Gordon Johnson Says SolarEdge 'One Of The Better Shorts In The Market'

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

For those who don't have the time to tune in live or listen to the podcast, Benzinga will highlight one stock that merits further discussion. This analysis is not a buy or sell recommendation.

GLJ Research founder Gordon Johnson weighed in on solar energy stocks during an appearance on Benzinga’s PreMarket Prep show this week. The sector has performed extremely well since the market bottom in March.

Despite the stock market strength, Johnson said solar prices are collapsing, setting up many solar stocks for negative gross margins in the near-term.

“We think the fundamentals are going to be very bad,” Johnson said.

Solar High Flyers: Johnson said inverter stocks Enphase Energy Inc ENPH and Solaredge Technologies Inc SEDG have been performing particularly well for investors.

Enphase’s numbers will likely be pretty good, but the analyst said he can’t say the same for SolarEdge.

“With respect to SEDG, the high-flyer, we think there’s big problems in the second half. Their CEO was at the JPMorgan conference last week. He stated he has not seen a return to 2019 levels as of last week for his business. Pretty much every other solar company is saying they have,” Johnson said.

SolarEdge is losing money to Enphase and losing market share in China, he said. 

“We think there’s bad numbers coming from them in the second half, and we think the stock is going to get hit.”  

In addition, Johnson said the macroeconomic environment could be a headwind for SolarEdge’s residential business.

"[With] 40-plus million unemployed, people are not rushing at the bit to put a $30,000 or $20,000 solar system on their house." 

Johnson's Longer-Term Outlook: Beyond the second half of 2020, Johnson said the outlook for Enphase and SolarEdge is unclear.

The fact that the U.S. is not extending its solar investment tax credit beyond 2020 is a blow to the solar bull case, the analyst said. 

“We think what happens is, you had a rule in the U.S. that required you to have rapid shutdown if you used an inverter. And in 2017, 2018 and 2019, that gave SolarEdge simply a monopoly in the best market. Now everybody has that capability,” he said.

Johnson said Enphase has now taken over the lead in the inverter market, adding that Generac Holdings Inc. GNRC could potentially be a formidable competitor. 

“Given the quality issues with Solaredge’s product, we think Enphase is the one to play if you really want to be aggressive on the positive side,” Johnson said.

Even if SolarEdge’s demand rebounds in the second half of the year, Johnson said the company’s mix shift toward commercial revenue will negatively impact margins.

"We think it’s one of the better shorts in the market."

Module Manufacturers: When it comes to First Solar, Inc. FSLR, Johnson said pricing is the biggest potential issue.

“The question is, do customers break contracts and/or do they have to lower prices? I think the module manufacturers have significant risks,” he said.

SunPower Corporation SPWR is particularly at risk because of its high cash burn, the analyst said. 

Johnson's Top Solar Pick: Given all the near-term headwinds in the solar space, Johnson said investors need to be very careful.

Despite a recent bearish report by Prescience Point alleging fraudulent accounting at Enphase, Johnson said Enphase would be his top preferred play in the solar space.

“I think that when their Q2 numbers come out, there’s potential significant upside surprise potential,” he said. 

Watch to the full interview with Gordon Johnson in the clip below, or listen to the podcast here.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

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