Recognizing that the market moves in both directions across the vertical axis, JPMorgan analyst Mark Strouse recently downgraded shares of solar energy firm First Solar (NASDAQ:FSLR) to “neutral” from “overweight.” In particular, Strouse cited practical concerns about the company already scooping up the low-hanging fruit of recent catalysts. Now, FSLR stock is dipping about 2% this afternoon.
Following the passage of the U.S. Inflation Reduction Act, JPMorgan assigned an “overweight” rating to FSLR stock. That represented an upgrade from its prior assessment. Per a White House statement, the act provides expanded clean energy tax credits for various industry subsegments, including solar.
Additionally, as part of its “Revitalize American Manufacturing” component, the act incentivizes domestic production of clean energy technologies. The act also aims to support U.S. workers through “targeted tax incentives aimed at manufacturing U.S.-sourced products such as batteries, solar, and offshore wind components, and technologies for carbon capture systems.”
This has organically facilitated upside catalysts for FSLR stock. However, Strouse believes the subsequent skyrocketing of shares will not be a recurring event. While the Inflation Reduction Act does fundamentally bolster renewable energy, Strouse says that, “with the stock up [more than] 120% over the past four months […] the ‘easy money’ has now been made.”
The Downgrade on FSLR Stock Is a Matter of Practicality
To be clear, Barron’s notes that “Strouse doesn’t believe current shareholders should sell the stock,” having raised his 12-month FSLR stock price target to $190 from $147. The analyst still says that First Solar should “perform in-line with the mean of our coverage universe.” So, this means the downgrade on FSLR stock largely centered on practicality.
On a year-to-date (YTD) basis, First Solar has gained about 90%. Over the trailing half-year, FSLR stock is also up approximately 138% as of this writing. In contrast, the benchmark S&P 500 index remains down double digits YTD. Moreover, despite some recent enthusiastic sessions, the index still finds itself more than 4% below parity for the past six months.
Interestingly, FSLR stock also skyrocketed several days before the passing of the Inflation Reduction Act, implying a “buy the rumor, sell the news” phenomenon.
Fundamentally, First Solar runs into the headwind of rising solar panel prices as well. Of course, the climate bill aims to reduce such costs over the long run. But with consumers suffering from macroeconomic pressures right now, FSLR stock may incur a slower period of growth.
In other words, First Solar has already captured the low-hanging fruit of two critical components: the political (climate bill passage) and the economic (sales to more affluent households). Moving forward, the gains may be incremental while the risks may be of larger gradations, hence the relative pensiveness toward FSLR stock.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
