If you’re considering which solar stocks to sell, look no further. The solar sector has had a dismal year. The benchmark Invesco Solar ETF (NYSEARCA:TAN) has lost nearly half its value over the past 12 months.
There are two primary reasons why investors are selling solar stocks this year. First, the Inflation Reduction Act, which subsidized solar power, has largely come and gone. With Congress returning to Republican control in 2022, the government has lost its appetite for further subsidies to the sector.
But what about private financing of solar investments? That has largely disappeared as well due to higher interest rates. Renewable energy investments tend to have fairly low returns on investment (ROI) compared to alternative opportunities. The math could work when interest rates were near zero, but now that it is expensive to get financing, marginal investments in sectors such as solar no longer make financial sense.
Put these factors together, and investment demand has collapsed across the solar space. 2023 has been bad, and 2024 looks set to make things even worse for the sector. With no further ado, these are the three solar stocks to sell today.
Enphase Energy (ENPH)
The solar industry has collapsed in 2023. That’s not hyperbole, but simply a statement of fact. Micro invertor maker Enphase Energy (NASDAQ:ENPH) exemplifies this, and is thus first on the list of solar stocks to sell.
The company recently announced its Q3 earnings and offered forward guidance. Q3 revenues missed expectations and fell 13% year-over-year. That’s bad. But what came next was the absolute shocker.
Enphase guided its Q4 revenues to a range of $300 million to $350 million. Analysts had been expecting $579 million in Q4 revenues! In the space of a few months, it seems that nearly half of Enphase’s potential demand pipeline has simply dried up.
Analysts rushed to downgrade ENPH stock following this awful guidance. However, I believe the street is still too optimistic, as it is projecting $2.06 billion in 2024 revenues. Given the recent Enphase guidance, it may struggle to even hit $1.5 billion next year. Expect another huge sell-off on Enphase’s next earnings release when analysts once again slash their estimates.
NextEra Energy Partners (NEP)
NextEra Energy Partners (NYSE:NEP) is a specialty utility company that owns a portfolio of wind, solar and battery storage projects. It operates in conjunction with NextEra Energy (NYSE:NEE), a large and well-respected power utility firm. This long worked as a fruitful relationship where NEP was able to raise funds to help build and operate its parent’s green energy portfolio.
However, higher interest rates have caused the math to stop penciling out. NextEra Energy Partners had been forecasting it would give investors annual 10% dividend increases. This always required some juggling, as returns on wind and solar projects tend to be below 10% annually, thus necessitating the use of leverage to hit that dividend growth target.
With interest rates soaring, the model has now broken down as capital is simply too expensive. Management recently slashed its growth outlook, and the share price plunged.
After the initial plunge, NEP stock has stabilized. But I expect the crash to resume. That’s because NextEra Energy Partners didn’t generate enough cash flow from operations to cover its dividend last year, let alone fund further growth investments. I see it as unlikely that NextEra Energy Partners would maintain its current outsized dividend given its challenged balance sheet and troubling cash flow picture.
Sunrun (RUN)
Sunrun (NASDAQ:RUN) is a solar hardware and solutions company. It offers a broad approach, providing both solar production and storage solutions through direct-to-consumer channels and third parties. Investors had seemingly thought that Sunrun would inevitably enjoy growth as the whole industry expanded.
With the industry now facing hard times, however, the investment case for Sunrun has gone dark. Now the company is left with massive operating losses and a worrisome balance sheet.
To put it bluntly, Sunrun has a market capitalization of about $2 billion. And it lost more than $1 billion over the past 12 months. You don’t have to be a math genius to see that a company with those metrics is going to struggle to survive if things don’t rapidly change course. Making matters worse, Sunrun now pays more than $500 million annually in interest, so there’s no way to shrink to success given the massive amount of money that it owes its creditors.
There will probably be another round of government subsidies to the solar industry sooner or later. But given the gridlock in Congress right now, Sunrun may well be out of cash long before the industry can bounce back. Put simply, Sunrun appears to be sprinting toward penny stock status in 2024.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
