Greentech peaked in February and bottomed in May. There are still headwinds – as there are for many growth stocks – but we’re seeing the sector build a base for a resumption of its long-term bull move. We’re also seeing more stocks that are setting up for long-term success and more predictable performance from our current holdings.
This issue, we examine one of the leading providers of an essential technology for residential solar systems, a fast-growing market. The last two quarters for home-based solar have been the best ever in the U.S. Our pick this week is gaining market share with a unique approach that makes systems more efficient and more reliable. It’s also expanding into segments that could quadruple sales in coming years.
We also have newly recommended ratings and sell-stops for many of our current portfolio holdings.
Read through for more details.
Enphase Energy Inc.
Overview
Residential solar installations had their second-best quarter in the U.S. to open 2021, with 905 megawatts (MW) put on rooftops (or elsewhere on a homeowner’s property), according to data from Woods Mackenzie, an industry researcher. That’s up 11% year over year though down 8% from the last quarter of 2020, the best quarter for installations ever. The only things holding back the market right now are supply chain issues, which constrained growth quarter over quarter. Projections are for continued growth in the domestic sector. The 2024 estimate dip is due to the scheduled expiration of tax credits for solar installations. Those are expected to be extended by the infrastructure bill currently pending in Congress.
Since solar panels take sunlight and convert it into direct current (DC), the electricity needs to be converted to alternating current (AC) to be used by households. That makes the inverter, which flips the power from DC to AC, as important as the panels on the roof. There are a few flavors of inverters. String inverters aggregate the power from all of a home’s solar panels (or a sizeable batch of around 10 panels) and then convert the power to AC altogether. They’re cheaper up front, generally reliable, but have the downside of being only as efficient as the least efficient panel feeding into it. That can be affected by everything from tree shade to bird droppings or simple panel variability. When a string inverter fails, all power from it stops. Microinverters are inverters situated with each panel, transforming the power at the source before feeding into the household or its storage system later. They’re more costly, close to double the cost a string inverter and roughly 15% of the total cost of a home’s solar system, but they have the benefit of being able to monitor each panel independently and avoid full power shut downs if a panel or inverter fails. In between those two options, are centralized string inverters with optimizing electronics co-located with the panels.
Business Model
Enphase Energy (ENPH) is one of two solar inverter companies that dominate the U.S. market, along with SolarEdge (SEDG). It makes microinverters, while SolarEdge makes optimized string inverters. Other companies such as ABB Ltd (ABB) and Germany-traded SMA Solar Tech make string inverters for the U.S. market that claim smaller share.
Enphase is a California-based company founded in 2006 with a focus on microinverters. Any modern panel can use an Enphase microinverter, and the company has promotional partnerships with panel makers Sunpower (SPWR), Sunnova (NOVA) and AEE Energy, among others, and it generally sells microinverters to solar installers who then deploy their product.
Last quarter, ending June 30, Enphase shipped 2.36 million microinverters – a typical house would use about 20 – with demand well ahead of the supply it can produce at its India and Mexico manufacturing facilities. Simply, more solar installations means more demand for inverters.
Equally important to Enphase longer term is that inverters have developed from being just a switch that changes electrical current to an entry point into predictive management, smart home control and energy storage systems. Like competitors, Enphase sees cloud-based energy management as a way to boost efficiency of home systems, and the addition of in-home storage with whole-home energy management software as a way to get existing customers to return and buy more. For instance, as customers add EVs, the Enphase system can manage the flow of electricity, enabling an EV to draw power from the home or feed power into it, or flow to its energy storage. In the long run Enphase believes it has the potential to collect an additional $8,000 from each existing customer it can upgrade to storage systems (microinverter-only customers spend about $2,000 on average).
The company sells its home-based energy storage packs in two sizes, 10.1 kilowatt hours (kWh) and 3.4 kWh. It sold 43MW worth of them in its latest quarter. Battery wait times are higher than desired by the company, up to 14 weeks, but it believes it can optimize production to get that wait down to below 10 by year’s end. Enphase just started selling storage products in Germany and expects to enter into the Australian market by the end of 2021. In addition to storage systems that are stationary in the home, Enphase is also selling portable power, battery packs that can plug in three devices and deliver 1.6 and 3.2 kWh, the company feels will be particularly successful in the India market.
Enphase is also expanding its microinverter offerings into small commercial systems with a new product, the iQ8, that can handle the greater wattage a business-based system would demand. Launch of that has been slowed by the company to manage supply chain issues, so revenue probably won’t be seen until the fourth quarter. As with houses, storage systems and cloud management software will be offered too.
