Solar Stocks Enter Secular Uptrend

Solar stocks are wrapping up a historic year, with the Invesco Solar ETF (TAN) posting a phenomenal 301% year-to-date return. Better yet, the sector will add to gains in 2021 if the Biden administration makes up for lost time and puts the United States on the fast track in meeting long-term climate change goals. Given growing tailwinds, the group could easily head into a decade or more of impressive growth.

Key Takeaways

  • The solar sector entered a new uptrend in 2020.
  • Growing tailwinds could translate into many years of superior returns.
  • Many solar stocks are still trading well below all-time highs posted between 2007 and 2011.

A California law now mandates solar panels on all residential construction up to three stories, and other states could follow in coming years, increasing demand all across the board. Rising crude oil prices should also help the sector, making solar a more attractive alternative. In addition, many solar stocks are trading well below price levels posted 10 to 15 years ago, offering significant upside potential as long as tariffs or trade wars don't muddy the financial waters.

tariff is a specific tax levied on an imported good at the border. Tariffs have historically been a tool for governments to collect revenues, but they are also a way to protect domestic industry and production. The theory is that, with an increase in the price of imports, American consumers would choose to buy American goods instead.

Chart showing the share price performance of the Invesco Solar ETF (TAN)

The Invesco Solar ETF came public at $259 in April 2008 and posted an all-time high at $308 just one month later. The fund collapsed during the economic crisis, dropping into the mid-$40s and bouncing weakly into the new decade, posting a lower high at $116.70. Aggressive sellers returned in force in 2011, breaking 2009 support in a furious decline that finally ended at an all-time low at $12.60 in the fourth quarter of 2012.

A mid-decade uptrend stalled below 2009 resistance in 2014, while a 2015 breakout attempt failed, yielding downside that posted higher long-term lows in 2017, 2018, and March 2020. Committed buyers then returned in force for the first time since 2013, triggering a breakout above 2009, 2014, and 2015 resistance in August. The rally has now posted a 10-year high and is on track to reach the .382 Fibonacci selloff retracement level at $125 in coming years.

Chart showing the share price performance of SolarEdge Technologies, Inc. (SEDG)

Israel's SolarEdge Technologies, Inc. (SEDG) is the fund's biggest component and a top performer. Even so, the stock fell more than 24% in November after missing third quarter revenue estimates and guiding fourth quarter revenue below consensus. The downdraft didn't hurt demand because price then entered a V-shaped recovery wave that posted an all-time high on Thursday. Accumulation has risen in lockstep with the rally, setting the stage for a fresh breakout and buying surge into $400.

Chart showing the share price performance of First Solar, Inc. (FSLR)

First Solar, Inc.'s (FSLR) reputation as a market laggard is well justified, with the stock trading more than 200 points below 2008's all-time high at $317. However, it has gained substantial ground in 2020, posting an impressive 66% year-to-date return. The stock broke down from a four-year double top in 2011, entering a decline that hit an all-time low at $11.43 in 2012. The subsequent uptick stalled in the mid-$70s in 2014, marking resistance ahead of three failed breakout attempts.

The stock carved the second higher low since 2012 in the first quarter of 2020 and turned sharply higher, breaking out above six-year resistance in August. It has been basing above new support since that time, setting the stage for an assault on the double top breakdown at $100. Accumulation has risen steadily since March and is about to exceed the 2019 high, highlighting improving sentiment that could translate into several years of superior returns.

Accumulation/distribution is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The accumulation/distribution measure seeks to identify divergences between the stock price and volume flow. 

The Bottom Line

The solar sector entered a new uptrend in 2020 and could lift into market leadership as more aggressive climate change policy takes hold in the United States.

Disclosure: At the time of publication, the author held First Solar in a family account but no positions in the other aforementioned securities.

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