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Solar stocks poised for comeback in 2024

Solar stocks have gotten decimated this year amid high interest rates spurred by the Federal Reserve to tame inflation. Customers have been reluctant to spend on installations, and companies’ investment projects have gotten more expensive.

A policy change that lowered solar energy incentives in California also impacted the industry in the US. The state slashed the subsidy awarded to rooftop panel owners sending excess power to the grid.

The solar and wind energy benchmarks Invesco Solar ETF (TAN) is down 36% year to date, and Global X Solar ETF (RAYS) has lost more than 40% during the same period.

However, Wall Street sees tailwinds next year that could help turn the tide for the clean energy industry.

On Friday Morgan Stanley analysts upgraded First Solar (FSLR), a solar panel maker, to Overweight, raising their price target from $214 to $237 per share.

“After the 20% sell-off in the past three months, we see an attractive risk-reward profile for the stock,” Morgan Stanley equity analyst Andrew Percoco and his team wrote in a note to clients this week.

“We believe First Solar offers one of the strongest risk-adjusted earnings profiles within our US Clean Tech coverage with its sold-out position through 2026,” they added, referring to the thin-film module manufacturer’s backlog.

The note also reiterated renewable energy giant NextEra (NEE) and solar company Altus Power (AMPS) as names on their high conviction Overweight list. The analysts have a $76 price target on NextEra and $9 price target on Altus Power. Year to date, those stocks are down 29% and 17%, respectively.

‘Improvement in clean energy valuations’

One of the tailwinds for renewables going into 2024 is the market expectation of lower interest rates at some point during the year. Investors are betting the Fed can start to cut rates as inflation eases and the labor market normalizes.

“If rates fall in 2024, as our economists and strategists are predicting, we could see a meaningful improvement in clean energy valuations,” wrote Morgan Stanley’s analysts.

The prices of solar panels, battery storage, and inverters, which increased over the last couple of years, are also showing signs of deflation ahead.

“We see some evidence that supports a more optimistic view (for developers) of the cost trend for these technologies moving into 2024,” said the note. “Prices for solar panels and components have declined meaningfully since peak levels in the summer of 2023.”

Citi analysts also recently noted the global solar space is dominated by equipment manufactured in China, but US companies are poised to increase market share next year.

“With rising importance of emission cuts and opportunities from solar equipment production, more countries are implementing trade policy protectionism to ensure local supply,” Citi managing director Pierre Lau and his team wrote in a note to clients.

An example is the Inflation Reduction Act (IRA) passed last year, aimed at incentivizing the use of solar power via subsidy support for local manufacturing.

“Our analysis shows that outside of China, the US and India appear the most feasible for solar equipment production,” said the note.

Citi’s Buy recommendations include Altus Power and solar and storage company SunPower (SPWR), which is currently down about 70% year to date.

 

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