Clean energy has had an “abysmal stretch in the stock market” the last two and a half years, Lucas White, lead portfolio manager for the Resources and Climate Change strategies, wrote in a report Monday. But that shouldn’t turn investors away, he argued. Clean energy has momentous growth and major public policy on its side.
“Clean energy over the last few years looks suspiciously like one of Jeremy Grantham’s bubbles,” White said in reference to the GMO co-founder, who is known for his bearish predictions about markets, among other things. In hindsight, clean energy stocks might have looked like a bubble that burst. But in reality, they have just fallen on hard times.
The Wilderhill Clean Energy Index outperformed the MSCI All Country World Index (ACWI) by more than 200 percent over 2020 and the beginning of 2021. But it lost all that alpha, and then some, through the end of August — over 70 percent in absolute terms from its February 2021 peak.
Why aren’t the stocks doing as well as some investors hoped? White says it’s a tricky sector but that he’s nonetheless optimistic about it. The cost of solar and wind energy declined for decades until recently. Inflation and rapidly higher interest rates during the past 12 months made clean energy projects more expensive to finance and less attractive as future cash flows are discounted at a higher rate. Rising interest rates also caused investors to reevaluate growth stocks and clean energy companies “got caught up in the broader growth unwind.”
The Inflation Reduction Act (IRA) has also impacted clean energy performance in a way that was unexpected, according to White. The landmark legislative package, which included clean energy incentives, will drive investment over the long term. But in the short term, clean energy projects were delayed because stakeholders were waiting to learn the final details of the law. “Public policy changes often pull demand forward, but in this case, demand has been pushed into the future,” White wrote in his report.
The new market regime, coupled with policy changes, negatively impacted clean energy company earnings and their stock prices were impacted disproportionately. Canadian Solar, the world’s largest solar developer, is an example of that, according to White. This year, the company beat first quarter earnings estimates by almost 150 percent, then beat the second quarter’s by about 60 percent. Net income grew by almost 130 percent year-over-year. But even though revenues grew nearly 40 percent compared to the first quarter, they came in at the low end of guidance, sending the stock tumbling more than 30 percent from July levels.
“As of the end of August, Canadian Solar sat at less than five times forward earnings, territory not typically reserved for companies growing 25 to 30 percent per year,” White said.
Something similar happened to the company SolarEdge, he explained.
“These types of swings are nothing new. Clean energy has always been a sentiment driven sector, and the swings tend to be dramatic. This dynamic makes clean energy an uncomfortable place to invest for many, particularly when sentiment turns sour. However, this is not the Tech Bubble or Tech Bubble 2.0. Clean energy companies are growing profits rapidly, and the sector is maturing. At some point, one would expect the sector to withstand a bit of bad news. In the meantime, these situations create opportunities for long-term investors,” White said.
And GMO believes the growth and public policy changes will continue to support the sector.
The Infrastructure Investment and Jobs Act, the CHIPS and Science Act, the European Green Deal Industrial Plan, and other more local public policies will help transform clean energy in the future. But the impact of the Inflation Reduction Act’s $369 billion package of incentives — many that take the form of uncapped tax credits — will be huge. It hasn’t been appreciated by markets yet either.
“In short, the IRA is a big deal. Yet, in the year after its passage, the Wilderhill Clean Energy Index fell over 40 percent!” White wrote. “Barring a stunning change in course, it’s clear that U.S. investment in climate will dwarf anything we’ve seen before, and the same is true around the world. In fact, the U.S. has lagged China and Europe in driving clean energy investment over the last few years and needed to act aggressively in order to catch up.”
From 2019 through 2023, China has increased its annual clean energy investments by $180 billion, the European Union has invested $150 billion and the U.S. has invested about $110 billion more, according to estimators by the International Energy Agency (IEA).
“Clean energy isn’t just the future. It’s the here and now. Despite the recent jump in costs for wind and solar mentioned earlier, solar and onshore wind continue to be cheaper than natural gas, coal, and nuclear even without taking subsidies, the IRA, etc., into account,” White wrote.
