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Sustainable Investing

Are Solar Stocks a Buy After the Climate Bill Rally?

Renewable energy stocks gain on surprise climate bill news.

Solar stocks gained on the surprising news that U.S. Senate Majority Leader Chuck Schumer and Sen. Joe Manchin reached agreement on a bill that would provide hundreds of billions of dollars for efforts to fight climate change over a 10-year period.

How Did Solar Stocks React to the Climate Bill?

While the package has yet to be put to a vote, the news kicked off a rally in the sector. Among the top performers in trading on Thursday were Sunrun RUN, Plug Power PLUG, and Stem STEM.

Morningstar analyst Brett Castelli, who covers companies in the renewable energy space, sees the bill providing a tailwind for names in the residential solar industry, such as Sunrun and SunPower SPWR.

If approved, the bill “is a gamechanger for (the) domestic manufacturing of items such as solar panels, which historically have been largely imported,” Castelli says. First Solar FSLR is one company that he thinks is poised to benefit from the bill's tax credits for the manufacturers of both solar and wind systems.

The legislation would also provide incentives for new technologies that previously were not eligible for tax credits.

“This includes areas such as clean hydrogen and stand-alone energy storage,” Castelli says. “We view these as among the biggest beneficiaries.”

That means there will be an increase in expectations for the number of renewable energy projects in coming years, Castelli says. He expects this will be especially meaningful for firms exploring newer technologies, such as Plug Power and its hydrogen solutions.

What’s Next for Solar Stocks?

While the bill is exciting for solar stock investors, the actual implications have yet to be fleshed out, much less passed by Congress. “Currently the market is painting with a broad brush, but the details have the potential to distinguish winners and losers in the industry,” Castelli says. Investors should continue to be cautious about which solar companies they choose to invest in.

The solar industry is still incredibly competitive. Right now, the solar stocks covered by Castelli have yet to earn an economic moat rating, meaning that none of the firms have achieved a durable competitive advantage versus their peers, through things like high switching costs or intangible assets like patents. Castelli also warns that investors should keep an eye on energy prices when choosing to invest in solar.

“Solar and wind compete against natural gas, so if those prices remain elevated for longer than expected, it will be a positive for renewables, and vice versa” he says.

Many solar stocks were already considered fairly valued by Castelli before the rally sparked by the climate bill.

While he intends to raise his fair value estimates by 10% or more for solar firms, with increases varying depending on the company, many would still not be significantly undervalued at recent prices.

Castelli views SunPower and Plug Power as the most attractive among the group.

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