Green stocks are white hot. Stocks poised to profit from an expected multi-decade transition to clean energy, renewable power, electric-powered transportation and zero pollution emissions have skyrocketed in popularity—and in price. That means environmentally minded investors who want to grow their wealth by investing in the planet should tread carefully.
Many green stocks are up two-, three-, four-fold and more over the past year. Shares of electric car maker Tesla have risen 480%, for example, and the stock of solar-energy company Enphase Energy has surged 423%. From the start of 2020 through late January, a basket of U.S. renewable-energy stocks has outgained the broad S&P 500 index by more than 200 percentage points, with the median price-earnings ratio of the renewable names, based on projected profits, 40% higher than the S&P 500’s, according to Goldman Sachs. Analysts at investment bank Raymond James call this a “breakout moment” for green investing but advise investors “not to throw caution to the wind.”
That means brace for a pullback in the short term, but don’t let passing clouds eclipse an overall bullish outlook. “A shakeout is inevitable,” says Chris Marangi, co-chief investment officer of value investing at Gabelli Funds and comanager of its new Love Our Planet & People exchange-traded fund. Interest in stocks with an environmental focus, he says, has reached a level reminiscent of past manias. Given the lofty P/Es, a price decline of “30%, 40% or even 50%” is possible for green stocks that have doubled, tripled or quadrupled in value, says Lucas White, manager of GMO Climate Change Fund.
Multi-decade megatrend. But long-term investors have little call to avoid green stocks altogether. A stock that looks expensive today, White says, might turn out to be a bargain in the future, as profit and revenue growth catch up to share prices. Given the world’s heightened focus on climate change, the green investing trend has “barely reached adolescence,” Marangi says. Wealth manager Credit Suisse dubs it a “multi-decade megatrend.”
Wall Street and, increasingly, corporate America are on board in a big way in the fight against climate change. In a letter to CEOs in January, Larry Fink, CEO of BlackRock, which manages nearly $9 trillion and is the world’s largest asset manager, used his clout to call on the nation’s top executives to confront the global threat. “There is no company,” Fink wrote, “whose business model won’t be profoundly affected by the transition to a net zero economy,” which he defines as net zero greenhouse emissions by 2050. Firms that don’t act, he warned, “will see their businesses and valuations suffer.”
Many of America’s top companies are pledging to do more. General Motors, the nation’s biggest automaker, for example, recently said it will phase out vehicles that run on gas by 2035. And investors are voting green with their investment dollars. Buying stock in companies that in some way protect the environment is becoming as common as buying shares of smartphone makers, vaccine developers and banks. Flows of money into U.S. stock funds with a focus on environmental, social and governance factors—ESG funds—are hitting record highs, and the E in ESG is the top focus of investors in the fast-growing ESG movement, according to a BlackRock survey.
Sustainable investing will certainly be in the spotlight during 2021, given the Democratic sweep of the White House and Congress. President Biden’s planet-friendly agenda favors renewable energy, electric cars and green buildings, and addressing climate change is now a focus in virtually every corner of his cabinet. Expect more public spending on green initiatives amid Biden’s push to make the U.S. a 100% clean-energy economy by 2050. E stocks are also benefiting from social activism and public policy support abroad, such as mandated zero-emission targets in Europe and China.
To honor Earth Day this month, we’ve highlighted seven leading stocks on the environmental front. Due to the big rally, it’s tricky to gain green exposure while also managing risk. It makes sense to wait for a dip in price before buying first-in-class green stocks that now carry nosebleed valuations, such as solar-tech firm Enphase Energy, whose shares sport a triple-digit P/E. Other candidates for a watch list include solar-energy-system designer and installer Sunrun, with a P/E of 84, and TPI Composites, which makes blades used in wind turbines and trades at 47 times earnings.
