4 Downgraded Solar Stocks to Avoid

Even though governments worldwide have been taking steps to transition their countries to a renewable energy-driven future, rising input costs and supply chain constraints are affecting the renewable energy sector’s growth. Federal Reserve chair Jerome Powell said that the global supply chain issues could remain through 2022.

Analysts at Guggenheim Partners recently downgraded four solar stocks from “Buy” to “Neutral,” primarily on concerns over rising input costs, namely steel, aluminum, labor, and panels. Furthermore, Kelsey Goss, research analyst at Wood Mackenzie, said, “There’s lots of uncertainty in the industry because they do not know how strict the WRO enforcement will be, or currently is.”

The solar stocks downgraded by Guggenheim analysts—SolarEdge Technologies, Inc. (SEDG), First Solar, Inc. (FSLR), Shoals Technologies Group, Inc. (SHLS), and Array Technologies, Inc. (ARRY)—do look significantly overvalued at their current price levels. So, we think these stocks are best avoided now.

SolarEdge Technologies, Inc. (SEDG)

Headquartered in Israel, SEDG designs, develops, and sells direct current (DC) optimized inverter systems for solar photovoltaic (PV) installations worldwide. It offers inverters, power optimizers, communication devices, and smart energy management solutions.

On October 14, 2021, SEDG was reported to have a6.8%  ROCE, a low return that underperforms the 13% semiconductor industry average. Furthermore, its ROCE has declined 23% over the last five years.

SEDG’s total operating expenses increased 37.9% year-over-year to $100.63 million for its fiscal second quarter, ended June 30, 2021. Also, the company’s cash and cash equivalents were $524.11 million for the period ended June 30, 2021, versus $827.15 million for the period ended December 31, 2020. Its total current assets were $1.49 billion, compared to $1.72 billion for the same period. And its s net income decreased 4.7% year-over-year to $75.17 million for the six months ended June 30, 2021.

In terms of forward EV/S, SEDG’s 7.82x is 87.5% higher than the 4.17x industry average. And its 8.06x forward P/S is also 96.9% higher than the 4.09x industry average.

The stock has lost 17.3% in price since hitting its 52-week high of $377 on January 8, 2021, to close yesterday’s trading session at $311.92.

SEDG’s POWR Ratings reflect its poor prospects. It has an overall D grade, which indicates a Sell. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

Also, the stock has a D grade for Value, Stability, Sentiment, and Quality. Click here to access the additional POWR Ratings for SEDG (Momentum and Growth). SEDG is ranked #15 of 18 stocks in the F-rated Solar industry.

First Solar, Inc. (FSLR)

Tempe, Ariz.-based FSLR provides photovoltaic (PV) solar energy solutions in the United States, Japan, France, Canada, India, Australia, and internationally. It operates in two segments, Modules, and Systems.

FSLR’s net sales decreased 21.7% sequentially to $629.18 million for the second quarter, ended June 30, 2021. Also, its gross profit decreased 5.8% sequentially to $174.12 million. Its total liabilities and stockholders’ equity came in at $7.25 billion for the period ended June 30, 2021, compared to $7.11 billion for the period ended December 31, 2020.

In terms of forward non-GAAP P/E, FSLR’s 28.50x is 14.7% higher than the24.85x industry average. Furthermore, its 20.31x forward EV/EBIT is also higher than the 20.25x industry average. Analysts expect FSLR’s revenue to decrease 5.3% in its fiscal year 2022. And its EPS is expected to decline at a 37.7% rate over the next year. It has lost 3.1% in price since hitting its 52-week high of $112.50 on January 25, 2021, to close yesterday’s trading session at $109.04.

FSLR’s POWR Ratings reflect its poor prospects. The stock has a D grade for Growth and Stability.

We’ve also rated it for Momentum, Value, Sentiment, and Quality. Click here to access all the FSLR ratings. FSLR is ranked #4 in the Solar industry.

Shoals Technologies Group, Inc. (SHLS)

SHLS in Portland, Tenn., provides an electrical balance of system (EBOS) solution for solar energy projects in the United States. It offers EBOS components, such as cable assemblies, inline fuses, combiners, and others.

On August 30, 2021, SHLS agreed to collaborate with Ernst & Young LLP (EY US) for Shoals’ electric vehicle (EV) charging systems solutions. However, this initiative might take a toll on the company’s already weak financials.

For the six months ended June 30, 2021, SHLS’ net income decreased 94.4% year-over-year to $820,000. Its total liabilities and stockholders’ deficit/members’ deficit came in at $273.72 million for the period ended June 30, 2021, compared to $195.31 million for the period ended December 31, 2020. Its EPS stood at negative $0.01 in the period from January 27, 2021, to June 30, 2021.

In terms of forward EV/Sales, SHLS’ 12.17x is 504.6% higher than the 2.01x industry average. Also, its forward P/S of 11.30x is 609.9% higher than the 1.59x industry average of 1.59x.

Analysts expect SHLS’ EPS to decrease 17.1% in fiscal 2021. Also, it has lost 24.8% in price over the past six months to close yesterday’s trading session at $26.01.

SHLS’ POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. In addition, the stock has a D grade for Stability and Sentiment.

We also have graded SHLS for Growth, Value, Momentum, and Quality. Click here to access all of SHLS’ ratings. SHLS is ranked #70 of 91 stocks in the Industrial - Equipment industry.

Click here to check out our Industrial Sector Report for 2021

Array Technologies, Inc. (ARRY)

ARRY manufactures and supplies solar tracking systems and related products for customers in the United States and internationally. Its products include DuraTrack HZ v3, a single-axis solar tracking system, and SmarTrack, a machine learning software. ARRY is based in Albuquerque, N.M.

On September 16, 2021, a class-action lawsuit was filed in federal court against ARRY. Johnson Fistel, LLP is investigating the claims on behalf of the company. The lawsuit alleged that the defendants made false and misleading statements, thereby failing to adequately disclose the then-existing rise in costs related to certain supplies.

ARRY’s total current assets came in at $330.21 million for the period ended June 30, 2021, versus $375.18 million for the period ended December 31, 2020. Its total assets were $622.32 million, compared to $656.02 million for the same period. And its gross profit decreased 49.8% year-over-year to $70.64 million for the six months ended June 30, 2021.

In terms of forward EV/S, ARRY’s 3.24x is 61.2% higher than the 2.10x industry average. Furthermore, its 2.69x forward P/S is also higher than the 68.8% industry average.

ARRY’s EPS is expected to decline by 76.3% in fiscal 2021 and by 1.3% per annum over the next five years. Also, the stock has lost 38% in price over the past six months to close yesterday’s trading session at $18.20. 

ARRY’s POWR Ratings reflect its poor prospects. It has an overall grade of D, which indicates a Sell. Also, the stock has a D grade for Stability.

Click here to access the additional POWR Ratings for ARRY (Momentum, Growth, Value, Sentiment, and Quality). ARRY is ranked #8 of 18 stocks in the Solar industry.

SEDG shares were trading at $311.50 per share on Tuesday afternoon, down $0.42 (-0.13%). Year-to-date, SEDG has declined -2.39%, versus a 23.39% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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