October 5, 2019
If you happened to be napping or just relaxing during the past 3-months (and avoided peeking at your Schwab account), you would likely be pleased to compare your September statement to June’s. That said, the ride between these dates was a wild one, influenced by the volatility of our largest holding, Enphase (ENPH).
Last quarter, I stated the following related to Enphase: “It may seem prudent to sell some shares, but I believe that would be a premature.” I concluded with – “Long-term investors focus on big secular waves while traders look at cyclical, even seasonal, trends. Investors look out as far as their stomachs can handle and figure out what could go right”.
Although the stock has retreated from its August highs, the Enphase story has only strengthened by garnering market share from its competitors. For the record, Enphase was up 22%, quarter over quarter (June-Sept). So… within this time frame, we have been correct by holding😊
Not that long ago, Enphase’s business was wallowing in operating losses and weighed down by a troubled balance sheet. It was during this chaos in mid-2017, that we began purchasing Enphase shares. We did this with the conviction that the market was not looking forward but, rather, at the company’s recent past. We bought our shares when failure was priced in, but success was not. The risk/reward imbalance of which we took advantage is the essence of what GCM seeks. We often look for opportunities well before the “big boys” come to play. Now, firms such as Blackrock, Vanguard, JP Morgan, etc… are involved.
In 40+ years of investing, I have yet to witness a company execute its strategy as successfully as Enphase has. With solar emerging as a viable/acceptable alternative for worldwide energy, we are witnessing the collision of product excellence with an explosion of worldwide demand. The company’s turnaround has been swift. So, you may ask: If everything is so rosy, why did the stock drop off? This is not an easy question to answer because ALL variables cannot be analyzed with certainty. But let me give it a try:
Enphase began 2019 at $4.73/share and ended September at $22.23, a 370% rise. After announcing their second quarter 2019 results, the stock surged from its $18.23 close on June 30. The surge was due to the company exceeding revenue, costs and profit expectations as well as its balance sheet being in great shape. Due to the stock’s significant results and swift move, it got caught up in the world of technical momentum, where algorithms, hedge funds and investors can whipsaw a stock. The result – the stock exploded to the upside. However, what goes up…..
Next, a TV pundit suggested selling Enphase, due only to its meteoric rise. We discovered simultaneously that a sizable shareholder was selling, large investment firms began shorting, and a notorious author piled on with an erroneous/negative review. When you connect the dots, it’s easy to be suspicious! The intention of these actions was to manipulate the stock and profit from its decline. This decline occurred with NO legitimate company news. In fact, only positive company/industry news could be found. In summary, when a stock becomes popular, the wolves come out to play. One thing I like about the Enphase management team is that they ignore the stock’s volatility and let their progress and results do the talking. Unfortunately, this means that we must wait for their quarterly reporting for the market to acknowledge their progress. Knowing much more than I did 2+ years ago, I feel confident recommending the stock for the first time since it was $10/share. And here’s why:
Inverters have been important to residential solar adoption since the solar market first began expanding a decade or more ago. In the early days, however, inverters primarily served to convert the DC power produced by solar panels into the AC used by utility distribution grids. They also provided a critical safety function: In the case of any grid irregularities, first-generation inverters shut down the connection to rooftop panels. This prevented power from being fed onto distribution lines and potentially electrocuting line workers who might be performing repairs.
The growing interest in combining residential rooftop solar panels with battery-based storage often overlooks a critical piece of equipment: the inverters which are key to making such combinations work. Inverters today are the brains of these systems and could open new opportunities for future adoption as utilities are being pressed to support aging grids in a slow demand-growth environment. The market for solar-plus-storage is expected to grow exponentially over the next five years.
It’s no longer about solar—it’s about energy!
Enphase is transforming from a solar microinverter company to a home energy management systems company. They are thinking in terms of energy generation, energy storage, energy consumption and services. Energy generation is the core element of the business today. Energy storage is expected to play a major role, beginning in the fourth quarter. Enphase plans to release the Ensemble 1.0 solution which primarily focuses on residential storage in North America. Storage will be enabled by the “Encharge” battery. Customers will have the ability to measure, report and manage their consumption. Wow!
This move to smarter, more grid-involved inverter operations parallels a shift in the way utilities and regulators are beginning to think about distributed residential and commercial solar and solar-plus-storage installations. A decade ago, many utilities saw rooftop solar as a system disruptor and competition. Today, as falling panel prices are driving consumer adoption and more states are implementing aggressive carbon-reduction goals, state regulators are pushing utilities to consider customer-sited solar—especially solar-plus-storage—just another resource in their capacity planning. Solar systems, with inverters as the brain, could be integrated into the grid. And remember – the state of California has mandated that, starting in 2020, all new residential home construction have solar capacity.
With storage, we now have an energy source that’s available at night. And solar-plus-storage can offer great value for homeowners as well. Installation rates jump with every major hurricane or other storm. Similarly, in California, where utilities now regularly shut down wide swaths of their systems when wildfire risks run high, homeowners are increasingly adding batteries to new or existing solar-power systems to maintain household operations. A home can become a microgrid, with Enphase’s new “Ensemble” home energy management system.
Do know this: The concept of self-supply while having a backup is HISTORIC!
Small-Caps for the Long-Term – what does it take to become a great investor?
In the stock market, the most important organ is the stomach, not the brain. Watching Enphase (or any stock, for that matter) daily, will typically result in one or more of the following: 1). Bad decisions 2). Sleepless nights 3). Ulcers or 4). all the above. It’s essential to know your tolerance for pain. If Enphase was added to your account in the $2s, but you feel that you’ve lost money because it’s now in the low $20s, you probably meet the criteria for “4). all of the above.”
Finding the right investments takes more than crunching numbers. Being a skeptic with imagination serves both masters well. Although I don’t have a crystal ball, I can imagine my children and grandchildren being mostly fossil fuel independent. I can envision neighborhoods teaming up to create grids with economies of scale. Seeking well-managed companies with unique capabilities, life altering products and the ability to be profitable, while also being good stewards of capital, fuels my imaginative forecasting skills.
The starting point is ALWAYS the management team. This is the major reason we have retained our Enphase investment. I have never come across a better team of dedicated, competent professionals who march to the same tune. They are aware of the impact they can have in the world and are committed to making it a reality.
Two forces will drive the story for Enphase Energy in the near term: technological improvements and the growth of the solar energy sector. Naturally, they have more control over the former. For example, the company’s IQ 7 microinverter has gone from launch to domination in a little over one year. That has a lot to do with the recent surge in revenue and profits.
As technology advances, Enphase Energy can pack more computing power into the same footprint. That enables scientists/engineers to scale-down the microinverters and reduce the complexity of the overall hardware by reducing the number of components. Solar appears to be destined to gain momentum for the foreseeable future. The pace of solar energy’s rise, the macroeconomic factors surrounding it, costs continuing to fall, and state mandates are providing a helpful tailwind. The United States now has 2 million separate installations of solar panels. It took 40 years to reach that milestone, but the next 2 million may take only years.
According to the U.S. Energy Information Administration, non-hydro renewable energy sources (primarily wind and solar) provided 10% of the country’s electricity in 2018. That should rise to at least 13% by 2020. Meanwhile, it’s projected that the average cost of electricity produced from solar plus storage will be identical to that generated from natural gas by the end of 2023. If that inflection point is reached, then solar’s growth trajectory could turn nearly vertical within the next decade.
And my final note: More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. Most people do well because they simply hang in there.
Praise the Sun!
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.