The shift from high-carbon fuels to clean energy is in full swing, and solar stocks have been enjoying their moment in the sun. The market’s only pure-play solar ETF, Solar Invesco ETF (NYSEARCA:TAN), has posted triple-digit gains over the past year thanks to Wall Street growing more bullish on clean energy after the Democrats clinched a decisive win in the Georgia Senate runoff. Unfortunately, the solar sector has begun to let off some steam with investors beginning to confront harsh reality.
Leading solar names have been selling off heavily, with First Solar Inc. (NASDAQ:FSLR) down 8.8% on Monday; SolarEdge Technologies (NASDAQ:SEDG) has cratered 15.9%, Enphase Energy Inc. (NASDAQ:ENPH) is down 8.7%, SunPower Corp. (NASDAQ:SPWR) has lost 8.9% while Canadian Solar Inc. (NASDAQ:CSIQ) has dropped 7.9%.
TAN ETF is down 10.2% over the past five trading days in what is shaping up as a major correction for the solar sector.
A cross-section of Wall Street has been warning that it might be best to pump the brakes as stock valuations in the renewable energy sector increasingly get out of whack.
Source: CNN Money
Bubble in the Making?
About two weeks ago, Raymond James analyst Pavel Molchanov, downgraded five alternative energy and clean technology stocks urging investors to lock in profits and look for new opportunities.
Molchanov downgraded Enphase Energy Inc. (NASDAQ:ENPH) to Underperform from Market Perform, labeling the maker of solar inverters as a "textbook example of overly euphoric sentiment."
Molchanov noted that Enphase and close peer SolarEdge Technologies (NASDAQ:SEDG) remain the most dominant in module-level electronics for the U.S. residential market, "but new entrants are working to erode that duopoly." The analyst pointed at Enphase's premium 50x EBITDA valuation that leaves the company with little margin of error, meaning just about everything has to go right in the current year to justify the steep valuation.
Susquehanna's alternative energy analyst Biju Perincheril also downgraded both names to Neutral from Positive, citing stretched valuations. Perincheril assigned new price targets of $195 for ENPH and $340 for SEDG, suggesting 6% and 5% downside to their respective prices.
Not everybody bailed on Enphase, though, as Goldman Sachs upgraded the stock while downgrading First Solar (NASDAQ: FSLR), citing a shifting preference toward residential solar and battery exposure.
Clean energy stocks have been hot throughout 2020 and the first week of the new year thanks to the rapidly changing political landscape in the United States.
But the truth of the matter is that the slim majority that the Democrats have clinched in the Senate is likely to help President-elect Joe Biden fulfill his pledge to promote clean energy and EVs but sweeping legislation such as the Green New Deal might be a lot tougher to enact.
Solar stocks have enjoyed some of the most impressive gains in the clean energy rally mainly because the sector is expected to record the biggest growth in the current decade. However, Wall Street is beginning to adopt a wait-and-see attitude as the Biden administration gets ready to take over.
Bad for ESG?
The biggest risk to the clean energy bull thesis is that these overly optimistic bets hinge on the slim majority that the Democrats hold on the Senate.
Additionally, it's unclear how aggressively the Biden administration will pursue those policies considering the government's top priority at the moment is to contain a pandemic that is rapidly spiraling out of control.
Perhaps even more interesting, a cross-section of Wall Street now sees the clean energy frenzy posing a major threat to other ESG stocks.
According to Bloomberg Intelligence analysts Eric Balchunas and Athanasios Psarofagis:
"Clean-energy exchange-traded funds could bypass the broader ESG category in natural assets in the next few months if current trends hold. Flows into clean-energy ETFs have breadth and depth that typically portend a grassroots frenzy of buying as investors seek to grab exposure as fast as they can."
Indeed, the 15.2% gain by the iShares ESG MSCI USA Leaders ETF (SUSL) in the past 52 weeks has only slightly outpaced the 14.6% rally by the S&P 500 and looks downright pedestrian compared to a 147.0% gain by ICLN and 220.1% by TAN.
And bubble fear isn't confined to clean energy, either. A recent E*Trade Financial survey showed that most investors believe the stock market is in bubble territory. Some 66% of 904 investors managing at least $10,000 in an online brokerage account think the market is "either fully or somewhat in a bubble", while 32% list a recession as their top portfolio risk at present. And it's not just Tesla that's on their minds ...
By Alex Kimani for Oilprice.com
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