While clean tech-energy stocks have declined in value so far in 2021 – after racking up huge gains last year – the sector is poised for a rebound given the decarbonization pledges by some of the leading industrialized nations on earth, including the U.S., EU and China.
The iShares Global Clean Energy Exchange-Traded Fund, which holds about 30 stocks, has plunged 28% since a recent peak on Jan. 7 through Tuesday (versus a 1.9% gain by the S&P 500 index), after surging 142% last year.
Raymond James analyst Pavel Molchanov says after having enjoyed massive gains last year, it is “entirely reasonable and indeed healthy” for there to be a pullback in the sector, adding this recent decline is part of the broader equity market’s sector rotation out of growth towards value stocks.
Molchanov notes investors need to be selective in the clean tech-energy sector, citing that most stocks in this space are trading near record valuation multiples – on average, current multiples are approximately double the levels of one year ago.
Within solar, Molchanov is currently bullish on module manufacturer Maxeon Solar Technologies; residential systems provider Sunnova Energy International; and project developer ReneSola; while in the wind sector, he favors independent power producer NextEra Energy; and blade manufacturer TPI Composites.
J.P. Morgan analyst Mark Strouse recommended in a recent report green energy firms with “high margins and strong free cash flow,” including solar tracker maker Array Technologies; solar equipment maker Enphase Energy; solar panel maker Solaredge and solar tech company Shoals Technologies.
The movement towards the expansion of green energy endeavors in the U.S. and Europe is accelerating – as such, clean tech-energy companies will likely benefit from government and industrial encouragement of decarbonization for the long term. In mid-February, the U.S. officially rejoined the Paris Agreement on climate change – reversing President Trump’s departure from the accord — under which the U.S. and nearly 200 other nations will seek to limit global temperature increases to no more than 2 degrees Celsius above pre-industrial levels by reducing emissions of greenhouse gases. President Biden, who has made tackling climate change a key part of his administration’s strategy, will host a climate summit with world leaders on April 22 (Earth Day) where he is expected to unveil specific new targets for emissions cuts. Biden has also pledged to spend $2 trillion to fight climate change by, among other things, making investments in renewable energy projects and seeking to cease all emissions from U.S. power plants by 2035. Michael Weinstein, an analyst at Credit Suisse, notes that the Biden Administration is “slowly assembling appointees” across various roles in the Department o Energy and other departments, and “we still believe favorable renewable policies will start rolling out after the summer.” Molchanov of Raymond James observes that while there remain “many questions” about which of Biden’s climate reforms will be able to get through Congress, an even more “visible driver” of decarbonization and energy transition is the European Climate Law, which was approved last December. “This is a legally binding commitment to net-zero carbon emissions across the EU by 2050 – the first-ever such policy by a major global economy,” he adds. “Equally importantly, this law commits the EU to lower carbon emissions by 55% by 2030, ensuring that implementation will begin rapidly. This will require not just a massive change in power generation, but also across the transportation, agricultural, commercial, and residential sectors. All of this will generate trillions of dollars of market opportunity for decades, encompassing all the verticals in the clean tech ecosystem.”
571%. That’s how much Enphase Energy’s stock surged last year – but shares have since fallen 28% from recent highs on Jan. 7.
Among other clean energy subsectors, Molchanov is also bullish on industrial wood pellet maker Enviva Partners; natural gas fuel equipment maker Chart Industries; lithium supplier Livent Corp.; fuel cell manufacturer Bloom Energy; and Itron, a maker of electricity, gas, water and thermal energy measurement devices and related software.
“[Regarding the Paris Agreement], for Biden, he has to balance millions of jobs dependent on fossil fuels with clean energy campaign promises. At the same time, there remains a lot of uncertainty as to whether the Paris Agreement will become the ‘de-facto’ climate agreement or will it go the way of [the failed] Kyoto [Protocols]. These positions will influence how large investors, especially institutional investors, approach clean energy now that the U.S. has rejoined the Paris Agreement,” says Abishur Prakash, a geopolitical futurist at the Center for Innovating the Future, a consultancy based in Toronto.