Global renewable energy capacity grew by about 13% in 2021 to 272 gigawatts (GW). Solar generation capacity is expected to expand by an additional 25% in 2022, while new wind generation capacity will decline by about 10% year over year.

Mark Strouse, North American alt energy analyst for J.P. Morgan, noted that these estimates are based on current government incentives and the increases could be larger if incentives are increased. The most notable of these potential increases is about $555 billion targeted at energy and the environment over the next decade. Some $320 billion in tax credits lie at the heart of legislation currently being debated in the U.S. Senate.

Another headwind is proposed legislation in California that would change the way homeowners are subsidized for installing rooftop solar systems, cutting the credit they would receive by about 80%. If the proposal is adopted, solar installers likely will shift to marketing systems that include battery storage to capture more value per customer.

J.P. Morgan’s analysts expect the alt energy space “to remain volatile in the near term” while expecting margins to improve as the year progresses:

[W]e note that our space is trading at a ~35% discount to the one-year average multiple and a ~15% discount to the three-year average, implying that long-term investors interested in the long-term decarbonization theme (which is generally not impacted by these near-term headwinds) are being offered an attractive entry point, in our view.

In their note published Thursday morning, the analysts commented on six stocks they rate as Overweight, specifying three as their top picks out of 19 included in the firm’s coverage.

Sunrun

Sunrun Inc. (NASDAQ: RUN) is one of two residential solar installers to be designated a top pick for 2022. The company’s market cap is $5.9 billion, and Sunrun is expected to report fourth-quarter earnings on February 17. The analysts expect Sunrun’s solar+storage business to report double-digit compound annual growth rates (CAGRs) and to increase its market share over the next few years. The company is included on J.P. Morgan’s Analyst Focus List.

J.P. Morgan has cut its December 2022 price target on the stock from $86 to $69, but that still implies upside potential of 125% based on a current price of around $30.60. The stock traded up more than 10% shortly before noon Thursday.

Sunnova

Sunnova Energy International Inc. (NYSE: NOVA) is another supplier of residential solar and energy storage systems. The company’s market cap was around $2.6 billion Thursday morning, following a jump of almost 7.5% in the share price.

J.P. Morgan’s story on Sunnova follows closely its view of Sunrun: solid inventory to meet demand through the middle of this year, some pricing power and a shift to selling residential solar systems with attached storage. The analysts lowered their price target on the stock from $66 to $53, which implies an impressive potential upside of 129% to a share price of around $23.10. Sunnova is another of the top picks in this alt energy space.

Albuquerque-based Array Technologies Inc. (NASDAQ: ARRY) is the third of top alt energy picks. The company’s market cap is about $1.82 billion, and it supplies the tracking hardware and software that allow solar panels to follow the sun. J.P. Morgan analysts note a potential headwind from utility-scale project delays but expect the company to post a significantly higher profit in fiscal 2022 and a doubling of that total in 2023.

Array’s price target was cut from $38 to $32, which implies upside potential based on a recent price of around $12.10 of 164%. Shares traded up more than 5% Thursday morning.

Shoals

Shoals Technologies Inc. (NASDAQ: SHLS) manufactures cable assemblies, monitoring systems and other electrical balance of system products for solar energy projects. The company will celebrate its first anniversary as a publicly traded company next week, although, with a share price dip of some 42% since its initial public offering, the celebration could be muted. Strouse believes that Shoals’ “late position in the construction cycle provides some buffer for the company to execute on its backlog with less impact from supply chain disruptions near term.”

The analyst has cut its price target on Shoals from $43 to $37. The new target implies a potential gain of 105%, based on a recent price of around $18. The company’s current market cap is about $3.01 billion.

Generac

In addition to the residential market, Generac Holdings Inc. (NYSE: GNRC) also sells its power generation and storage systems to commercial and light industrial customers. J.P. Morgan’s analysts expect demand to remain “solid” with a higher-than-normal backlog and improving margins related to 2021 price hikes. Generac’s market cap is around $18.9 billion.

The analysts have cut their price target on the stock from $520 to $463. The new target implies an upside of 54.6%, based on a recent price of about $299.40. The stock traded up about 2.7% Thursday morning.

SolarEdge

SolarEdge Technologies Inc. (NASDAQ: SEDG) makes and sells direct current inverter systems for solar energy systems. The company’s market cap is around $12.9 billion. J.P. Morgan expects margins to rebound in the first quarter due to the resumption of production at the company’s plant in Vietnam. The analysts also like SolarEdge’s opportunity in new energy storage sales and its international expansion plans.

The company’s $373 price target was cut to $324, which implies upside potential of 32%, based on a recent price of around $245.20. Shares traded up about 5.7% just before noon Thursday.

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