Jefferies initiates coverage on solar energy stocks

Higher interest rates have been a headwind for many sectors, including solar energy. As the Federal Reserve may pivot to rate cuts next year, hope is on the horizon for the renewable energy sector. In turn, Jefferies has initiated coverage on a number of solar stocks — including Enphase Energy (ENPH) and First Solar (FSLR) — with a "Buy" rating.

Yahoo Finance Reporter Madison Mills joins the Live show to break down the announcement from Jefferies and what it means for the solar sector going forward.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

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BRAD SMITH: The increased cost of capital from the Fed's interest rate policy has been a headwind for companies across the board. One industry particularly susceptible to that is solar power. Those stocks haven't had a great run this year, but the Fed's so-called pivot certainly changes the game.

Today, Jefferies initiating a slew of those stocks with a buy recommendation, including for Solar and Sunrun. Yahoo Finance's Madison Mills has the detail. Hey, Madison.

MADISON MILLS: Hey, guys. So the headline from Jefferies this morning is all about the solar coaster. And as we've been talking about, this is one of those sectors that is really going to benefit from the decrease in interest rates coming from the Federal Reserve. So what's interesting about this initiation of coverage from Jefferies is not only confirmation of what we've already been hearing on the Street that solar stocks could be in for a great year in 2024, it's also confirmation that banks are really starting to get behind the anticipation of Fed cuts coming sooner rather than later.

But zeroing in on some of these names that we've got from Jefferies here, they're looking at First Solar, Enphase, and Sunrun. And they're starting to see, again, some of those tailwinds coming from those Fed rate cuts. Also, we've got Array, Sunrun, SunPower here.

Taking a look at First Solar in particular, you can see really struggling throughout the course of this year, but starting to see an uptick today. They're actually having the most volume on the stock that they've had in weeks here as Jefferies is initiating that coverage. You can see that pop into the green this morning in pre-market. They're up about 8%, which is a great day for them over the course of the past month.

Interesting to note also from this morning's coverage of Jefferies, they say that First Solar is their top pick, that's because of some of the fundamentals here. They've got a strong backlog, supportive pricing in this declining price environment. They've also got a good balance sheet and some good margins as well. So just another reminder that the fundamentals still matter even when a broader sector group is going to be performing well.

SEANA SMITH: Yeah, Maddie, we know interest rates clearly has been a massive factor in the underperformance of a group of these names here over the last year, so that seems to be likely here to improve in 2024. But there's also just intense competition, especially when you take a look at what's coming out of China and in Europe, what we're seeing play out there. That though, I think, will likely be one of those challenges is that similar to what you're hearing and what a lot of-- what a lot of the analysts are saying up until this point.

MADISON MILLS: Well, what's interesting to your point, Seana, is that in the note, they talk about how they're less interested in the residential plays. They're more interested in broader company-driven plays for these solar power installations, which makes sense because that's going to be a lot more bang for their buck when it comes to installation. And those bigger projects are going to get better margins when it comes to the decrease in the interest rates that these solar power companies are going to have to pay on their loans to install those bigger, broader solar power projects.

So it's interesting to see them, kind of, transitioning away from a bet on consumers going solar and more to more industrial bigger plays in the space. And that's where they're seeing more of the demand come heading into next year, so we're going to be hearing a lot about that on these company earnings calls. And I think the ones that can talk about that bigger stream of demand coming in from those bigger budgets from other companies are the ones that are going to benefit the most heading into '24

SEANA SMITH: All right, Maddie, thanks so much for that.