Momentum is building for renewable energy.
A growing number of sustainable energy investments are available for investors who want exposure to renewable energy stocks and exchange-traded funds. There is the potential for a strong upside for renewable energy, such as companies that produce solar or wind energy, says Jodie Gunzberg, managing director, chief investment strategist at Morgan Stanley, Wealth Management Institutional. Energy companies focused on fossil fuel production, processing or transportation may be at risk of “stranded assets or write-downs as energy transfers to renewable sources,” she says. Despite some challenges in 2020 from the pandemic for new renewables deployment, renewable energy is compelling for investors. The WilderHill Clean Energy Index, which tracks companies that provide clean energy and work to prevent pollution, is at about $94 compared with a low of $62.79 on July 12, 2019. “The long-run investment opportunities are attractive from the building pressure to decarbonize, which may change how investors construct their portfolios in the future,” Gunzberg says. Here are seven renewable energy investments to consider.
Invesco Solar ETF (ticker: TAN)
The Invesco Solar ETF offers exposure to global technology and utilities stocks that can benefit from demand for solar as an alternative energy. “Investors benefit from the diversification and liquidity to not only U.S. but European and Chinese companies in one product,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA, a New York-based investment research company. The Invesco Solar ETF tracks two dozen solar energy companies such as First Solar (FSLR) and SolarEdge Technologies (SEDG). Solar stocks are popular among investors, including retail and institutional ones. Since TAN owns fewer companies, the price can be more volatile than other renewable energy funds with a larger number of companies.
iShares Global Clean Energy ETF (ICLN)
The iShares Global Clean Energy ETF provides exposure to solar, wind and other renewable energy companies, Rosenbluth says. This ETF tracks the S&P Global Clean Energy Index and includes companies that produce solar, wind and other renewable power sources globally, including power generation players. The top three holdings are SolarEdge Technologies, Xinyi Solar Holdings (968) and Plug Power (PLUG). Investors are using new and improved metrics to measure current portfolio emissions to better gauge how to move toward a net zero portfolio, Gunzberg says. “Since this may take a long time, pockets of renewable opportunities may outperform at different times, so investors will need to tactically adjust by sector or broadly diversify to generate alpha over different time horizons,” she says.
NextEra Energy (NEE)
NEE is a utility company that owns Florida Power & Light Co. and Gulf Power Co., along with wind and solar assets. NEE’s regulated utility Florida Power & Light reduced its power generation costs by more than 50% over the past decade by switching from higher-priced coal and oil to cheaper natural gas, says Jean-Hugues de Lamaze, senior portfolio manager at Tortoise Advisors in London. The next opportunity for the company is to increase adoption of renewable energies, particularly solar, and allow FPL to further reduce its cost base, he says. In 2019, FPL unveiled plans to increase solar generation from 1% in 2018 to 15% in 2028. “This will keep customer bills affordable, lower emissions and present an attractive investment opportunity for shareholders,” he says. NEE trades at a 50% premium compared with regulated utilities on 2022 price to earnings, “implying that investors are willing to assign a significant growth premium to the management team,” says Michael Underhill, chief investment officer at Capital Innovations in Wisconsin.
Vestas Wind Systems (VWDRY)
Vestas Wind Systems is a Danish company that designs, manufactures and installs wind turbines globally and has more than 115 gigawatts of wind turbines in 81 countries. While there is a host of potential companies across the value chain in both the U.S. and Europe that are levered to the offshore wind theme, Vestas is “well-positioned overall as a manufacturer of equipment,” Underhill says. The company’s offshore development, including associate companies, supports 15% of 2020 revenues. Underhill says he has a target price of $46. “As consumers migrate towards renewable energy sources, it may change the composition of inflation, reducing the power of traditional oil and energy to hedge inflation, so investors will need renewable energy to hedge against inflation in the long term,” Gunzberg says.
Brookfield Renewable Partners (BEP)
Brookfield Renewable Partners is a global renewable power platform with 19,300 megawatts of capacity and 5,288 generating facilities in North America, South America, Europe and Asia. The company is one of the largest owners of renewable assets globally, 75% of which is hydro, and generates a 4.5% dividend yield with a 5% or higher dividend growth. One of the company’s strengths is the long-lived nature of hydro assets of around 100 years and the potential to complement wind and solar generation, de Lamaze says. Brookfield Renewable Partners also has a strong track record in value-creating mergers and acquisitions and efficient operations, he says. “We believe they will be able to take advantage of COVID-related M&A opportunities,” de Lamaze says.
Iberdrola is a Spanish utility company that owns wind assets. The company announced in June that it will invest $4.5 billion during the next four years in France to develop renewable energy, including onshore wind, solar photovoltaic and offshore wind capacity auctions. The company is a “best-in-class wind developer company,” Underhill says. “We expect continued momentum in the U.S. for offshore wind development along the Eastern Seaboard.” His target price is $62.
ALPS Clean Energy ETF (ACES)
The ALPS Clean Energy ETF invests in the CIBC Atlas Clean Energy Index, a benchmark index. The ETF has an expense ratio of 0.65%. The three top holdings are Cree (CREE), Tesla (TSLA) and Enphase Energy (ENPH) as of May 31. Investors, especially millennials, are looking for ways to invest in companies that contribute to a sustainable future and reduce their carbon footprint, says Mike Loewengart, managing director of investment strategy at E-Trade. Renewable energy is subject to unpredictable weather and government regulation and has had an interesting trajectory as the industry has matured and regulation has lessened, he says. “The training wheels have come off, so you could expect a bumpier ride,” Loewengart says. “Do your homework before investing in any one fund — the underlying securities could be concentrated in one geographic area or stray from its investment objective.”
Stock and ETF picks for renewable energy:
— Invesco Solar ETF (TAN)
— iShares Global Clean Energy ETF (ICLN)
— NextEra Energy (NEE)
— Vestas Wind Systems (VWDRY)
— Brookfield Renewable Partners (BEP)
— Iberdrola (IBDRY)
— ALPS Clean Energy ETF (ACES)
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Update 07/14/20: This article was published previously and has been updated with new information.