All posts by Brandon Borello

Market Preview: Markets Lower on China Weakness, Big Bank Earnings This Week

Markets finished lower Monday after more news of economic weakness out of China, and an increasing sense of unease over the partial government shutdown. With mid-month January paychecks now not showing up in government employee bank accounts, the impact of the shutdown appears to be accelerating. And, with both sides digging in, there appears to be little hope of a near-term solution to the impasse. Investors are keeping one eye on the shutdown and the other on earnings, as earnings season is now in full swing. Many large banks report earnings this week, mixed with a number of transportation stocks. While most analysts agree earnings are coming down from the blockbuster growth of 2018, the question for investors is whether the bottom in stocks has already been put in when the market sold off last quarter, or if there is more pain to come in 2019.

PPI and the Empire State Manufacturing Survey are scheduled for release Tuesday. PPI is expected to come in flat, owing mainly to the continuing drop in oil prices in December. The Empire State numbers are expected to bounce back from a reading of 10.9, and to come in at 12 for December. Analysts will be watching this number closely to determine whether recently weak manufacturing numbers were an aberration, or the beginning of a more substantial decline in manufacturing.

JP Morgan Chase (JPM) and Wells Fargo (WFC) report before the open Tuesday. Many analysts believe the large banks are undervalued, while others are citing pressure from fintech startups and payment processors, like Visa (V), as a growing challenge to large bank profits. Citi’s (C) report on Monday, while not stellar, reinforced the pillars the large banks have come to rely on in recent quarters, large buybacks of stock and attention to cutting costs. Citi finished flat on the day. Some analysts are holding their breath hoping none of the large players encountered an unexpected trading loss given the massive volatility at the end of 2018. Also reporting Tuesday is Delta Airlines (DAL). Airlines have taken it on the chin since early December when earnings warnings began to emerge from the sector.

Banking earnings continue Wednesday, when Bank of America (BAC) and Goldman Sachs (GS) report. Goldman has been under the gun with an investigation of its involvement in an embezzlement scheme at 1MDB, a Malaysian state investment company. Revelations by Goldman employees, that they intentionally avoided the firm’s internal compliance rules, are being investigated by the Federal Reserve, and has spooked investors. CSX Corporation (CSX) reports after the close Wednesday. The rail company has been successful cutting costs and improving efficiency this year, but some analysts fear that may not provide much support going forward. CSX should be able to put forth some color commentary on the economy given its vital role in transporting goods. One question analysts have is whether the lead up to the China trade tariffs resulted in a bulge in traffic headed into the fourth quarter, and if that portends lower volume the next few quarters.

Economic numbers released Wednesday will include mortgage applications and the housing market index. Housing index numbers are expected to rise slightly to 57 after a devastating 8 point drop in November. Also on tap are retail sales, import and export prices, Redbook retail numbers, and business inventories. Both import and export prices are expected to decline, again due to the weakness in oil prices. Falling export prices were somewhat offset by a bounce in the price of farm products.

3 Energy Stocks to Buy as China Cuts Solar Subsidies

There was good news recently for supporters of solar energy…

Despite tariffs imposed on imported solar panels, the United States installed more solar energy than any other source of electricity (accounting for 55% of all capacity installed) in the first quarter of 2018. According to a report from GTM Research, there were 2.5 gigawatts of solar power installed in the first quarter, a rise of 13% from the year earlier period.

This was part of the move globally toward renewable energy. In its annual review of world energy released in mid-June, BP (NYSE: BP) revealed a surprising fact – 17% of the world’s energy growth in 2017 came from renewable energy sources. That was the largest increase on record and the equivalent of the energy consumed by Sweden and Denmark in a year.

Much of this progress is the result of falling prices for solar panels, thanks to overproduction from Chinese companies. The International Energy Agency (IEA) estimates that solar power will soon be the cheapest source of new electricity in a number of countries.

However, there is a dark cloud on the horizon. As prices for solar power come down, government policymakers are moving away from subsidies for solar power projects and shifting toward auction-based systems to reward the lowest-cost producers of renewable electricity.

China’s Solar Eclipse

We saw such a move in the world’s biggest solar power market, China, announced in early June. It accounted for two-thirds of solar installations worldwide in 2017, with a 55% surge in new solar installations. So it was a bit of a shock to the industry when China said it would eliminate subsidies for most new solar projects as well as reducing feed-in tariffs.

China’s move was aimed at curbing runaway growth in the country’s solar generation, which had boomed under its generous subsidies program. The massive subsidies created a deficit of $15.6 billion in a fund set up to pay for the higher feed-in tariffs. The energy consultancy Wood Mackenzie forecast that deficit would soar to nearly $40 billion by 2020 if China had left its policy unchanged.

In addition, much of the solar power installed in China in recent years is “curtailed”, or unused, as provincial grid operators choose to use electricity from local coal-fired power plants instead. This practice is particularly prevalent in China’s far western provinces. In Xinjiang, for example, curtailment stood at more than 20% at the end of 2017. This was actually an improvement about one-third of installed capacity that stood idle the year before.

