Shares of residential solar installer Sunrun ( RUN -6.30% ) jumped a whopping 402.4% in 2020, according to data provided by S&P Global Market Intelligence, as investors crowded into solar energy stocks. And the run continues in 2021 with shares up 31% in the first week of trading.
COVID-19 could have cratered the residential solar industry in 2020, but surprisingly this was one of the best-performing stocks on the market.
There were a number of factors driving solar energy stocks higher, and surprisingly none of them were improving financials. You can see below that Sunrun's revenue actually fell in 2020 while net income hovered near breakeven.
But investors did see some signs of light for the industry. First, President-elect Biden's win should give the industry some relief. Not only is he likely to pass policies that will help solar energy, regulators that are appointed over the next few months should swing rules away from coal and toward solar.
Second, interest rates fell again in 2020, making the cost of capital for Sunrun even lower. The company finances solar installations long term, so lower costs means higher margins for the company. But it could take years for contracted margin to reach the bottom line.
Finally, there was simply a sentiment change in the market, and that has driven everything from solar energy stocks to electric vehicle stocks through the roof. Sunrun was along for the ride.
The rubber really hits the road in 2021 when solar companies are going to need to show that their higher stock prices are justified. You can see above that growth needs to turn positive to start with, but Sunrun also needs to prove it can make a profit long term. There are a lot of tailwinds behind the company, including an extension of solar tax credits for the next two years, but over the next few years I'm worried that tailwinds will become headwinds, and that's why I'm not jumping into the stock.