As odds of a blue wave on Election Day have risen, solar stocks have been rising right alongside, with the TAN Solar Invesco ETF—which holds many of the biggest names in the sector—up nearly 130% year-to-date.
Expectations that Democrats could win control of the White House, House of Representatives, and Senate has ushered in hopes for an infusion of investments in alternative energy, pushing the sector higher so far in 2020.
But this week, UBS issued downgrades for four stocks in the sector: Jinko Solar (NYSE: JKS), SolarEdge (NASDAQ: SEDG), SunPower (NASDAQ: SPWR), and SunRun (NASDAQ: RUN), arguing that policy implementation could be more difficult than current optimism is pricing in.
All four stocks have more than doubled this year, with Jinko Solar up more tan 165% so far this year, SolarEdge up 177%, SunPower up nearly 108%, and SunRun up a whopping 304% year-to-date.
“This is 100% a play on the election,” Strategic Wealth Partners president Mark Tepper said this week. “But, I think investors would be wise at this point to take some chips off the table.”
According to Tepper, given these stocks’ massive move higher this year, they are likely to pull back no matter who wins the White House in next week’s election.
“If Biden wins, I think these stocks eventually sell off anyways because there’s not a level of a Democrats’ plan that’s going to be perfect enough to justify these ridiculous valuations where they’re at right now,” Tepper said. “The Green New Deal would literally have to be $100 trillion to justify these valuations. And if [President Donald Trump], the underdog, wins, these stocks sell off pretty quickly.”
Given the risk, Tepper said he’s staying away from the group altogether.
Should Democrats stage a win, however, there’s hope for the sector down the road.
“More important than who wins the presidential election is whether or not there’s a Democratic sweep, because that would be the cleanest path to implementing a lot of these policies,” he said. “But these stocks have just moved way too much to the point where the valuations are ludicrous. I would wait for a pullback which I think is going to happen regardless of the outcome of the election.”
Cowen analyst Jeffrey Osborne said that even as valuation among these solar stocks remains a concern, he added in a recent note that “the paradigm has shifted and the sector can stand on its own legs,” with solar stocks and renewable energy seeing growth in the long term, especially with a Democratic sweep.
As a candidate, former Vice President Joe Biden has called for nearly $2 trillion to be invested in the next decade to set a clean electricity standard in the U.S. by 2035. Biden has also called for the installation of 500 million solar panels over five years, twice the size of the current market, as well as an additional 1 million hopes with rooftop solar panels, which would benefit names like SolarEdge and SunPower.
Even if there’s some pain in these stocks in the near-term, MKM Partners chief market technician JC O’Hara said the technical picture is bullish.
“The solar companies, they’re some of the strongest charts out there,” O’Hara said. “I mean, they’re offering you robust momentum, sturdy trends. If you look at the solar index year to date, it’s up 125%. Nothing wrong with that.”
O’Hara cautioned, however, that there could still be pain in the near term.
“I’m a little concerned in the short term with just how stretched some of these charts have come from their longer-term trends,” O’Hara said. “Just last week the solar index was trading 90% above its longer-term 200-day moving average. …Only twice going back to 2006 have we found trends this stretched.”
“The interesting takeaway is when prices become this stretched form longer-term trends, we didn’t see a meaningful pullback. Rather we saw consolidation through time,” O’Hara said. “Historically, any sort of pullback we’ve seen has been a great buying opportunity. So rather than selling into strength or taking profits, I think it would behoove investors to exercise some patience. Wait, let some time go by, let solar names catch [their] breath, and then it’ll be time to reengage and add a new position.”