Clean energy stocks 'didn't get the memo' in 2021, but BMO says these solar names can turn a corner

Published Sun, Oct 3 20218:10 AM EDT

Clean energy stocks have significantly underperformed the market this year, but BMO believes decarbonization and power decentralization will drive future returns, especially for solar stocks. The recent weakness is a buying opportunity, the firm said as it initiated coverage on several solar companies with an outperform rating. "Global investment in clean energy is a multitrillion dollar, multidecade effort that will drive secular growth for many companies leading the transition away from carbon through the next several business cycles," the firm wrote in a note to clients. Analysts led by Ameet Thakkar said that clean energy stocks "didn't get the memo in 2021." After stellar performance in 2020 amid enthusiasm for what a Biden administration would mean for renewable energy, the group has declined this year. The iShares Global Clean Energy ETF , which tracks the space generally, is down 23% for 2021, while the Invesco Solar ETF is down 21%. The S & P 500 , by comparison, is up 16%. Supply chain bottlenecks and rising raw material costs have also weighed on the group. "The next few quarters could be noisy for solar but after underperforming the S & P...investors have an opportunity to get exposure to a multidecade secular growth story," Thakkar said. The firm favors Enphase Energy , SolarEdge Technologies , Sunnova and Sunrun , all of which it initiated coverage on with an outperform rating. BMO said these names stand out because they are involved in distributed, or on-site, power generation. While much attention is given to greening the grid, the firm said moving it away from a centralized operation will be just as important. And opportunities are growing for companies involved in home solar generation as more things become electric, including vehicles. Additionally, BMO likes these names since they can differentiate themselves through service and technology, unlike panel manufacturers and module suppliers, which the firm believes have become commoditized portions of the industry. That's why the firm favors the installers — Sunrun and Sunnova — and inverter makers Enphase and SolarEdge. "As solar becomes more prevalent in homes across the U.S., we think customers will want reliable relationships that are often lacking with utilities and a full-service solar product offering that includes installation of the solar system, integration of energy storage and EV charging and financing," the firm said. When it comes to Sunrun, the firm said the company has a "long RUNway," playing on the stock's RUN ticker. BMO's $65 target is about 46% above where the stock closed on Friday "RUN is the country's largest residential solar provider with a best-in-class solar marketing and sales effort spanning multiple channels," BMO said. Thakkar added that the sales pitch for solar is becoming clearer amid power outages across the country and rising utility rates. This should also help fellow installer Sunnova, which BMO envisions rallying 52% to $50. "NOVA offers exposure to the fast-growing U.S. residential solar market that is energized by government policy goals, EV adoption, and demand for energy storage," the firm said. BMO also pointed to clear visibility for Sunnova's future cash flows given that the typical solar agreement is between 20 and 25 years. Solar systems are becoming more complex, making sophisticated inverters all the more important. Often called the "brains" of the system, part of an inverter's job is to convert the energy generated from the solar panel into power that the grid can use. Enphase makes a specialized inverter known as a microinverter, and this technological advantage sets the stock up for long-term gains. BMO has a $200 target on the name, which is 29% above where shares closed on Friday. The firm pointed to "meaningful earnings growth," which it pegs at a 30% compound annual growth rate from 2020 to 2025 driven by more solar systems, increased revenue per customer as batteries and vehicles are integrated, and expansion into commercial and international markets. SolarEdge, meanwhile, makes module level power electronics, which increase a solar system's efficiency. "SEDG's core inverter product is becoming an increasingly important part of a fast growing solar market," the firm said, adding that the company's system design "lends itself to larger C & I and utility-scale systems." BMO has a $357 target on the stock, which is 31% above where the stock closed on Friday. - CNBC's Michael Bloom contributed reporting.

Aaron Newsom, left, an installer for the solar company, Sunrun, and Tim McKibben, a senior installer, install solar panels on the roof of a home in Granada Hills.

Mel Melcon | Los Angeles Times | Getty Images

Clean energy stocks have significantly underperformed the market this year, but BMO believes decarbonization and power decentralization will drive future returns, especially for solar stocks.