The backdrop: While there’s plenty of talk about how President’s Trump’s tax plan will affect all businesses, one of the industries that the proposed tax plan would affect most is energy, and specifically alternative energy and solar stocks. President Trump made it clear on the campaign trail that he was not in favor of the many breaks that would push growth on the alternative energy front, and now he’s proving it.
That’s particularly true in solar energy, where a potential of a repeal of the 30% investment tax credit for commercial and utility solar projects could hit the solar stocks hard.
What you need to know: The proposed GOP plan looks to repeal the tax credit for commercial and utility solar projects, beginning after 2027. It also seeks to end the 10% tax credit for large-scale solar projects after 10 years.
You might think that’s a long ways away, but the market doesn’t care. If the plan actually goes through, I’d expect to see the fallout in the Guggenheim Solar ETF (TAN), First Solar (FSLR), and SolarEdge Technologies (SEDG), to name just a few.
Solar stocks — and the industry ETF — have been on a tear for awhile now:
TAN, FSLR and SEDG have been rising from recent lows and that trend could continue, but tax news could make them more volatile here. If it looks like the plan is stalling, that would be good news for the solar stocks, while passage of the GOP plan would be a setback.
What to watch for: We’re focused on politics for this potential trade; if the GOP tax plan goes through soon, favoring traditional energy more than renewable alternatives, there could be a significant drop in TAN, FSLR and SEDG. However, there’s no reason to go short or buy puts just yet; watch for that trade in the solar stocks, but be patient and wait for a catalyst before making it.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs. At the time this article was published on RagingBull.com, he had no shares, options or open orders in TAN, FSLR or SEDG..