3 Energy Stocks to Buy as China Cuts Solar Subsidies

There was good news recently for supporters of solar energy…

Despite tariffs imposed on imported solar panels, the United States installed more solar energy than any other source of electricity (accounting for 55% of all capacity installed) in the first quarter of 2018. According to a report from GTM Research, there were 2.5 gigawatts of solar power installed in the first quarter, a rise of 13% from the year earlier period.

This was part of the move globally toward renewable energy. In its annual review of world energy released in mid-June, BP (NYSE: BP) revealed a surprising fact – 17% of the world’s energy growth in 2017 came from renewable energy sources. That was the largest increase on record and the equivalent of the energy consumed by Sweden and Denmark in a year.

Much of this progress is the result of falling prices for solar panels, thanks to overproduction from Chinese companies. The International Energy Agency (IEA) estimates that solar power will soon be the cheapest source of new electricity in a number of countries.

However, there is a dark cloud on the horizon. As prices for solar power come down, government policymakers are moving away from subsidies for solar power projects and shifting toward auction-based systems to reward the lowest-cost producers of renewable electricity.

China’s Solar Eclipse

We saw such a move in the world’s biggest solar power market, China, announced in early June. It accounted for two-thirds of solar installations worldwide in 2017, with a 55% surge in new solar installations. So it was a bit of a shock to the industry when China said it would eliminate subsidies for most new solar projects as well as reducing feed-in tariffs.

China’s move was aimed at curbing runaway growth in the country’s solar generation, which had boomed under its generous subsidies program. The massive subsidies created a deficit of $15.6 billion in a fund set up to pay for the higher feed-in tariffs. The energy consultancy Wood Mackenzie forecast that deficit would soar to nearly $40 billion by 2020 if China had left its policy unchanged.

In addition, much of the solar power installed in China in recent years is “curtailed”, or unused, as provincial grid operators choose to use electricity from local coal-fired power plants instead. This practice is particularly prevalent in China’s far western provinces. In Xinjiang, for example, curtailment stood at more than 20% at the end of 2017. This was actually an improvement about one-third of installed capacity that stood idle the year before.

The government’s new policy sets a strict quota for solar installations and eliminates subsidies for any projects outside the quotas. And the quotas were so low that most of the quotas were already filled within the first five months of this year.

Because of China’s actions, solar installations worldwide are now expected to drop and the sudden contraction will place even more pressure on solar panel prices and on the manufacturers, who in many cases were already struggling. Wood Mackenzie expects that 20 gigawatts will be shaved off China’s solar installations this year as a result of the new policy.

That is equivalent to a fifth of last year’s overall global demand! Or as Edurne Zoco, head of solar research at IHS Market, told the Financial Times “If China really clamps down, there is no market, no combination of markets in the rest of the world that can actually compensate for that.”
The end result is that 2018 will likely be the first year in the short history of the industry that it will experience negative annual installation growth. And price-wise, Bloomberg New Energy Finance (BNEF) lowered their forecast for this year from a 25% price decline to a 34% drop for solar panels.

More on China: Buy This Export to China That Is Exempt From Tariffs

Investing in Solar

This is why you saw steep price declines of all solar power-related stocks in June. Is now a time then to look for bargains among the beaten-down solar stocks?

The answer is yes and no. Let me explain…

First of all, you must stay away from broad exposure to the industry through ETFs such as the Invesco Solar ETF (NYSE: TAN), which is down about 8.5% year-to-date. There are just too many of the lower-tier players in such a broad fund.

You will need to pick and choose, or as the old adage goes, ‘separate the wheat from the chaff’. One way to do that is to go with the beneficiaries of lower solar panel prices (despite the tariffs), the companies that install solar power.

One such example is Sunrun (Nasdaq: RUN), which is the largest residential solar power company in the United States with a 15%  market share. Its stock has soared over 122% year-to-date and is up 90% over the past year.

Since establishing its so-called ‘solar as a service’ model in 2007, Sunrun leads the industry in providing clean energy to homeowners with little to no upfront cost and at a savings to traditional electricity. The company designs, installs, finances, insures, monitors and maintains the solar panels on a homeowner’s roof, while homeowners receive predictable electricity pricing for 20 years or more.

Another factor in its favor is the fact that California passed a law that will require the installation of solar power generation of all new homes, beginning in 2020. The state’s largest solar system installer is Sunrun.

Another company to look at is one that was once considered ‘dead’ – Enphase Energy (Nasdaq: ENPH). Its semiconductor-based microinverter system converts energy at the individual solar module level and brings a system-based high-technology approach to solar energy generation, storage, control and management.

It is interesting to note that as China pulls back on solar, India is going ahead full steam. And Enphase is installing a 4.5 gigawatt solar power plant in India that will send power to Bangalore. When completed, it will be the company’s largest microinverter-based solar plant installation.

Its stock has seen a Lazarus-like comeback, soaring over 700% in the past year and it is up more than 182% year-to-date.

Finally, there is my favorite and a member of the Growth Stock Advisor portfolio, SolarEdge Technologies (Nasdaq: SEDG).

The company has invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (PV) system. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. Since beginning commercial shipments in 2010, SolarEdge has shipped over 6.7 Gigawatts of its DC optimized inverter systems and its products have been installed in solar PV systems in 120 countries.

