Shares of solar and EV-related stocks Enphase Energy (ENPH -4.19%), Solaredge (SEDG -1.87%), and Lucid Motors (LCID 1.34%) were rallying big on Thursday, rising 13.2%, 16.2%, and 13.9%, respectively, as of 12:10 PM EDT.
Solar and electric vehicle stocks are generally rallying in a catch-up trade following yesterday's Federal Reserve meeting and press conference with Chair Jay Powell. In the aftermath, many interest rate-sensitive stocks, including renewables and EVs, continue to benefit, as the meeting spurred increased confidence in lower inflation, interest rates, and a higher probability of a "soft landing."
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.
As this industry is in its relatively early stages of growth, most related companies either traded at high multiples, or are actually generating losses on their bottom lines. So as interest rates surged in the past two years, their valuations were affected heavily, as 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, as well as electric vehicles served by 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 their stock prices beaten down throughout the year, yesterday's Federal Reserve meeting and commentary allowed for a relief rally that carried strongly over into Thursday. In recent months, Federal Reserve officials had anticipated that another Federal Funds rate hike was likely, followed by the potential for two interest rate cuts in 2024.
However, officials were more "dove-ish" than anticipated yesterday, admitting inflation is coming down towards the Fed's 2% goal. Most officials now don't anticipate anymore increases, and the current outlook is now for three cuts next year, above Wall Street's expectations for the Fed to anticipate just two. Furthermore, Chair Jay Powell said at the post-meeting press conference more increases were "not likely," and that a recession was not required in order for the Federal Reserve to begin cutting rates.
It was certainly encouraging that the Fed may take its foot off the brake of 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 electric vehicle stocks, as loans and lease rates would come down, but consumers would be employed and still confident enough to purchase an EV 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 may be 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. So while that limits risk of bankruptcy, that backstop has come at a high price to other current shareholders through dilution. But if electric vehicle purchases take hold and luxury consumers gravitate towards Lucid's designs, 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, and also across the world in Latin America and Asia-Pacific. These two companies make 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, as its microinverter products 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 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.
