Solar and electric-vehicle (EV) stocks Enphase Energy (ENPH 3.80%), SolarEdge Technologies (SEDG 2.81%), and Lucid Group (LCID 0.41%) were rallying big on Thursday, rising 13.2%, 16.2%, and 13.9%, respectively, as of 12:10 p.m. ET.
Solar and EV stocks are generally rallying in a catch-up trade following yesterday's Federal Reserve meeting and press conference with Chairman Jay Powell. In the aftermath, many rate-sensitive stocks, including renewables and EVs, continue to benefit, as the meeting spurred increased confidence in lower inflation, lower interest rates, and a higher probability of an economic soft landing in the year ahead.
Renewables stocks are highly sensitive to interest rates
The past 18 months have shown just how sensitive most renewable energy stocks are to interest rates.
This industry is in its relatively early stages of growth, so most related companies either traded at high multiples, or were actually generating losses on their bottom lines. And as interest rates surged over the past two years, their valuations were affected heavily because the present value of their future profits were discounted by a greater amount.
But perhaps more dire, residential solar installations (the market served by inverter companies Enphase and SolarEdge) and EVs (Lucid) are big-ticket items that are often financed either by loans or leases. So the fastest-ever rise in interest rates in response to the post-pandemic inflation made these items less affordable.
As a result, demand cratered, with both Enphase and SolarEdge posting revenue and profit declines this year, and Lucid recently lowering its production growth to better align with lower-than-expected demand in the near term.
ENPH year-to-date total returns (daily); data by YCharts.
With the three companies' stock prices beaten down throughout the year, yesterday's Federal Reserve meeting and follow-up commentary allowed for a relief rally that carried over strongly into Thursday. In recent months, Fed officials had anticipated that another rate hike was likely, followed by the potential for two interest rate cuts in 2024.
However, Fed officials were more dove-ish than anticipated yesterday, admitting inflation is coming down toward their 2% goal. Most officials now don't anticipate more increases, and the current outlook is for three cuts next year, above Wall Street's expectations for just two.
Furthermore, Powell said at the post-meeting press conference that more increases were not likely, and that a recession was not required in order for the Fed to begin cutting rates.
It was certainly encouraging to hear that the Fed could take its foot off the brakes for the economy if inflation comes down even if the job market remains fairly strong. That could enable the elusive soft landing many investors had been hoping for, but which many had deemed highly unlikely this time last year.
In any case, the reduction of interest rates without a large rise in unemployment would be a dream scenario for renewable energy and EV stocks: Loan and lease rates would come down, but consumers would be employed and still confident enough to purchase EVs or invest in residential solar.
Image source: Getty Images.
The rally could have legs
These three companies are still risky if inflation reaccelerates or if there is a recession, but should inflation continue to come down without widespread job losses, there could be more upside.
For Lucid, its ongoing losses have been backstopped by the Saudia Arabia Public Investment Fund (PIF), which has continued to invest in the company's equity as it has needed more capital. While that limits the risk of bankruptcy, that backstop has come at a high price to other current shareholders through dilution. But if EV sales pick up and luxury consumers gravitate toward Lucid, there could be upside in the making.
Meanwhile, Enphase and SolarEdge should recover, too, as long as the residential solar market keeps growing in in the U.S., Europe, Latin America, and the Asia-Pacific region.
These two companies make high-tech inverters, not commodity-like panels, and were actually profitable before this downturn. So should residential solar growth return, profit growth should follow.
It should also be noted that after the October inflation report came in softer than expected in mid-November, Enphase's CEO bought shares of the stock on the open market in a show of confidence.
Of the three, Enphase looks the most promising because its microinverters are premium products that command higher margins than SolarEdge's lower-cost string inverters. Furthermore, I think the inverter industry, consolidated among just a couple of players, is more attractive than the capital-intensive and competitive EV market. So of the three, Enphase would be my pick to aggressively play a soft-landing scenario.
