Solar energy stocks have been hammered over the last few months as investors sold off growth stocks and rising interest rates put pressure on the returns that solar projects may generate over the long term. But on Monday, the market gave those assets a little reprieve and solar stocks rose sharply.
Enphase Energy (ENPH -5.56%) led the way with a gain of as much as 13.6%, SolarEdge Technologies (SEDG 1.92%) popped by 12.7%, and Sunrun (RUN -2.43%) jumped by as much as 10.9%. Shares of these three companies closed the session up by 13.4%, 12.3%, and 10.7%, respectively. But was this a short-term bounce or the start of a trend?
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Interest rate concerns have been a headwind for solar energy stocks
The downward trend in solar stocks has coincided with a rise in interest rates, which the chart below illustrates. I did a deep dive on the impact that interest rates have on solar companies here, but the general idea is that higher rates make the long-term cash flows from solar projects less valuable. With everything else held constant, that will put pressure on the margins of installers, finance companies, and component suppliers.
As much as rising interest rates may have been a headwind recently, it's also worth putting the broader market into context.
Solar energy is still well-positioned
One thing to consider is that interest rates remain near historic lows and solar energy projects are getting extremely good financing rates. Sunrun just announced $425 million in financing at a rate of 2.25% plus the federal funds rate plus 0.5%, or under 3% today. That's a great interest rate for building residential solar projects that could generate revenue for 30 years.
Another dynamic to note involves the price of competing energy sources. Strong market demand combined with restricted supply has pushed oil and natural gas prices higher, so in the residential, commercial, and utility market, solar energy is better positioned to compete with fossil fuels. This should help the solar industry's growth and margins over the long term.
WTI Crude Oil Spot Price data by YCharts
As much as the long-term picture seems to be improving, investors can often be focused on short-term concerns, and that's why solar stocks have had such a rough few months.
What to think about solar energy stocks right now
As hard as it can be to be bullish about stocks that have fallen by 50% or more from their highs, I'm starting to see real opportunities in solar energy stocks. Installers have a durable business model and financing terms are getting better each year. Component suppliers have also solidified their positions in the market as competitors have been acquired or gone out of business. And it's hard not to be optimistic about solar energy when the costs of fossil fuels continue to rise.
The next few months and years may be volatile, but solar energy will be a big part of the long-term future, and I think that makes this a buying opportunity for investors.