Business Performance and Outlook
SolarEdge is often cited as the largest inverter seller in the U.S., but our analysis of company-reported data tells us otherwise, with Enphase the leading inverter provider in the US by dollar-volume. SolarEdge is larger by global sales, and has more robust business in Europe and Australia, while Enphase is smaller by total sales but has the bulk – more than 80% – of its sales from the U.S. The accompanying graph shows U.S.-derived sales from both companies in each of their past four second quarters, both ending June 30. We like that the company has been taking market share, although in a growing market it’s not necessarily a bad omen for SolarEdge while being a good one for Enphase.
Enphase has been profitable since 2018, posting $1.37 earnings per share last year and is expected to deliver $2.14 this year and $2.80 in 2022. Total sales for 2021 should hit $1.35 billion, from $774 million, and perhaps $1.8 billion next year. The expansion of product offerings should help the business catch more of the tailwinds from adoption of solar. By adding small-commercial solar, on-site storage and portable power systems, the company says it has an addressable market of $14.1 up from, $4.1 billion last year.
Management believes its base operating model can support a 35% gross margin, 15% operating expenses and 20% operating income. It’s been performing better at each of those metrics this year.
Issues to Consider:
- U.S. solar investment tax credits are set to expire in 2024. We argue it wouldn’t be a death-knell for the market – fundamental demand will still be there – but it would be bearish and many consider the tax credits essential to the domestic industry. The federal infrastructure bill is yet to be finalized, but there is widespread belief the credits will be extended. Additional incentives for residential and small business solar will be incrementally bullish.
- Smart energy management software and home storage are more crowded segments. While Enphase and SolarEdge dominate the U.S. inverter market, with 80% to 90% share combined, storage is more competitive, with companies like Tesla (TSLA) and Generac (GNRC), the diesel back-up generator maker which is getting into renewables and just purchased an inverter business.
- The global semiconductor supply crunch affects Enphase, resulting in it being unable to fulfill all the demand it could have otherwise. Current-quarter supply remains tight, but is better than last quarter.
- Management has $500 million in share buybacks authorized for the next three years. They have indicated they intend to use the program to buy shares on relative weakness in the market, which should help support the price.
- Enphase has no net debt.
- We choose Enphase over SolarEdge here because of its strength in the U.S. – we want more exposure for the growing domestic market.
Technical Analysis
ENPH is basically unchanged year-to-date, although shares have trawled between 114 and 213 in the past 8 months. On the long-term charts, action looks very much like a base-building after completing a 2.5-year rally. Encouragingly, the number of funds owning ENPH has increased 125% in the past 12 months, including 40% year-to-date, when shares have largely been stuck at current levels. That suggests long-term support for shares and institutional expectation growth will continue. ENPH bounced off support at the 200-day line mid-month and have retaken the 40-day moving average this week, both bullish.
What to Do Now
The 163 level should be firm support for shares, while more immediately the 178 spot is either support or resistance, depending on where ENPH sits. Shares appear positioned to make a run at a recent top of 193. There’s a band of stronger resistance at 210-215, near the all-time high. We’re going to add shares here with a sell-stop, on a closing basis, around 161. BUY
Enphase Energy, Inc. (ENPH)
Revenue (trailing 12 months): $1.061 billion
Earnings per share (TTM): $1.27
All-time high (intraday): 229.04
Market cap: $23.64 billion
Recommendation: Buy
The ESG Three
The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. We screen further to eliminate widely held companies we believe have clear ESG problems. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.
Eli Lilly & Co. (LLY)
What is it?
A drug manufacturer with strong business in diabetes, neurology, oncology and erectile dysfunction.
Why is it ESG?
It is average to better-than-average overall on ESG compared to peers and has a strong employee engagement practice. However, it is average-to-lagging in social and governance issues. ESG funds own $609 million of shares.
Why now?
Q2 revenue was above forecasts at $6.7 billion with eight drugs providing strong sales, lessening dependence on any one item. Shares are pulling back toward support near 251 after making all-time highs in the 270s.
West Pharmaceutical Services (WST)
What is it?
A manufacturer of packaging and delivery systems for pharmaceuticals and health care treatments.
Why is it ESG?
Considered a leader in all three components of ESG in the health care equipment sector, especially corporate governance to the benefit of small shareholders. ESG funds hold $263 million of shares.
Why now?
Shares are at all-time highs as pandemic-induced demand continues to power strong sales growth – 25% this year is expected. Shares are overbought right now, a pullback to initial support around 437 likely provides a better entry.
Align Technology Inc (ALGN)
What is it?
A provider of clear dental aligners, digital services and scanners used in dentistry.
Why is it ESG?
Its employee incentivization programs are better than peers, as is its focus on diversifying its workforce. However, governance – 6 of its 15 directors have served for 15 or more years, which reduces their likely independence – is considered worse than peers. ESG funds hold $160 million of shares.