But so-called “green chips,” including water-tech company Xylem and NextEra Energy, a powerhouse utility with a renewable-energy portfolio, are good buy-and-hold candidates now and likely to reward long-term investors; the two are included in our list below. We also looked beyond the expensive pure plays in the electric vehicle sector—think Tesla—to consider less obvious beneficiaries, such as companies that make EV components. Finally, we trolled for shares that, if not exactly overlooked, are trading at relatively cheaper valuations than more-vaunted green peers. Prices are as of February 5.
Auto parts makers are an indirect but prudent route to the growing EV market. Sophisticated electrical components from Aptiv (symbol APTV, $147) help power EVs and distribute data throughout a vehicle, essentially acting as the car’s brain and nervous system. “You are paying nowhere near the nosebleed valuations of Tesla, and Aptiv’s technology is on the cutting edge,” says Andy Braun, manager of the Pax Large Cap fund.
Aptiv, which counts 23 of the 25 biggest automotive-related firms as customers, is a beneficiary of the long-term EV growth trajectory. Although electric passenger cars now account for just 3% of total global auto sales, that’s expected to more than double, to 7%, by 2023 and swell to 31% by 2040, according to energy research company BloombergNEF. Following two years of global automotive and EV sales declines, pressuring sales at Aptiv, research firm CFRA is expecting a post-pandemic pickup in auto sales overall of 9% this year. That will spur a 2021 revenue rebound of 19% for Aptiv compared with 2020, and an earnings-per-share increase from $1.84 last year to $3.75 this year. “We’re a big believer in rocket-like penetration of EVs globally,” says Will Riley, manager of Guinness Atkinson Alternative Energy. “Aptiv has a big part to play.”
Investing in a company that makes aluminum cans (and glass containers) that you put out for recycling might not seem as exciting as investing in a state-of-the-art wind farm. But recycling-focused Ardagh (ARD, $19) is a rare green stock trading at about half the valuation of the broad market. The Luxembourg-based firm supplies leading brands, including Heineken, Coca-Cola and Del Monte, with sustainable packaging for beer, soda and canned foods. Ardagh’s claim to green fame? Aluminum is “infinitely” recyclable, which means it can be recycled over and over again. Cans are the most recycled container in the world, according to Metal Packaging Europe, an industry association.
That makes Ardagh an anti-plastic play. Plastic (8 million tons of which winds up in oceans every year, says the International Union for Conservation of Nature) can only be recycled one time, into new plastic, according to Earth911, a recycling proponent. The higher recycling rate for aluminum lowers Ardagh’s carbon footprint and boosts demand for its cans, says Marangi, at Gabelli Funds.
The company’s earnings are estimated to rise nearly 17% this year and 16% in 2022, according to earnings tracker Refinitiv. Growth is being driven by strong long-term demand for earth-friendly packaging and the expected reopening of bars, restaurants and hotels where beer and other canned beverages are sold. Business is forecast to pick up as COVID-19 vaccines roll out and the global economy continues to reopen. But given that Ardagh shares have gone nowhere in the past 12 months and the stock carries a low P/E of 12, Ardagh is likely to be less volatile than the highfliers.
Avangrid (AGR, $48) is a stock that could energize your portfolio. This gas-and-electric utility, trading at a below-market P/E of 21, has been overlooked by investors during the recent renewable-energy boom, despite its growing wind-energy portfolio. Its business profile is similar to NextEra Energy, a Wall Street favorite whose shares have nearly doubled since last year’s market low. “Avangrid has the potential to replicate” NextEra’s success, says Tim Winter, a portfolio manager specializing in utilities at Gabelli Funds. We think there’s room for both in your portfolio (see more on NextEra, below).
Two big renewable-energy projects should help Avangrid bolster its revenue stream, including its Vineyard Wind project off the coast of Martha’s Vineyard that will generate electricity for 400,000-plus homes. Under new CEO Dennis Arriola, who took over in July, Avangrid is expected to nearly double its current 7.6-gigawatt renewables portfolio, to 13.2 gigawatts, by 2025 and boost its 2021 earnings by 21% over 2020 levels, to $2.35 a share, according to Gabelli Funds.
