider that currently has a $3.8 billion market capitalization. In the past month, SHLS delivered a -39.14% return, and as of May 14, 2021, the stock closed at $23.08 per share.

Here is what Baron Small Cap Fund has to say about Shoals Technologies Group, Inc. in its Q1 2021 investor letter:

"We purchased shares in Shoals Technologies Group, Inc., a leading provider of electrical balance of systems (“EBOS”) solutions for solar energy projects in the U.S. EBOS solutions include all the components that are necessary to carry the electrical current produced by solar panels to the inverter, and ultimately to the grid. Shoals estimates that 50% of utility scale solar projects used one of its components in 2020.

While EBOS is mission critical, it represents only 6% of the cost of a solar project, and the labor to install it can be up to 150% of the cost of the components. Shoals invented a proprietary patent-protected system called the Big Lead Assembly (“BLA”) that is a “plug-n-play” solution that makes installation more reliable and cost efficient. Shoals estimates that the BLA results in 43% lower installation costs and 20% lower material costs than the conventional architecture. Shoals’ market share has grown from 7% in 2017 to 32% currently, and we think it can get up to 60% in a few years.

We expect revenues to grow from $175 million in 2020 to $500 million in 2023, while margins increase from its already robust 33% EBITDA margins. We think this is achievable as Shoals executes on its plan to develop innovative products that bring its labor-saving solutions to new high-growth end markets such as battery storage and electric vehicle charging infrastructure, while at the same time expanding its U.S. solar product portfolio and bringing the solar product to the international market. Electrical architecture will be even more in demand as the world electrifies and moves towards the rapid adoption of alternative energy."

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Our calculations show that Shoals Technologies Group, Inc. (NASDAQ: SHLS) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. SHLS delivered a -39.14% return in the past 3 months.

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Disclosure: None. This article is originally published at Insider Monkey.