Recently, the Inflation Reduction Act (IRA) was signed into law by U.S President Joe Biden in August of 2022. While the bill is controversial (it spends $738 billion to reduce inflation), it is the investor’s job to put opinions and politics aside and focus energy on potential outcomes and catalysts in the market. Undoubtedly, the largest beneficiary of the bill is the clean energy and solar space. Included in the IRA bill is $369 billion allocated to advancing renewable energy over the next 10 years, amounting to the most extensive spending plan of its kind in U.S history! What is included in the bill?
· Community Solar Stimulus: Entities buying a piece of a solar project can take advantage of credits based on the amount of electricity their portion produces
· Residential Tax Credits: The IRA extends the 30% federal tax credit on residential solar for 10 years.
· Non-profit Incentives: Tax-exempt organizations such as schools, churches, and other not-for-profit organizations
Today we will look at a top solar pick that broke out late last week and should stand to benefit from the IRA.
Enphase Energy ENPH
Fremont, California-based Enphase Energy (ENPH) isa solar technology company that manufactures solar micro-inverters, energy storage solutions, and electronic vehicle (EV) charging stations. Enphase’s marquee product is the unique Enphase solar micro-inverter. Traditionally, most solar photovoltaic systems rely on a central inverter to convert direct current (DC) power produced from the solar panels to grid-friendly alternating current (AC). While solar panels still produce electricity this way, they are beholden to the performance of the lowest-performing solar panel. Enphase founder Marting Fornage made the astute discovery that many of the inefficiencies inherent in central servers would be corrected by placing a small inverter behind each panel. The discovery led to the birth of Enphase Energy in 2006. The biggest qualm that most prospective clients have with solar panels is cost, which is directly linked to efficiency. By addressing this problem with its unique solution, Enphase has captured nearly 50% of the global market share for residential micro-inverters.
Energy Efficiency Leads to Financial Efficiency
As fossil fuel prices continue to trade at nose-bleed levels, more people are turning toward ENPH’s clean energy solutions. However, Enphase is no longer a one-trick pony. The company has added new products to its offering to help solar customers achieve higher solar output efficiency, including at-home EV chargers and batteries for electric storage.
The Solar industry group is a bottom 33% industry group rank according to Zacks. The group comprises many strong stocks; however, ENPH’s stellar fundamentals separate it from the pack. Enphase boasts a Return on Equity (ROE) of 74.5, the highest in the solar group. Daqo Energy DQ and Solaredge Technologies SEDG are the two closest in the group in terms of ROE, with 51.7 and 22.8, respectively. Return on equity measures how much profit can be generated versus the company’s net worth. In other words, it considers assets minus liabilities. To put ENPH’s ROE into perspective, companies with ROEs of 20 often go on tremendous runs.
Enphase’s financial efficiency is not the only winning characteristic the company has. Over the past eight quarters, the company’s earnings growth has been electrifying. ENPH has seen (at least) double-digit revenue growth and earnings per share (EPS) growth for eight consecutive quarters while smashing consensus expectations for four straight quarters. No other company in the group has achieved this type of consistency. Unlike many of its competitors, ENPH has a rare combination of liquidity and high earnings growth. It is one thing to grow fast, it’s a whole different thing to grow fast and at scale. Large institutions tend to gravitate toward liquid high-growth stocks because they want growth but cannot enter illiquid stocks without moving the market. Therefore, when hedge fund managers such as Will Danoff (portfolio manager of the $112 billion Fidelity Contrafund) see this magic elixir, they take note. Danoff is not alone. In fact, more than 2,000 funds own positions in Enphase.
Solar’s Bright Future
Enphase is set up as a potential winner over the next year due to its consistent fundamentals, institutional sponsorship, and financial efficiency. Sky-high fossil fuel prices aren’t the only catalyst for Enphase. The recent Inflation Reduction Act will be a tailwind for the solar group for years to come.
ENPH Stages Encouraging Breakout
Image Source: Zacks Investment Research
Pictured: ENPH emerges from a multi-month base structure. Orange line represents EPS growth
Friday, Enphase staged an impressive breakout. While the market was red, shares bucked the trend to finish higher by 7% on volume 40% above its daily average. High-volume breakouts from multi-month bases in sound fundamental stocks tend to bear fruit more times than not.
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