Goldman Downgrades Solar Sector To Neutral, Says 'Growth To Value'

• US solar stocks surged more than 50 percent in December.
• Goldman Sachs’ Brian Lee downgraded the view on the Solar sector from Attractive to Neutral.
• Lee maintained a “selective bias” toward companies with robust balance sheets, solid cash flows and improving returns.

Despite the jump in December, US solar stocks modestly underperformed in 2015, analyst Brian Lee stated. He added that there now seems to be 16 percent average upside in the group. Companies that have strong balance sheets, solid cash flow and improving returns appear to be “better positioned to perform in a backdrop of rising cost of capital in a financing-intensive sector.”

Lee mentioned the key investment themes for 2016 as:

Growth to value
There is likely to be a shift in focus from growth to value, which would determine the trajectory of solar stocks through 2016. Following the recent sharp rise in shares, growth prospects appear better reflected in the stocks. The analyst recommended focusing on EBITDA and CROCI as the key metrics.

Balance sheet and cost of capital
Investors are increasingly focusing on balance sheets, and the trend is expected to continue through 2016. This is on account of the sharp increase in cost of capital, expectations of interest rate increases in the US and “the potential for more challenging access to capital markets for select solar names, Lee commented.

“Simply put, solar business models have never been more financing-intensive than they are today, and 2016 will be the first year in which they will face rising rates,” the Goldman Sachs report added.

ITC tailwind
Some investors consider solar stocks to be “un-investable,” in view of significant uncertainty and “relatively tight timing” of the pending ITC stepdown from 30 percent to 10 percent starting in 2017.

Lee pointed out, “With the unexpected extension of the ITC at the end of 2015, we believe the “investability” of solar will be an emerging theme for longer-term oriented investors heading into the next several years.” He added, however, that the ITC could be “less of a tailwind” in 2016, following the sharp rise in shares in December 2015.

Referring to the top stock ideas for 2016, Lee named the following:

First Solar
The analyst upgraded the rating for First Solar, Inc. FSLR to Buy, with shares expected to outperform in 2016 and 50 percent upside to the new price target of $100.

“Best in class balance sheet, CA RPS and the ITC should help volumes more than appreciated (and vs. peers),” Lee wrote.

Solaredge
Goldman Sachs added Solaredge Technologies Inc SEDG to its Conviction List, with 46 percent upside to the price target of $41. Lee cited the key catalysts as Tesla Energy, new battery OEM wins and EPS beats.

8Point3
Lee reiterated a Buy rating for 8Point3 Energy Partners LP CAFD, citing the company’s attractive dividend, de-risked 15 percent DPS growth potential and top-tier asset quality. The new price target of $20 implies a 28 percent total return potential.

The analyst reiterated a Sell rating for TerraForm Global Inc GLBL, citing “risk to even no growth.” The price target of $3.25 implies 40 percent downside. The ratings for SunPower Corporation SPWR and Sunrun Inc RUN were downgraded to Neutral, following their recent outperformance and “better risk-adjusted returns elsewhere in our coverage.”