I believe its DC voltage optimizer strategy will win more and more market share versus the more expensive micro-inverter strategy used by their rivals. Despite its recent pullback, the stock is still up 25% year-to-date and 129% over the past year.

Stocks like these three will likely survive and even thrive, despite tariffs and China’s cutbacks on its subsidies for solar, as the number of competitors dwindle.

A Proven 5-Step System for Safe 7%+ Dividends and 40% Gains

With over 500 closed-end funds (CEFs) on the market, how do you choose the best one?

It’s not an easy question to answer, because there are literally dozens of metrics any CEF investor should look at before buying.

But you don’t have to worry, because in a moment, you’re going to get the “guts” of the 5-point system I’ve carefully designed to pick winning CEFs for our CEF Insider service.

So why is it important to have a good system?

Because if you don’t, you could find yourself holding an empty bag—like investors who bought the Virtus Total Return Fund (ZF) at the start of the year because they were seduced by its 15.3% dividend yield.

Sadly, that move resulted in a massive loss in no time flat, even with dividend payouts:

The Perils of a High Yield

What’s even sadder is that there are plenty of funds that invest in the same assets as ZF that have done far better over the long term. Take the Liberty All-Star Growth Fund (ASG), which also focuses on high-growth stocks and is up a nice 22.8% since the start of 2018.

A Better Long-Term Pick

This is one of many instances where blindly buying a CEF would have cost real money. So how do you avoid the trap?

My 5-Point System

When choosing CEFs, I look at 5 crucial points that drive each buy call I make. And they can help guide you, too. They are:

  1. Management: How good is the team at the top, and has the fund changed horses lately (frequent management changes are an obvious red flag)?
  2. Discount: What’s the fund’s discount to its net asset value (NAV, or the value of its underlying assets), and what has that markdown been historically? We want a current discount well below the long-term average to drive our upside.
  3. Portfolio: What does the fund hold now, are there any big changes to the portfolio, what’s the rationale behind those changes, and how are those assets going to perform in the future?
  4. Dividend: How sustainable is the payout, what are the chances of a dividend cut, and how low can the payouts go? (Key here is to look at yield on price, yield on NAV, changes in NAV and total net investment income, or NII)
  5. Current Climate: How does the fund’s investment strategy fit within your broader portfolio and view of changes in the broader economy?

In other words, the system combines a variety of bottom-up questions about the fund’s portfolio, strategy and management with top-down questions about the asset class and economy as a whole.

The System in Action

To show how this works, let’s look at a recent example: the BlackRock Science and Technology Trust (BST). Although this fund had soared a massive 58.6% in 2017, my system still urged readers to jump head-first into this high-quality fund just as 2018 arrived, because it ticked all the right boxes. You can read my original recommendation here.

Judging by who was managing this fund, the market price and NAV performance, and the sustainability of its payouts, it was clear that this fund was not done rising. That turned out to be accurate: BST has given investors a 33.9% total return since my system flagged it less than six months ago:

A Quick Ride Up

What makes this performance all the more impressive is that it is more than double the fund’s index, the Nasdaq 100. If you tried to get into that index with the “dumb” passive index fund, the Invesco QQQ Trust (QQQ), you’d be missing out on $1,971 for every $10,000 invested.

In less than six months.

3 CEFs to Put on Your Watch List Now

Nowadays, there are a couple dozen CEFs that are getting to that perfect place where the fundamentals and the broader economic climate are combining to create a perfect storm for massive upside and sustainable high yields.

The first is the BlackRock Resources & Commodity Fund (BCX), a commodity specialist that has done well in a tough environment for commodities. It’s an example of a well-managed portfolio with a great management team—but while the bottom-up is good for BCX, we’re not quite there from a macro standpoint yet. But we’re getting closer.

In the utilities world, there’s the Gabelli Global Utility Fund (GLU), which is diversified and has the added bonus of going beyond the US to take advantage of currency fluctuations. I haven’t added it to the CEF Insider portfolio yet, for a couple of reasons. For one, its 3.9% dividend is too small, and its discount to NAV isn’t low enough, given how rising interest rates tend to lower demand for utilities stocks.

Instead, I’ve chosen a diversified equity fund with a bigger discount than GLU’s and a REIT fund that is less sensitive to higher interest rates.

And both of those picks are up nicely, up 13.6%, on average, since my recommendation, while GLU has gained just 9.1%. And instead of paying a 3.8% dividend, these two picks are paying 8.1% each. (Click here to get access to my complete CEF Insider portfolio, including these two fund picks.)

Finally, another interesting fund for your watch list is the BlackRock MuniHoldings Fund (MUH), a municipal-bond fund with a massive 5.8% dividend payout (which is tax-free for many Americans). MUH is also one of the best-performing muni-bond funds in the CEF universe (its 7.5% annualized return over the last decade is far above the 5.2% average across muni-bond CEFs).

Not only is BlackRock the biggest municipal-bond investor in the world, giving it a big edge in this complex market, but MUH’s 8.8% discount to NAV is far bigger than its average 3.4% discount over the last decade.

The only problem? Interest rates. The market still hasn’t priced in the Federal Reserve’s aggressive rate hikes for this year and the next, but when it does, this fund will be ideally positioned to buy and hold for years.

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