Why now?
People adopted use of teeth aligners more during the pandemic, boosting sales. The company kept up spending in the pandemic which hurt profitability but is expected to result in wider margins moving ahead. Shares recently set all-time highs, meaning there is no pent-up selling as resistance.
Our Greentech Timer
Near-term signals from our Greentech Timer suggest we continue to face headwinds. The 20-day and 40-day moving averages are downward trending. The sector is struggling with resistance at the 40-day after breaking lesser resistance from the 20-day, as well. Our Greentech Timer is fully bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential). Right now, the Timer flashes caution.
Still, stepping back and looking at the longer, cyclical view, Greentech has completed a 50% Gann Retracement. This theory, developed by early 20th century trader and pioneering technical analyst W.D. Gann says that normal action involves a step back of half the gains made in a recent run – in fact, in Gann’s experience, a 50% retracement showed the most profitable trades. There are various flavors of these wave theories – Elliott Wave and Fibonacci are two of the more needlessly complex ones. We prefer Gann for his simplicity and our experience, too, that these 50% dips occur in normal longer-term bullish moves. We judge this movement from the bottom of 2020’s pandemic panic to the peak in February this year, back to the bottom of early May. The 50% mark, on a closing basis, was 78 – Greentech overshot that just a bit, but basically we’re on target. That doesn’t mean we won’t break down from here – nothing is guaranteed – but it is likely we’re base-building at current levels for a move higher. The chart here is a weekly view of the Wilderhill Clean Energy Index ETF, the basis of our Timer.
Current Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell-stops are essential to long-term success to our approach. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows, because closing prices are far more important than dips during mid-session. However, if you prefer to have a standing sell order on intraday violations of the level, in the long run our experience is it really shouldn’t affect performance too badly and certainly not as badly as not having sell-stops at all.
The special opportunities portfolio is named Excelsior, which is managed without consideration to the Real Money Portfolio. The current Excelsior portfolio is an evenly divided basket of SPAC warrants. We have no firm sell-stops; use your discretion.
SX Greentech Advisor Real Money Portfolio
| Stock | Buy Date | Buy Price | Price on 8/31/21 | Sell-Stop | Gain/Loss | Rating |
| Aemetis, Inc. (AMTX) | — | — | 11.12 | — | — | Watch |
| Ameresco (AMRC) | — | — | 69.15 | — | — | Watch |
| Aptiv plc (APTV) | 8/11/21 | 164.39 | 152.19 | around 147 | -7.42% | Hold |
| Chipotle Mexican Grill (CMG) | 7/22/21 | 1,773.91 | 1903.33 | around 1,790 | 7.30% | Buy |
| Enphase Energy (ENPH) | New | — | 173.73 | — | — | Buy |
| First Trust ISE Water Index ETF (FIW) | 8/3/21 | 87.99 | 90.73 | near 86.50 | 3.11% | Buy |
| KraneShares MSCI China Clean Technology ETF (KGRN) | 8/19/21 | 44.18 | 47.02 | around 43.25 | 6.44% | Buy |
| ON Semiconductor Corp. (ON) | 8/3/21 | 44.63 | 44.36 | around 39-40 | -0.60% | Buy |
| Steel Dynamics (STLD) | 5/19/21 | 61.13 | 67.49 | around 66 | 10.40% | Hold |
| Trex (TREX) | 5/5/21 | 107.44 | 109.76 | around 102 | 2.16% | Hold |
Portfolio notes: STLD paid a 26-cents a share dividend to holders of record as of June 30. Add .425 of a percentage point to the Gain/Loss to get our total return on the position.
