The Energy Stocks No One is Talking About (But Should!)
Oct 27, 2023
Energy stocks have done well in recent months. Let’s clarify that statement. Legacy, fossil fuel energy stocks—as represented by the Energy Select Sector SPDR Fund (XLE)—have done well in recent months, gaining more than 10% from their lows over the past six months.
However, renewable energy stocks—such as those held by the Invesco Solar ETF (TAN)—have performed horribly, down over 43% year-to-date and sitting at their yearly low at the time this was written.
Renewable energy stocks, as part of the "green economy" or ESG (environmental, social, and governance) movement have been shellacked as U.S. Treasury yields have risen over the course of 2023, plain and simple. The promise of cheaper, clean energy has been undercut by the need of service providers to pass on rising costs to consumers, putting renewable energy companies on their backfoots.
TAN is down 43.7% year-to-date. In what might be one of the uglier charts out there, momentum is firmly to the downside as TAN sits right at its yearly low. Rising U.S. interest rates may be seen as a prime cause: the one-month rolling correlation between 30s (/ZBZ3) and TAN is currently +0.70 and has peaked above +0.90 for weeks at various points this year. TAN has an implied volatility (IV) rank of 73.3%.
Enphase Energy (ENPH), a prominent player in the solar industry, has been grappling with market challenges. The stock is presently priced at 81.92 and holds an IV rank of 38.0%. Recently, ENPH announced disappointing earnings for 3Q’23, and the firm's weaker forecast for the fourth quarter led to the next leg of the downturn in its stock price. Dip buyers beware.
It's worth noting that market challenges are not unique to ENPH. SolarEdge Technologies (SEDG), a direct competitor, has also seen a significant drop in its stock price following a weaker-than-expected revenue forecast.
The company identified high inventories and a slowdown in installations across Europe as key reasons behind the gloomy forecast. Moreover, SEDG reported significant cancellations and deferrals of existing backlog from its European distributors. The company's stock is currently trading at $77.47, with an IV rank of 66.3%.
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
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