Microgrids are here to stay. Here's what you can do about it.
As you may know, solar homes are now mandated in California for new home construction, and electricity is typically sold back to the electricity grid at very low rates. But with the California electricity grid no longer reliable during fire season, more businesses and homeowners are looking to store their electricity in backup systems. These backup systems are also vital for electric vehicles (EVs) in California and in other major solar markets.
But what most people don’t know is that just because you have solar panels doesn’t mean you will have power during an outage. In order to solve that problem, you need a microgrid. Simply put, a microgrid is a self-sufficient system used to generate and distribute energy to a specific area, such as a home, school, office building or neighborhood.
Today’s microgrids rely on renewable energy generation, such as solar panels or wind turbines, combined with a battery storage and distribution system. While microgrids can operate independently, for the most part they are still connected to a central utility grid. When the microgrid produces excess energy, that energy can be sent to the central grid.
If power generation is low, the microgrid can pull energy from the grid as a backup. Since energy prices constantly fluctuate, timing is important. Advanced microgrids will buy power from a central grid to charge their battery storages when prices are low and use stored energy when grid prices are high.
So, in today’s Market360, I want to share three stocks to watch if you’re interested in this space.
Enphase Energy, Inc. (ENPH)
Enphase Energy (NASDAQ:ENPH) is headquartered in Fremont, California, and manufactures and sells micro-inverter systems for the photovoltaic industry. Inverters convert energy generated by solar panels into usable energy that can power a home.
The company has benefited immensely from the California mandate that requires new single-family and multi-family homes to be built with solar capacity. The law went into effect in California on Jan. 1, 2020, and applies to all new home construction less than four stories tall. Perhaps, unsurprisingly, this led to a more than 500% increase in share price for ENPH in 2020.
Speaking of numbers, for the first quarter, the analyst community is estimating sales of $292 million, a 42% increase over the same quarter last year and earnings per share of $0.45, an 18% increase over last year. In the past three months, the analyst community has revised its consensus earnings estimate 15.4% higher.
Typically, positive earnings revisions precede future earnings surprises. In my opinion, Enphase Energy will continue to benefit from the microgridification of the home and it will grow into its relatively high price-to-earnings (P/E) ratio.
ENPH currently holds a B-rating in Portfolio Grader, making it a solid “Buy.”
Generac Holdings, Inc. (GNRC)
Generac (NYSE:GNRC) engages in the design and manufacturing of power generation equipment and other power products. The company is headquartered in Waukesha, WI. They also directly compete with Tesla’s (NASDAQ:TSLA) Powerwall business.
Like the Powerwall, Generac’s PWRCell allows homeowners to store up to 17.1 kilowatt hours (kWh) that can be used to power a home during an outage. They claim to be the superior battery storage solution.
As far as fundamentals are concerned, for the first quarter, the analyst community is estimating sales of $726 million, a 53% increase over the same quarter last year and earnings per share of $1.83, a 110% increase over last year. This is a great sign when we see companies that can grow their top and bottom lines at such rapid rates. In the past three months, the analyst community has revised its consensus earnings estimate 24.5% higher.
In my opinion, Generac will continue to benefit from the microgridification of the home. Furthermore, it trades at a relatively low P/E ratio compared to its peers in the space. All of these factors combined make Generac a top pick in clean energy storage. And an added benefit: Generac could see increased buying pressure since its inclusion in the S&P 500 on March 22, 2021.
The company is A-rated in Portfolio Grader with a B-rating for its Fundamental Grade and an A-rating for its Quantitative Grade, which makes it a “Strong Buy.”
Solar Edge Technologies, Inc. (SEDG)
SolarEdge Technologies, Inc. (NASDAQ:SEDG) is headquartered in Herzliya, Israel, and engages in the development of energy technology, which provides inverter solutions. Its products and services include photovoltaic inverters, power optimizers, photovoltaic monitoring, software tools and electric vehicle chargers.
The company’s inverters play a key role in the microgrid system as they convert direct current (DC) electricity into alternating current (AC) electricity. This is what allows electricity generated from solar panels to be used to power our homes. So, the global shift toward a clean energy future should be a major tailwind for SolarEdge.
However, looking ahead to the first quarter, the analyst community is estimating sales of $396 million, an 8% decrease over the same quarter last year and earnings per share of $0.77, a 5% decrease over last year. However, the company’s operating earnings have typically been stronger than its overall earnings and the stock has posted substantial earnings surprises for the past three quarters. Case in point: It posted a 14% earnings surprise in the fourth quarter.
Additionally, in the past three months, the analyst community has revised its consensus earnings estimate slightly higher, which bodes well for another potential earnings surprise. In my opinion, SolarEdge will continue to benefit from its role in the microgrid ecosystem. That being said, there is stiff competition in the inverter business and SolarEdge will need to take more market share in order to justify its high valuation.
With that said, the company is C-rated in Portfolio Grader, so it is a “Hold” right now.
Why the Microgrid Trend Is Here to Stay
Overall, microgrids are more efficient and reliable than central grids, which are prone to outages that can impact entire cities, and even states. As of 2019, only two million homes had solar panels and, of those, less than 100 thousand had the inverters and battery storage needed in order to have power during a blackout.
I expect to see these numbers increase dramatically over the next few years as renewable energy gets cheaper. Therefore, I believe the microgridification of our energy system will lead to massive opportunities for investors. However, the real profit potential will come from the fundamentally superior stocks, like the ones I mentioned above.
The Editor (Louis Navellier) hereby discloses that as of the date of this email, the Editor (Louis Navellier), directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Enphase Energy, Inc. (ENPH), Generac Holdings, Inc. (GNRC), Solar Edge Technologies, Inc. (SEDG)