SX Greentech Advisor Excelsior Portfolio
| Security | Buy Date | Buy Price | Price on 8/31/21 | Gain/Loss | Rating | Note |
| Live Oak Acquisition Corp. II (LOKB) Warrant | 6/16/21 | 2.57 | 1.32 | -48.54% | Buy | Navitas Semi |
| Origin Materials (ORGN) Warrant | 6/16/21 | 2.43 | 1.71 | -29.48% | Buy | |
| Li-Cycle (LICY) Warrant | 6/16/21 | 2.42 | 1.70 | -29.75% | Buy | |
| ReNew Power (RNW) warrant | 6/16/21 | 1.81 | 1.31 | -27.62% | Buy | |
| Volta (VLTSA) warrant | 6/16/21 | 2.21 | 1.64 | -25.79% | Buy | |
| Ree (REE) Warrant | 6/16/21 | 1.10 | 1.06 | -3.64% | Buy |
Real Money Portfolio
Aemetis (AMTX)
Shares of the renewable natural gas and ethanol maker are still working to break resistance at the 200-day moving average in the mid-10 range. WATCH
Ameresco (AMRC)
AMRC looks ever closer to breaking through resistance at 69, with higher lows putting shares into a tight range of late. With our Greentech Timer still suggesting some caution, we’re falling back on the old wisdom of not anticipating a break out. WATCH
Aptiv (APTV)
Aptiv tested support last week and recovered a bit this week. We’re now below the 40-day moving average, which is acting as resistance. Taking a step back and looking at the weekly chart, APTV shows positive movement. Our sell stop is “around 147.” Given market conditions, we’re adjusting our recommendation from “buy” here. HOLD
Chipotle Mexican Grill (CMG)
CMG continues to inch higher, as bears haven’t been able to do much to reverse the uptrend. Shares hit an all-time high last week, though volume and volatility have lessened. We’re raising our sell-stop again this week, to “around 1,790” from “near 1,777.” BUY
First Trust Water ETF (FIW)
Water stocks remain the leader in Greentech, and our primarily U.S.-focused ETF continues to display strength. Let’s inch up our sell-stop to “near 86.50” from “near 85.50.” BUY
KraneShares China Clean Tech ETF (KGRN)
The China-focused ETF is working at holding support on the 40-day average, just under 47. Shares looks bullish overall though not wildly so. We’re raising our sell-stop to “around 43.25,” from “around 42.” BUY
Onsemi (ON)
ON Semiconductor changed its name to Onsemi with the same ticker. More importantly, it announced it is buying GT Advanced Technologies for $415 million cash. The privately held GT was for a time a hot stock that sold wafers to Apple and then stumbled in bankruptcy in 2014. It since reformed and has been focused on developing silicon carbide, SiC, a fusion of silicon and carbon that handles high heat and power better than silicon or gallium nitride, a silicon replacement manufactured by Navitas Semiconductor, held in our Excelsior portfolio. There’s probably room for both in the future, with SiC believed better in larger forms given its inherent superiority for thermal transfer. The move puts Onsemi into position to better capitalize on EVs and EV charging as a result, although adoption of SiC in EVs isn’t guaranteed. SiC is a small market, with about $300 million to be sold overall this year. Onsemi estimates EV chargers could incorporate $4,000 worth of SiC apiece, potentially a market in the billions of dollars if true. Onsemi already trades at 4 times current year sales, much cheaper than peers. Our sell-stop “around 39-40” remains, with good support above that level. Given the positive chart and our belief management’s shifting into higher-margin semiconductors will adjust the historical multiple the market placed on ON, we continue to see good upside from here. BUY
Steel Dynamics (STLD)
STLD is improving on good volume and looks nicely bullish here. We want to see shares break the recently set all-time high in 71.67 to make a run toward 80. Our sell-stop is “around 66,” which would lock in a decent profit. HOLD
Trex (TREX)
Trex is finally pushing up through resistance, setting an all-time high this week. The breakout isn’t explosive, and it’s not being done on great volume and with no news. Still, it’s bullish and there’s a path to add 15 or so points here. We’re raising our sell-stop to “around 102” from “near 101.” That’s a level below normal volatility and the 40-day moving average. The more conservative could raise the sell-stop to our buy price, 107.44. There has been little news. HOLD
Excelsior Portfolio
Our rating remains BUY on each of our SPACs, preferable as a basket of even positions. We have no sell-stops.
Li-Cycle (LICY warrant)
Little news and little movement in shares or our warrants in the lithium recycler. Action is typical of recent post-SPAC merger trading.
Navitas Semiconductor / Live Oak II SPAC (LOKB warrant)
Warrants are weaker this week while shares have seen a small lift. Little news. This is the last of our SPAC warrant purchases that is still to complete its merger.
Origin Materials (ORGN warrant)
The carbon negative plastics start-up also has little news to move shares or warrants this week. Management is slated to present at a Bank of America conference today as part of educating the market about the business.
Ree Automotive (REE warrant)
Mild improvement in the EV chassis maker this week on no real news.
ReNew Power (RNW warrant)
After completing the SPAC merger last week shares are largely unchanged while warrants improved by a nickel.
Volta Charging (VLTA warrant)
SPAC shareholders approved the merger last week and the stock ticker has changed to VLTA. Warrants have perked up on the event, adding more than 50% in the past week. Shares are up about 7% in the same period. Little news other than the usual release on new charger installations. Volta is an EV charging station provider whose business plan includes display advertising for businesses near the station.
Thank you for being a subscriber. Contact me anytime with questions or comments at brendan@cabot.net. The next issue of SX Greentech Advisor is out Wednesday September 15. Our regularly scheduled update comes next week, September 8. Extraordinary alerts will go out if needed.
The next Sector Xpress Greentech Advisor issue will be published on September 15, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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