Perseverance Pays Off With SolarEdge

I typically don’t discuss portfolio holdings of The Energy Strategist in this column, but today I am going to make an exception. I want to take you along on my personal 13-month roller coaster ride with SolarEdge Technologies (NASDAQ: SEDG).

SolarEdge is a supplier of solar inverters, a high-tech component that turns collected solar energy into a usable electric current. The inverter is a key determinant of a system’s efficiency. Importantly, this is a higher margin business with fewer competitors than that of photovoltaic panel manufacturers. 

Since going public in 2015, SolarEdge’s results have repeatedly beat expectations, and the company has maintained a strong balance sheet. SolarEdge has consistently and impressively grown revenues, profitability, and cash flow generation year after year.

But the solar sector slumped in 2015 and 2016, and SolarEdge traded down with the rest of the sector. Following a more than 50% decline from its peak price in 2015, we added SolarEdge to the Growth Portfolio of The Energy Strategist on May 24, 2016. I bought shares for my personal portfolio in June 2016.

The company continued to report good results, but the share price continued to decline. SolarEdge continued to suffer from negative sentiment across the solar sector, as well as concerns about competitors. Then there were fears that the election of Donald Trump would have a chilling effect on the sector. The noise drove down the share price even as the company continued to turn in one solid quarter after another. At year-end, I had sustained a loss on my position of nearly 35%. I was really frustrated at what I believed was a disconnect between perception and reality.  

But I don’t give up on a company just because the share price is going down. I typically only sell companies when the outlook changes, or when I believe the company is fully valued — neither of which applied in the case of SolarEdge.

SolarEdge is a great company with a great future. I am a true believer in the future of solar power. I believe that growth in the sector will be exponential for many years to come. I think quality companies in the sector will outperform the market in time, but short-term fluctuations can be sharp. I didn’t sell my own shares, and I didn’t remove the company from the portfolio. The fundamentals continued to impress, and the outlook was good.

I believed that eventually, the tide would turn. It did. The share price, which ended 2016 at $12.40, started to rise in February. By mid-year, shares had risen by 61%, making SolarEdge the top-performing company in the portfolio for the first half of the year.   

My own shares were in the black in June, so I put a reminder on my calendar for June 24th that I had held SolarEdge for a year, and thus qualified for the long-term capital gains tax rate. Once that date passed, I started looking for an exit point. So I put a limit order in with my broker about a month ago, and this week it was triggered. I was out of my position with a 20% profit after falling into a deep hole. 

To be clear, I have not yet issued a Sell recommendation on SolarEdge. I don’t believe it is yet fully valued, it’s just that I feel most of the upside is gone in the short term. SolarEdge is now up 83% year-to-date, and I have some concerns about a pullback. The past year showed how quickly things can change in the solar sector, and I needed to lighten up on the sector. If you are a long-term investor, it’s still probably a good pick for your portfolio, but shares could be susceptible to a short-term correction. Should I decide to update guidance for SolarEdge, I will provide that update in The Energy Strategist.

I was just happy to get out of the position with a win. Patience and a belief in the company’s fundamentals ultimately paid off, although my timing on buying SolarEdge was clearly too early. But you know what they say about hindsight. 

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.