2020 was the breakout year for solar stocks — why you should avoid residential solar

The solar industry has been a story of repeated boom and bust.

In 2011, solar stocks crashed and have since gone through several up and down cycles. And now, solar’s taking investors for another ride…

• The largest solar ETF — Invesco Solar ETF ($TAN) grew 3x in value in 2020.
• Two of the largest solar panel installers for home use, Sunrun and Sunnova, have grown more than 4x in 2020.

Solar’s breakout year

Solar power installations in 2020 reached a record high and solar stocks saw their biggest year in a decade as a result of…

• Biden’s pledge to spend $2t on renewable initiatives to build the infrastructure to support clean energy, transportation and electricity.
• Extension of the US Solar Investment Tax Credit (ITC) for another 2 years until 2022 — which lets consumers reduce income taxes by 26% on the cost of solar installation.

It took over a decade for the cost of wind and solar to become the cheapest form of power in most of the world but we finally made it.

Anything but residential solar

Not even a pandemic that slowed solar panel sales and installation could slow down renewable stocks. Just don’t get blinded by the lack of profitability in parts of the solar supply chain — primarily, residential solar which sells solar panels directly to homeowners.

Two of the largest home installers, Sunpower and Sunnova, have lost a combined $500b in the first 9 months of 2020. While hundreds of smaller residential solar businesses have gone bankrupt over the past couple of years.

Selling residential solar panels is a tough business…

• High upfront cost with the installation of panels
• Competitive market driven by a large number of smaller competitors
• Large sales & marketing cost involved with many companies using door-to-door sales tactics.

For investors… Follow the profits

The most profitable part of the solar industry is in selling inverters — the component that helps electricity flow from solar panels to the power grid. Two of the largest suppliers of inverters are Enphase ($ENPH) and SolarEdge ($SEDG) — whose stock has grown 440% and 200% in 2020.

Todd Rosenbluth, director of ETF research at CFRA Research, cautions that bets on solar stocks may be too optimistic. He reasons that Biden could prioritize stabilizing COVID and the economy before focusing on renewable policies.