SunPower Is a Viable Momentum Trade for the Near Term

Thanks to a rise in environmental concerns fueled by demographic shifts, solar energy companies are presently enjoying a renaissance of sorts. One of the more consistently robust names in this viable space is SunPower (NASDAQ:SPWR). On a year-to-date framework, SPWR stock is up nearly 285%. As well, a recent rally helped contribute to the tally.

a phone with the sunpower logo in front of a U.S. flag
Source: IgorGolovniov / Shutterstock.com

Barring an extremely unusual set of circumstances, President-Elect Joe Biden will take the White House early next year. And this one event has catapulted investments like SPWR stock to the forefront. As you likely know, the Biden plan will ensure that “the U.S. achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050.”

Of course, a Biden administration can do much more if Democrats somehow take control of the Senate. That will likely depend on two runoffs in Georgia. In the most realistic scenario, Democratic contenders must win both races for Kamala Harris to have the tiebreaking vote as vice president.

Failing to secure this critical set of victories will undoubtedly hamper Biden for at least the next two years.

However, bullish investors shouldn’t just focus on the senatorial race regarding SPRW stock. Amid the terrible novel coronavirus pandemic, much of the country suffered a massive heat wave. In turn, this caused rolling blackouts in some parts of the country as the electrical grid couldn’t handle the demand overload.

Perhaps this more so than other event related to climate change got people to wake up to solar energy. Not only can solar panel systems help mitigate costly electricity bills, attached with a storage system, homeowners can theoretically go off grid. Or, at the very least, they have usable power when the grid goes down.

Put another way, 2020 was the year of free marketing for SPRW stock and its ilk. Still, before you dive into the company, it may be time to consider the conflicting fundamentals working against solar energy.

Demographic Awkwardness May Hurt SPWR Stock

One of the curious developments of the pandemic is soaring housing demand. If there was pivotal evidence of a K-shaped economic recovery, this is it. Those who have money have been pouring into the housing market, resulting in soaring prices.

Further, millennials who may be priced out of coastal areas decided to relocate to other states. According to SmartAsset.com, some of the most popular destination states include Texas, Georgia, Florida, Arizona and Nevada. In other words, young Americans are moving to the Sun Belt, which in turn helps SPWR stock.

Thus, the solar bonanza should continue, right? Well, it might. However, some risk factors exist which prospective buyers of SPWR stock should be aware.

First, with millennials moving to new locations, that act alone is a killer for cash flow. Unfortunately, one of the disadvantages of solar energy is that it requires significant upfront costs, with homeowners breaking even after several years. Simply, new and younger buyers may not have that kind of cash in addition to the money required to close a home deal.

Second, baby boomers are downsizing, which invariably limits the market for solar energy companies. At a certain point, solar energy doesn’t make sense. That’s especially the case for retirees, who may not be using that much energy to begin with. Therefore, it’s possible that the migration effect benefiting SPWR stock could be washed out by other demographic trends.

Consumer sentiment vs. home sale prices
Click to Enlarge
Source: Chart by Josh Enomoto

Just as importantly, investors may want to consider the relationship between consumer sentiment and median home sale prices. Back before the 2008 market crash, consumer confidence dropped sharply before housing prices eventually plummeted. Essentially, consumer confidence was an early-warning indicator to the Great Recession.

Currently, we also see a dichotomy between sentiment and housing prices, with very low readings in consumer confidence while housing prices remain elevated. Of course, you don’t want to read too much into one economic data point. However, it’s possible that the enthusiasm toward SPWR stock is getting ahead of itself.

SunPower Is a Momentum Trade

At this juncture, I feel reasonably comfortable in stating that SPWR stock is a momentum trade. It’s really feeding into the enthusiasm for clean and renewable energy. Plus, as a McKinsey & Company research note points out, people are willing to pay for sustainable products and solutions. Theoretically, this is a big positive for the solar energy industry.

However, cash-strapped millennials moving to their first homes combined with baby boomers downsizing suggest a conflict with sharply rising SunPower valuations. As well, one has to wonder what the upper limit of the K-shaped recovery is. I mean, it’s hard to imagine the foundation of America (i.e. small businesses) suffering while everybody else goes into party mode indefinitely.

Still, momentum is a funny thing. I believe election euphoria should bode well for SPWR stock in the near term. However, I’d be careful about getting too deeply involved, especially because prices are already elevated.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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