Two ways to invest in solar energy

Many investors thought 2020 was a breakthrough year for solar energy as heightened interest in clean power and falling costs gave the companies a new appeal.

But one of last year’s best performing sectors is one of the poorest this year as all renewables have sold off sharply. However, the fundamentals remain strong and for those who are patient and feel comfortable with the volatility, the current environment is an opportunity.

Here are two solar energy options. One is the Invesco Solar ETF (NYSE: TAN) considered a sector benchmark fund. The fund is off 19% year-to-date.

The other is an update on Guelph, Ont.-based Canadian Solar Inc., (NDQ: CSIQ), which is off 29% year-to-date even as its profitability continue to impress.

Invesco Solar ETF (NYSE: TAN) $83.33. (All figures in US dollars.)

Background: The Invesco Solar ETF is used as a proxy for the solar industry and has 100% of its holdings in solar manufacturing and related equipment including the technology to operate power plants, store energy, and build related equipment. It is passively managed, follows the MAC Global Solar Energy Index, and is rebalanced quarterly. It has $3.2 billion in assets and 56 holdings.

Performance: While the fund is down about 19%year-to-date at the time of writing, it is about 65% higher year-over year.

According to Morningstar Research, the ETF had a total return on an annual basis of 239% in 2020 and 65.6% in 2019.

Holdings: About half of the companies are in the US, with roughly a quarter each in Asia and Europe.

The top holdings are California-based Enphase Energy Inc., which makes solar power management software (11.5%), and Israel’s SolarEdge Technologies Inc. (11.22%), which makes solar power inverter and monitoring systems for battery storage. China’s Xinyi Solar Inc. (7.5%) makes solar panels and develops and operates solar farms. Canadian Solar is a fund holding.

Discussion: The ETF offers broad diversification within the solar sector with a reasonable management expense ratio of 0.50%. Its higher weighting towards North American companies means a greater participation in higher margin solar products, including inverters, which are the brains of these systems.

Inverters convert the direct current (DC) power that solar panels create to alternating current (AC) power that is usable in homes. They also maximize power output and optimize the output of the farm.

In a recent interview, Jason Bloom, Global Macro ETF Strategist with Atlanta-based Invesco, noted that Chinese companies have dominated the commodity side of the solar panel business, while North American companies offer better quality and technology in this area.

Dividend: The fund paid a modest distribution in its latest 12 months yielding 0.11% on an annual basis.  

Canadian Solar Inc. (NDQ: CSIQ) $36.54. (All figures in US dollars.)

Background: Canadian Solar, based in Guelph, Ontario has operations in 24 countries. It has evolved from a low-cost manufacturer of solar panels into one that now designs, builds, and sells solar power plants for utilities and commercial and industrial customers.

Canadian Solar is well along with plans for a dual listing in China.

Performance: Canadian Solar was a top performer in 2020, but since hitting a high of $67 in January 2021 the shares have slid with the sector. Year-over year they are still up 19.9% .

Financials: Canadian Solar’s latest results were strong and better than expected. During the second quarter, to June 28, it delivered record module shipments and reported record revenue of $1.18 billion. Its gross margin was ahead of guidance and net income of $11 million ($0.18 per share) was double that of a year ago. The expectation was for a quarterly loss.

Discussion and outlook: In his remarks to analysts, CEO Shawn Qu emphasized the opportunity in China, the world’s largest solar market, noting the company is building an ingot manufacturing facility in Shanghai to be close to that market.

Canadian Solar continues to expand in China, which will mitigate some of the pressure of higher shipping costs. It raised module prices in the quarter by 15-20% as COVID-related bottlenecks raised raw material prices.

Mr. Qu reiterated that 2021 will be a good year. He said Canadian Solar is pushing ahead with its battery storage investments and the software and systems that manage power plants. There is a growing battery storage backlog and surging demand. He expects the company to capture 10% of the solar battery storage market in the US alone in 2021.

Dividend: Canadian Solar does not pay dividends but has a share buyback program.

This is an edited version of article that appeared in the Internet Wealth Builder on Sept. 13, 2021.  For information on how to reprint this article please view this page.