California Sends a “Buy” Signal on the Solar Sector

Eric Fry By Eric Fry
Macro Strategist

Alternative Energy

Florida may be the Sunshine State, but California is fast becoming the Sun Power State – much to the delight of solar energy companies.

Last week, the California Energy Commission adopted a regulation that requires homebuilders to install solar panels on newly constructed homes. Solar energy companies were thrilled about the new mandate; homebuilders, not so much.

The commission, which voted unanimously to approve the measure, justified its ruling by citing both direct financial benefits and indirect health benefits.

It estimated that adding solar panels would add about $9,500 to the cost of an average new home but would save homeowners around $19,000 in energy bills over the course of 30 years.

Additionally, the commission believes its new regulation will reduce air pollution, thereby bestowing significant health benefits to California’s 40 million residents… who will likely need fewer sick days and have fewer heart attacks.

Maybe so. But homebuilders might begin suffering from more heart attacks now that they must deal with a costly new regulation. And it may be difficult to pass this expense through to homebuyers.

But the homebuilders’ pain is the solar companies’ gain.

Guggenheim Partners analyst Sophie Karp believes California’s new mandate has the potential to “roughly double the size of the [solar] market in the state.”

SunPower CEO Tom Werner heralded the regulation as “super-good news” that’s likely to produce “a fivefold increase in attachment rates to new homes.”

Certainly, California’s legislative love fest with solar power will be helpful to SunPower and other solar companies operating in California.

But this regulation is merely the cherry atop the sundae of an already-booming statewide solar industry. If California were an independent country, it would rank fifth on the list of countries with the largest amount of solar power capacity – tied with India and Italy…

But solar power isn’t just a California thing; the industry is booming worldwide. During the last two years, for example, China more than doubled its installed capacity while India has almost quadrupled its capacity.

Thanks to these torrid growth rates, new additions to solar power capacity last year were nearly double the new additions to wind power capacity…

Clearly, the solar industry is entering a major growth phase. And it will feature growing profitability, not just growing revenues.

Although many solar companies are still reporting losses, most of the industry leaders have been posting rising profits recently. Companies like SolarEdge and First Solar, for example, have nearly doubled their annual profits during the last 12 months…

This surging profitability is inspiring a surge of hiring. Here in the U.S., for example, solar jobs are growing 17 times faster than the U.S. economy. And the solar industry now employs more people than Apple, Google and Facebook employ combined.

Worldwide, the solar photovoltaic industry remains the largest employer of all renewable energy technologies. According to the latest figures released by the International Renewable Energy Agency, the number of jobs in the solar sector jumped nearly 9% last year to 3.4 million. That’s triple the employment of the wind industry…

Thanks to trends like these, investors are warming up to the solar sector. Since the end of 2016, the Guggenheim Solar ETF (NYSE: TAN) has advanced 62% – more than double the gain of the S&P 500 over the same time frame.

Incredibly, the stock is still more than 90% below its all-time high of $307.90 in 2008. The stock probably won’t reclaim that stratospheric level anytime soon, but it will likely continue outperforming the broad stock market averages.

Bottom line: The solar sector is finally beginning to realize its enormous potential.

For most of the last decade, investors have needed faith of biblical proportions to buy solar energy stocks.

The sector always offered the bright promise of a prosperous future. But it also offered the buzzkill of a money-losing present. That’s why most solar stocks have been consuming capital for so many years.

But those days are over. A prosperous solar sector is no longer a mere article of faith… and the industry’s robust growth path is no longer a distant hope.

Good investing,

Eric