- Renewable energy stocks have badly underperformed their fossil fuel peers and the broader market in the current year.
- Sunrun and Sunnova Energy are among Hazeltree’s list of most shorted small-cap stocks.
- Interest rates are a key area of sensitivity for the renewable energy sector because clean energy projects require developers to borrow lots of capital up front to build projects.
Three weeks ago, shares of Israel-based solar inverter manufacturer, SolarEdge Technologies Inc. (NASDAQ:SEDG) crashed spectacularly after the company issued weak guidance for its upcoming third quarter earnings report. SolarEdge said Q3 revenues, gross margin and operating income will all come in below the low end of the company’s prior guidance, citing “substantial unexpected cancellations and pushouts of existing backlog from our European distributors,” due to higher than expected inventory in the channels as well as slower than expected installation rates.
A similar playbook played out a week ago after shares of iconic EV manufacturer Tesla Inc. (NASDAQ: TSLA) were badly hammered following the company’s less-than-stellar Q3 Report. The report revealed that Tesla not only missed Wall Street’s earnings estimates but its margins have continued to shrink at an alarming clip, suggesting the EV maker is facing stiff competition.
And now the shorts can smell blood in the water, with dozens of solar and electric vehicle stocks becoming their targets. In the solar sector, Sunrun Inc. (NASDAQ:RUN) and Sunnova Energy International (NYSE:NOVA) are among the top 10 most-crowded securities in treasury and liquidity management platform Hazeltree’s list of the most shorted small-cap stocks while Tesla, alongside luxury EV startups Rivian Automotive (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID), are among the top 10 most shorted mid- and large-cap stocks in October. Among these names, Sunnova and Lucid Motors have the highest short interest at 30.1% and 25.1%, respectively. For some perspective, the median short-interest among S&P 500 stocks usually falls in the 2.1% to 2.4% range, with small-and mid-cap stocks among the most shorted corners of the market at 2.9% and 3.6% short interest, respectively.
So, what’s ailing these clean energy industries? Renewable energy stocks have badly underperformed their fossil fuel peers and the broader market in the current year, with the selloff accelerating in recent months thanks to higher interest rates and a hawkish Fed outweighing considerable backing by the Biden administration.
There’s a dark cloud hanging over green stocks,” Martin Frandsen, portfolio manager at Principal Asset Management, has told the Financial Times.
Interest rates are a key area of sensitivity for the renewable energy sector because clean energy projects require developers to borrow lots of capital up front to build projects. Further, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels.
In fact, analysis from the International Energy Agency in 2020 found that a 5% rise in interest rates increases the levelized cost of electricity from wind and solar by a third but only marginally for natural gas plants. Although the U.S. central bank left interest rates unchanged at its latest meeting a week ago, it signaled a willingness to raise rates again if progress on inflation stalls.