Solar Stocks Get Crushed As Interest Rates Find A Short Term Bottom

As I wrote last month, solar stocks have been on a tear. (HERE) Since early April project developers like Vivint (VSLR-NYSE) and SunPower (SPWR-NSDQ) are up 50% and 100% respectively. Producers of solar inverters, such as Enphase (ENPH-NYSE) and SolarEdge (SEDG-NYSE), have performed even better.

The moves in these names really got going in the spring and that momentum carried through into the summer. But in September the momentum has slowed abruptly. High-flying names like Enphase and SolarEdge have made abrupt corrections.

So what’s going on?

I explained last month how this is a bull run being driven by demand. Just look at Enphase, which saw revenue increase 77% year over year and 34% sequentially in the second quarter.

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Source: Enphase August Investor Presentation

Meanwhile SolarEdge saw 20% sequential and 43% year-over-year revenue growth.

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Source: SolarEdge Third Quarter Earnings Presentation

Without a doubt that demand reflects the secular expansion of solar based electricity. But there is another factor, often overlooked, that needs to be considered.

The run up in solar stocks from April has traversed a similar type move in longer dated bonds. The slump in September has coincided with a similar correction.

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On the surface this would seem to be coincidence. After all, what does the 10-year bond have to do with a solar panel?

More than you think.

Solar stocks are VERY tied to rates–because of the financing required.

Solar projects are expensive upfront. They require lots of capital. You make back that return over years of producing cheap electricity (and collecting government subsidies to do it).

Therefore, developers of solar projects are always looking for investors willing to put up capital to fund their projects.

Most districts subsidize solar projects as a way of promoting green energy. In the United States, these subsidies take the form of an investment tax credit.

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