U.S. tariffs expected to hurt solar stocks in the short term

A 30% tariff on import of solar cells and modules by the U.S. can dampen the growth of the space in the near term.

Rising demand for a carbon-constrained environment along with declining costs of solar technologies should keep the outlook for the U.S. solar stocks favorable. However, the imposition of a 30% tariff on import of crystalline-silicon solar cells and modules by the U.S. government in January and flaring trade tensions with China and America can dampen the growth of the space in the near term.

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Per a report by International Renewable Energy Agency (IRENA), solar photovoltaic (PV) modules prices dropped more than 80% in 2009-2017 time frame. Such plummeting costs have prompted other nations like India and Japan to rapidly expand their solar industry. This in conjunction with grid developments has made the solar industry an attractive investment target for big corporate houses, apart from utility providers.

However, Trump's signing of an order to repeal the Clean Power Plan and decision to withdraw from the Paris climate agreement last year made a few analysts skeptical about the near-term growth prospects of the U.S. solar stocks. Nevertheless, abundance of solar energy allows it to score higher than fossil fuels, which are exhaustible. This should keep solar stocks' momentum alive.

Looking at shareholder returns over the past year, it appears that the current U.S. government’s repeated moves against renewables hardly impacted investors’ confidence in the industry. Even after revocation of the Paris accord, electric utilities throughout the United States continue to shift toward a clean energy environment.

In fact, a number of coal-fired generators have been closed across the nation. This shows that the growth of the solar industry is inevitable. Moreover, demand for solar energy is projected to rise 20% annually (per the Renewable Energy: United States report of December 2017), indicating immense growth scope in this space. This is encouraging for solar investors.

The Zacks Solar Industry, which is a 15-stock group within the broader Zacks Oils-Energy Sector, has outperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively rallied 32.6%, the Zacks S&P 500 Composite and Zacks Oils-Energy Sector have gained 14.2% and 15.1%, respectively.

The Chinese government's announcement of a sudden policy makeover on Jun 1, involving a significant cut in subsidies offered to the nation’s solar projects, dealt a major blow to the solar industry worldwide. This policy change is anticipated to be detrimental for those U.S.-based solar stocks that have increased commitments to ship modules or are set to construct new projects in China. China's dominance in solar space now poses a serious threat to U.S. based operators, all the more with the imposition of the import tariffs.

While the near-term prospects might not look very welcoming for investors, the long-term (3-5 years) EPS growth estimate for the Zacks Solar industry appears promising. The group’s mean estimate of long-term EPS growth rate has been increasing since August 2017 to reach the current level of 17.5%. This compares to 9.8% for the Zacks S&P 500 composite.

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SOURCE: Zacks; https://www.zacks.com/commentary/168353/solar-stock-outlook-tariffs-to-hurt-cost-cuts-a-relief

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