Solar Stocks Alert: Why Wells Fargo Sees RUN, NOVA Stocks Soaring
Although the collapse of two major financial institutions sparked fears about banking system instability, the sector wasn’t the only victim of the fallout. Solar energy specialists Sunrun (NASDAQ:RUN) and Sunnova (NYSE:NOVA) fell sharply…
Although the collapse of two major financial institutions sparked fears about banking system instability, the sector wasn’t the only victim of the fallout. Solar energy specialists Sunrun (NASDAQ:RUN) and Sunnova (NYSE:NOVA) fell sharply since the crisis erupted, leading to worrying year-to-date losses. Still, Wells Fargo struck an optimistic tone, noting that solar stocks represent a discounted buying opportunity. Nevertheless, the true verdict may stem from monetary policy.
Specifically, CNBC reported that Wells Fargo analyst Michael Blum had a simple message for clients in a research note: “Weakness in resi-solar driven by the SVB crisis is a buying opportunity.” True, stability concerns around regional banks sparked broader economic anxiety. However, many experts anticipate a pause in the Federal Reserve’s rate-hiking campaign.
Blum believes that a 50-basis-point reduction to a long-term discount rate of 7% to 8% would mean greater upside for solar stocks Sunrun and Sunnova. The analyst stated the following:
“The silver lining of the bank issues is that interest rates have fallen by 30 bps (the 10-year treasury yield is down to 3.7% from 4.0%). Further, in light of a potential banking crisis, the Fed could pause rate hikes, which would reduce the cost of financing for resi-solar names, a key driver of performance.”
Further, Blum forecasts that the biggest solar stocks could hit their 2023 guidance by expanding their market share by 8%. Still, the sensibility of this course of action depends on the Fed’s strategic pivot, if any.
Solar Stocks Face a Deflationary Headwind
At the core of a bank run — the collective behavior that fell the two major financial institutions recently — sits a deflationary headwind. Assuming withdrawn money is not transferred elsewhere, the impacted funds take units of currency out of the banking system’s distribution. Therefore, fewer dollars chase after more goods. Fundamentally, this action raises borrowing costs due to greater demand for available dollars, hurting growth-oriented solar stocks.
Apart from the U.S. government undergirding depositors, the Fed apparently remains committed to tackling inflation. With the labor market continuing to add more workers to the economy than anticipated, policymakers will be under pressure to continue their hawkish trajectory. Otherwise, the previous actions it took to curb rising prices risks negation.
Further, the downdraft of solar stocks represents a worrying sight despite Blum’s optimism. True, a large number of analysts believe the Fed will be reluctant to raise rates, per Reuters. However, investors don’t seem to be getting the memo. On Wednesday afternoon, both RUN and NOVA fell 10%. For the year so far, they’re down 22% and 17%, respectively.
Why It Matters
Finally, investors will want to monitor the layoffs situation before taking heavy bets on solar stocks. Recently, Facebook parent Meta Platforms (NASDAQ:META) confirmed that it will reduce headcount by about 10,000. This represents approximately 13% of its workforce.
Fundamentally, fewer people with high-paying jobs will necessarily affect solar stocks. Layoffs also suggest that deflationary (i.e. recessionary) forces are now weighing on the economy.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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