The government’s new policy sets a strict quota for solar installations and eliminates subsidies for any projects outside the quotas. And the quotas were so low that most of the quotas were already filled within the first five months of this year.

Because of China’s actions, solar installations worldwide are now expected to drop and the sudden contraction will place even more pressure on solar panel prices and on the manufacturers, who in many cases were already struggling. Wood Mackenzie expects that 20 gigawatts will be shaved off China’s solar installations this year as a result of the new policy.

That is equivalent to a fifth of last year’s overall global demand! Or as Edurne Zoco, head of solar research at IHS Market, told the Financial Times “If China really clamps down, there is no market, no combination of markets in the rest of the world that can actually compensate for that.”
The end result is that 2018 will likely be the first year in the short history of the industry that it will experience negative annual installation growth. And price-wise, Bloomberg New Energy Finance (BNEF) lowered their forecast for this year from a 25% price decline to a 34% drop for solar panels.

More on China: Buy This Export to China That Is Exempt From Tariffs

Investing in Solar

This is why you saw steep price declines of all solar power-related stocks in June. Is now a time then to look for bargains among the beaten-down solar stocks?

The answer is yes and no. Let me explain…

First of all, you must stay away from broad exposure to the industry through ETFs such as the Invesco Solar ETF (NYSE: TAN), which is down about 8.5% year-to-date. There are just too many of the lower-tier players in such a broad fund.

You will need to pick and choose, or as the old adage goes, ‘separate the wheat from the chaff’. One way to do that is to go with the beneficiaries of lower solar panel prices (despite the tariffs), the companies that install solar power.

One such example is Sunrun (Nasdaq: RUN), which is the largest residential solar power company in the United States with a 15%  market share. Its stock has soared over 122% year-to-date and is up 90% over the past year.

Since establishing its so-called ‘solar as a service’ model in 2007, Sunrun leads the industry in providing clean energy to homeowners with little to no upfront cost and at a savings to traditional electricity. The company designs, installs, finances, insures, monitors and maintains the solar panels on a homeowner’s roof, while homeowners receive predictable electricity pricing for 20 years or more.

Another factor in its favor is the fact that California passed a law that will require the installation of solar power generation of all new homes, beginning in 2020. The state’s largest solar system installer is Sunrun.

Another company to look at is one that was once considered ‘dead’ – Enphase Energy (Nasdaq: ENPH). Its semiconductor-based microinverter system converts energy at the individual solar module level and brings a system-based high-technology approach to solar energy generation, storage, control and management.

It is interesting to note that as China pulls back on solar, India is going ahead full steam. And Enphase is installing a 4.5 gigawatt solar power plant in India that will send power to Bangalore. When completed, it will be the company’s largest microinverter-based solar plant installation.

Its stock has seen a Lazarus-like comeback, soaring over 700% in the past year and it is up more than 182% year-to-date.

Finally, there is my favorite and a member of the Growth Stock Advisor portfolio, SolarEdge Technologies (Nasdaq: SEDG).

The company has invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (PV) system. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. Since beginning commercial shipments in 2010, SolarEdge has shipped over 6.7 Gigawatts of its DC optimized inverter systems and its products have been installed in solar PV systems in 120 countries.

I believe its DC voltage optimizer strategy will win more and more market share versus the more expensive micro-inverter strategy used by their rivals. Despite its recent pullback, the stock is still up 25% year-to-date and 129% over the past year.

Stocks like these three will likely survive and even thrive, despite tariffs and China’s cutbacks on its subsidies for solar, as the number of competitors dwindle.

Delta Air Lines, Inc. (DAL) Confirms $25 Billion Airbus Jets Purchase

The airline announced that it would be buying these A321neo jets for $25 billion to go along with an optional 100 more of the aircraft. Delta Air Lines announced the move through a filing with the U.S. Securities and Exchange Commission.

The company added that it expects deliveries of the aircraft to begin in the first quarter of 2020 and continuing to arrive through 2023. Delta added through the SEC filing that it now expects its operating margin of its fourth quarter to be 11%.

The company previously said that it expected this figure to be between 11% and 13% in its previous forecast. Airbus beat out Boeing Co (NYSE:BA) for the move as Boeing and Delta have had a fraught relationship in recent quarters.

The disagreements between the two companies began in October following Boeing’s success in lobbying the U.S. Commerce Department to pass trade duties of roughly 300% of Delta’s decision to order CSeries jets from Bombardier Inc (OTCMKTS:BDRBF).

Delta has made no mention regarding whether or not the disagreement between the two companies affected the airline’s decision to go with Airbus for the deal.

“This is the right transaction at the right time for our customers, our employees and our shareholders,” CEO Ed Bastian said in a statement today.

DAL stock gained 2.8% on Thursday.

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