To The Moon

Summary

• I maintain a hold rating on TAN due to its decent valuation but weak momentum and bearish seasonality.
• TAN outperformed from Election Day 2016 to 2020, but is down over 20% in 2024, with assets under management dropping significantly.
• The ETF has a 17.3x price-to-earnings ratio, with a high annual volatility and concentrated allocation, posing cyclical risks.
• Despite weak price trends, a breakout above the June peak could lead to a rally up to $67, offering potential upside.

Justin Paget

Looking for a Trump trade? Solar stocks might not jump out at you, but the Invesco Solar ETF (NYSEARCA:TAN) returned 332% from Election Day 2016 through Election Day 2020. That trounced the performance of the S&P 500, +77%. Moreover, traditional oil & gas stocks, as measured by the Energy Select Sector SPDR Fund ETF (XLE) were down a whopping 49%.

But TAN is down by more than 20% so far in 2024, so momentum clearly sides with the bears with about two months to go before voters head to the polls. There could be some moving and shaking between now and then as, according to Seeking Alpha’s recent survey, one out of six subscribers is shifting their allocation before November 5. It’s not a high number, but we’ve seen how Election Day can result in significant sector and industry moves.

I reiterate a hold rating, however, on TAN. I see its valuation as not yet cheap enough, while price action remains lackluster. I assert, though, that solar stocks could certainly come to life depending on the outcome of the US general election.

Performance From Election 2016 to 2020: TAN Shines

StockCharts.com

According to the issuer, TAN invests in global developed market equities, focusing on companies in renewable energy sectors, excluding coal, petroleum, and nuclear energy. The fund invests in growth and value stocks and promotes environmental responsibility. It generally allocates over 90% of its assets to equities in solar energy.

Investors have fled TAN in the last handful of months. Shares are actually up by 3% since my April analysis, underperforming the S&P 500’s 11.5% total return, but assets under management have dropped from $1.5 billion to just $1.0 billion as of August 30, 2024. Sideways action in the oil markets and constant chatter about tariffs on Chinese imports have weighed on the group.

TAN sports a somewhat high annual expense ratio of 0.67% while its forward dividend yield is just 0.12%. Share-price momentum has been extremely poor this year, and that’s within a solid overall tape. TAN is down by 29% from this time last year. The fund is also quite risky, evidenced by a high annual volatility reading and a concentrated allocation.

But liquidity metrics are healthy given average daily volume of more than one million shares and a median 30-day bid/ask spread of 12 basis points, though prospective investors should consider using limit orders during the trading day.

TAN’s valuation has shifted since my early Q2 outlook. The ETF now features a 17.3x price-to-earnings ratio – about two turns more expensive than what it was in April. There remains a sizable allocation to both US and non-US small- and mid-cap stocks, adding to the portfolio’s cyclical risks. TAN is geared toward the growth side of the style box, with just 18% considered value.

TAN: Portfolio & Factor Profiles

Morningstar

The ETF primarily holds stocks from the Information Technology sector, but that’s deceiving in my opinion. TAN often trades based on how the Energy sector performs and what’s happening with interest rates.

Many renewable energy firms rely on debt financing, so falling borrowing rates (so long as the credit markets remain liquid) is a bullish factor. Moreover, if crude oil prices rally, it makes solar more attractive and in higher demand, often benefiting many of TAN’s biggest positions.

TAN: A Concentrated Allocation, Low Yield

Seeking Alpha

The TAN bulls must be on guard for soft seasonal trends right now. Along with March, the September and October periods have been riddled with volatility over the past 10 years.

Thus, I would not be surprised to see TAN trade lower from here, potentially offering an attractive buying opportunity right ahead of the presidential election.

TAN: Bearish Seasonal Stretch September-October

Seeking Alpha

The Technical Take

With a slightly higher earnings multiple and bearish seasonal trends on hand, TAN’s technical situation is not encouraging. Notice in the chart below that shares have been trending modestly lower for the better part of a year, following an outright free fall from July 2023 through early in the ensuing Q4. A series of lower highs and lower lows, along with a falling 200-day moving average, reveal that the bears control the primary trend.

But take a look at the RSI momentum oscillator at the top of the graph – it has been ranging in a neutral area between 30 and 70, never reaching technical overbought or oversold levels this year. That’s an encouraging sign amid weak price trends.

Also take note of the high amount of volume by price from $38 up to $47 or so – with TAN trading at $41, the bulls and bears are battling it out in a high-congestion zone. If we see a breakout above the June peak, then a rally up to the previous breakdown point of $67 could come to fruition.

TAN: Bearish Downtrend, Neutral RSI, $67 Potential Upside Target

StockCharts.com

The Bottom Line

I have a hold rating on TAN. I see the solar ETF as having a decent valuation overall, but weak momentum and bearish seasonality are too much to overcome for this underperforming industry ETF.