Technically, the U.S. is already in recession territory but we may only be at the beginning of the long-lasting impacts of COVID-19's economic fallout. Unemployment is staying stubbornly high just as stimulus checks and generous unemployment benefits run out. Meanwhile, companies are running out of reserves and their own stimulus funds, which could lead to more layoffs in coming months.
In any recession, there are companies who can still thrive. This time around, I think solar stocks are built to benefit, and it comes down to what they offer consumers in a recession environment.
Cost savings are the biggest selling point
When recessions hit, consumers often look for ways to save money without giving up a lot of their lifestyle. Cutting back on eating out, eliminating gym memberships, or putting off that next new car are simple ways to save money. But so is going solar.
When residential solar companies like Sunrun (RUN -11.43%), Vivint Solar (VSLR), and SunPower (SPWR -8.60%) make a sales pitch to customers, the cost savings they provide is front and center. Whether customers choose to go with power purchase agreements, leases, or loan financing, the monthly cost of solar panels should be less than the cost of utility electricity being offset. That economic pitch is why states with high electricity costs like California and Massachusetts have higher solar penetration than sunny states like Nevada, Arizona, and New Mexico.
In a recession, the cost savings of solar energy could be more compelling than ever before, and that should keep residential solar stocks strong.
Low interest rates are like rocket fuel
Solar stocks may not seem like they're dependent on low interest rates, but they are more so than most industries. Whether a company is financing a small, residential solar installation or a massive solar farm, they're financing long-term cash flows that are more valuable when interest rates are low. And in a recession, interest rates typically go down (rates are already low but they seem to keep going lower).
Low interest rates are fuel for Sunrun, Vivint Solar, and SunPower, but they're critical for manufacturers like First Solar (FSLR -3.86%), SolarEdge (SEDG -8.27%), and Enphase Energy (ENPH -4.95%) who rely on others for demand. So everyone has reason to like low interest rates.
The green new deal could be part of a stimulus package
The reality is that mandates and regulations have both helped solar energy grow, particularly before the industry could compete with fossil fuels on a cost basis alone. In a recession, when states and the federal government look for ways to stimulate the economy, the solar industry will likely be among the first on the list.
After all, that's the pitch of the green new deal -- to drive billions of dollars of investment in renewable energy, including solar energy. We don't know what a package would look like, but any stimulus would be a tailwind for the industry and renewable energy stocks.
A recession may not be all bad for solar stocks
There are a number of reasons to be optimistic about solar stocks in a recession. Cost savings provided to customers, low interest rates, and potential stimulus are the leading reasons to like the industry, even in a recession. And I think we're seeing in 2020 that solar energy can thrive in any economic environment.