The Ultimate 3 Diamond in the Rough Stocks

When it comes to investing, the best opportunities are often disguised by fear and negative sentiment. 

It can feel safer following the crowd, but that can get you in the habit of always chasing the latest market fad. Many of the most successful investors in history have built their wealth by being ‘greedy when others are fearful’ and vice-versa. 

According to this approach, investors should be looking at sectors that are unloved, undervalued, and brimming with pessimism, especially when there are catalysts that could improve their circumstances. Today, such an opportunity can be found with green energy stocks. 

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Perfect Storm

In order to understand the current pessimism surrounding green energy stocks, let’s first go back to 2021 — a much more optimistic time. President Biden was taking over from President Trump with majorities in the House and Senate. There were expectations that a Green New Deal would be signed, while interest rates were at historically low levels. 

Ironically, this turned out to be peak optimism for the sector. Democrats were unable to get the Green New Deal passed although some elements of it did make it into the Inflation Reduction Act. Joe Biden and the Democratic Party’s approval ratings steadily sunk lower throughout his tenure, resulting in losing control of the House and Senate in 2022 and the Presidency in 2024. 

Additionally, interest rates started marching higher by the end of 2021 and have remained elevated due to high and persistent levels of inflation. Higher rates are a headwind for the industry, since it makes financing projects more expensive and erodes profit margins.

Green Shoots of Opportunity

It’s certainly ironic that the euphoria in 2021 marked the top for green energy stocks with many companies in the sector tumbling more than 90% in the ensuing 4-year period. Just as the market was at its most expensive when a new paradigm seemed assured, it may be at its most undervalued now that the herd is running scared, and the sector is left for dead. 

Powerful secular trends are brewing beneath the surface that could fuel a significant rebound. The primary catalyst is that global demand for electricity is going to sharply increase which will require an all hands-on deck approach to increase electricity production. 

The political and economic climate should also become more favorable for green energy. Based on historical precedent, Democrats are favored to take back control of the House in the midterms. Additionally, interest rates will move lower given a weakening economy and new dovish Fed chair in 2026. 

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3 Diamonds in the Rough

Another piece of this puzzle is that many green energy companies have managed to continue growing and winning market share despite this challenging environment. These are the companies that are well-positioned to thrive as macroeconomic conditions for green energy companies improve.

Additionally, investors can increase their chances of success by identifying companies with more exposure to utility-scale projects and less impact from tariffs. Three such diamonds in the rough are…

1. Nextracker (Nasdaq: NXT)

Nextracker is a global leader in solar trackers, with a 23% share of the global solar tracker market. These products help large-scale solar projects optimize their energy output. 

In its latest earnings report, the company disclosed a $4.5 billion backlog and achieved its 9th straight quarter of topping earnings expectations. Another impressive feat is that analysts have hiked estimates for 2025 and 2026 full-year earnings by 15% and 20% respectively, this year.  

The Zen Ratings are also bullish on NXT as it’s rated a Strong Buy (A). A-rated stocks are in an elite category with average annual performance of 32.5% which is significantly better than the S&P 500’s average annual 10.5% gain.  

NXT stands out in terms of Component Grades with a B for Momentum and Financials. Its strong momentum grade reflects NXT’s outperformance vs its peers, relative strength, volume-adjusted momentum, and risk-adjusted momentum. Another indication of its relative strength is that NXT is near all-time highs, while the Invesco Solar ETF is more than 60% lower from its 2021 high. 

2. Enphase Energy (Nasdaq: ENPH)

Enphase manufactures microinverter-based solar and battery systems that enhance solar efficiency, primarily for rooftop solar installations in the US. ENPH has been a laggard among its peers given that it derives the majority of its revenues from residential solar which is more dependent on subsidies. As a result, the stock is down by more than 75% from its 2022 high. 

However, this has resulted in the stock becoming undervalued with a forward P/E of 15.1. Additionally, the company has a market cap of $4.7 billion and has $1.5 billion in cash with only $1.2 billion in debt, indicating a strong financial position. 

In terms of the Zen Ratings, ENPH is rated a Buy (B). Since 2003, B-rated stocks have had an average annual return of 19.9% which handily beats the S&P 500’s average annual gain of 10.5%. A major reason for this rating is that ENPH has strong Component Grades including a B grade for Growth and Value.

The value grade is not surprising given its cheap forward P/E, low levels of debt, 8% earnings yield, and strong cash flow. The company’s growth grade is due to analysts forecasting 20% revenue growth this year, while the company’s gross margins have steadily expanded over the past decade. 

3. Array Technologies (Nasdaq: ARRY)

Array Technologies is a leading provider of utility-scale solar tracking technology which optimizes solar panel orientation for increased energy production. The company has operations in the US, Spain, Brazil, and Australia, and its major customers include utilities, engineering, and construction companies. 

Like many of its peers, recent headwinds have led to depressed valuations. Currently, ARRY has a forward P/E of 9.8 which is significantly cheaper than the S&P 500’s forward P/E of 23 and 21 for the solar sector. However, the company has managed to navigate these challenges pretty well as indicated by its $1.6 billion backlog, and it derives 70% of revenues from utility-scale projects.

The Zen Ratings are also constructive on ARRY as it has a Strong Buy (A) rating. Out of our universe of more than 4,600 stocks, ARRY ranks in the top 3% for Growth. This is due to expectations of annual, double-digit growth on the top and bottom-line over the next 3 years. Additionally, the company’s gross margins have climbed from 6% to 28% over the last 3 years.  

Conclusion

The green energy sector, once overhyped, now offers a contrarian opportunity amid pervasive pessimism. 

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