The United States government is spending trillions of dollars to push alternative energy programs and boost non-carbon-based fuels. Yet for all the hype and efforts to try to change Americans’ behavior when it comes to energy sources…
The alternative energy sector is taking a few HUGE punches at the moment.
Take a look at the Invesco Solar ETF (NYSEArca: TAN), a fund that owns all the big players in the sector. That includes big solar producers like First Solar Inc. (Nasdaq: FSLR), Enphase Energy Inc. (Nasdaq: ENPH), and Solar Edge Technologies Inc. (Nasdaq: SEDG). Have a look at the chart.
So far this year, TAN is down a staggering 42.5%, and it doesn’t look like it’s ready to find a bottom just yet.
Enphase is down 67% this year, while SolarEdge has cratered by 72%.
So what gives in the solar sector? And how should you trade it?
A Shot Across the Solar World
This morning, shares of Enphase cratered by more than 15% after the company reported dismal third-quarter sales. U.S. revenue collapsed by 16% from the previous quarter. Ongoing jumps in U.S. interest rates and changes in electricity incentives in solar-friendly California weighed on revenue here in the U.S. Meanwhile, demand has collapsed in Europe, with sales dropping by 34% in a quarter.
The company also slashed its forward guidance by a massive amount. This earnings report is a HUGE blow to the ongoing government push for more clean energy.
The narrative of recent years called for a greater transition to green technologies — with solar leading the way. Governments around the globe have not only pushed more public dollars into projects, but they’ve also placed big regulatory curbs and aggressive targets to reduce emissions with this technology.
But Ukraine and global inflation happened, and the ongoing transition continues to stall. Nations across Europe aren’t just turning away from their aggressive carbon-reducing targets, but they’re turning back to coal and other dirty fuels. It turns out that citizens don’t like the idea of freezing to death in the winter, and the political winds are shifting.
Simply put: Politicians got ahead of themselves… and so, too, did investors who bidded up a large number of companies on the expectation of robust growth. Now it’s back to the drawing board. The sector isn’t expected to stabilize until at least the second quarter of 2024 — and even that might be too optimistic for Europe, where inflation remains sticky and interest rates remain high (impacting the cost of capital for new projects)
How to Play This Solar Collapse
Sometimes, the most obvious strategy is the right one when it comes to the Energy sector… Despite all of the lofty predictions among politicians and regulators, we only need to look at one research report to understand the expected success of the great transition in the future.
The Energy Information Administration (EIA) is the research arm of the Department of Energy, the regulatory body that is trying to steer Americans toward solar panels and electric vehicles. This research arm released its annual Long-Term Energy Outlook in March 2023.
As expected, the forecast projects robust demand for oil in the future (its high price for oil in 2050 is $190 per barrel). It projects robust demand for solar power in the future, but also a stable amount of demand for natural gas for electricity generation. And — here’s the big one — the forecast only suggests that just 20% of vehicles operated by consumers (light duty) in 2050… will be EVs.
So, despite all the commitment to solar and EVs, 80% of the cars on the road over 25 years from now will still operate on gasoline. Boy… that goes against the narrative, doesn’t it?
The obvious story here is that this commitment to solar and EV is going to create a lot of problems in the future. In fact, it’s already fueling big moves in oil and natural gas prices, while we confront geopolitical tensions across the Middle East.
Bad policies will only aid the current Energy Supercycle. If you want to learn more about how you can trade this… check out my recent presentation.
Enjoy your weekend,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
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