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Why Solar Energy Stocks Popped Today

What happened

Solar energy stocks jumped on Tuesday after an analyst gave two of the industry's leaders positive ratings. Shares of Enphase Energy (NASDAQ: ENPH) rose 5.7%, while SolarEdge Technologies (NASDAQ: SEDG) gained 3.1% in the wake of their thumbs-up from Wall Street.

Peer solar companies ReneSola (NYSE: SOL) and Sunworks (NASDAQ: SUNW) saw their shares rise as well, and they ended the session up 5.2% and 2.8%, respectively.

Image source: Getty Images.

So what

Analysts at Tudor Pickering provided fuel to solar stocks today by initiating coverage on Enphase Energy and SolarEdge. Enphase was initiated with a buy rating and a $195 price target, while SolarEdge received a buy rating and a $327 price target.

It also doesn't hurt that a multibillion-dollar infrastructure bill that has specifically highlighted renewable energy and electric vehicles continues to slowly move forward in Washington, D.C. It'll likely be months before a bill is passed, but if it is, there could be tailwinds for solar companies for years.

It's also very notable that the 10-year Treasury yield fell 6 basis points today and is down 8 basis points since its peak yesterday. That may sound small, but remember that the pullback in solar energy stocks was driven by a 74-basis-point increase in the 10-year Treasury yield so far this year, so the drop this week is significant.

Now what

Analyst upgrades or downgrades can impact stocks in the short term, but they don't fundamentally change a company's fortunes. Interest rates, on the other hand, are worth paying more attention to. Solar projects large and small are often financed with debt, and the lower the cost of debt, the lower the cost of electricity from a solar installation. So, lower rates are like fuel for the solar industry.

Sunworks and ReneSola would directly benefit from low interest rates because they're the solar installers and are often selling projects or debt to finance companies. Lower rates mean higher project values. Enphase and SolarEdge would see a less direct impact but are downstream of finance and installation, so if rates fall, they should see higher demand for their products. And the reverse is true when rates rise.

At the end of the day, daily moves like these are noise in the long-term trajectory of solar stocks, and they could reverse tomorrow. What investors should watch is where interest rates are heading and whether Congress is able to pass more incentives for solar installers. Those factors will drive the industry's long-term growth and ultimately determine how much these companies will grow in 2021.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has a disclosure policy.


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