If you want to hitch a ride on the electric vehicle stock market journey, put your thumb out for General Motors (GM, $54), which is electrifying its product line aggressively. Choosing GM, helmed by CEO Mary Barra, over Elon Musk’s Tesla juggernaut is all about share valuation. GM stock recently traded at just nine times earnings—vastly cheaper than Tesla, which is sporting a P/E of 200-plus and priced as if nothing can go wrong. GM shares trade as if the company’s only focus is gas-guzzling vehicles. Conventionally powered vehicles still account for all of the company’s profits, but GM is speeding up its EV transformation and expects profits to follow in coming years. “We are all-in on electrification,” Barra said in January.
GM plans to launch 30 new all-electric models globally by 2025 and expects that four out of 10 cars it sells in the U.S. by then will be battery-powered EVs. The carmaker also has a big footprint in China, the world’s largest EV market, and is a leader in battery technology. GM’s battery can power a car for an estimated 400 miles on a full charge, a range competitive with that of Tesla’s Model S. “Don’t ignore transformations at companies like GM, as they may be lower-risk situations,” says Gabelli’s Marangi.
In the meantime, GM’s old-school business of selling gas-powered SUVs and pickup trucks should boost sales this year as the economy moves toward more normal activity, analysts say. GM’s revenues are estimated to increase more than 16% in 2021, to nearly $141 billion, and earnings per share should rise 24%, to $6.20, forecasts CFRA. This isn’t your dad’s GM, but its stock hasn’t yet been caught up in the momentum lifting other EV stocks to unsustainable levels. “GM is one stock that will survive the EV mania,” say analysts at stock research firm Zacks, which rates it a strong buy. “It has the scale to make a big splash.”
The Florida-based electric utility, which has a market capitalization of $164 billion, is the largest U.S. utility measured by both stock market value and retail electricity produced and sold. But its inclusion on our list of top green stocks stems from its sizable and growing portfolio of wind, solar and battery storage projects. It has “a competitive advantage over the other players,” says Gabelli’s Winter.
NextEra (NEE, $84) is part stodgy electric utility, with a secure dividend (the shares yield 1.7%), and part green growth engine. It “gives investors the best of both worlds,” says Andrew Bischof, senior stock analyst at Morningstar. The utility’s unregulated clean-energy arm, NextEra Energy Resources, is the main ESG attraction for investors.
NextEra’s business is heading in the right direction as renewable energy gains a bigger foothold, tax credits for wind projects are extended through year-end, and a new White House administration takes steps to reduce the nation’s use of fossil fuels. In 2020, more than 40% of NextEra’s $4.6 billion in earnings came from its Energy Resources unit, and there is a huge pipeline of new renewables business. The company believes it can construct 23 to 30 gigawatts of new renewable-energy projects through 2024, one and a half times the size of its entire portfolio at the end of 2019. Another big plus for the utility is that substantially all of NextEra’s customers are locked into long-term power contracts.
Given its strong growth prospects, NextEra expects to post profits at the top end of its projections through 2023. The company is forecasting earnings growth of as much as 10% this year and 6% to 8% in 2022 and 2023. But Morningstar analysts are betting the utility will top that.
Renewable Energy Group
Renewable Energy Group (REGI, $99) is a clean-fuel company that produces biodiesel made from animal fats, inedible corn oil, recycled cooking oil and vegetable oils. Similar to how ethanol is blended with gasoline, biodiesel is blended with petroleum diesel. Biodiesel fuel reduces greenhouse emissions and fossil fuel use, and it is increasingly being adopted by trucking firms and governments to further their ESG goals.
Sure, EVs grab most of the attention, but they’re not yet viable for most trucking runs. Trucks, which transport roughly 70% of all U.S. goods, will require cleaner-burning biodiesel and renewable biodiesel blends for years to come, making Renewable Energy Group an “exciting, high-potential investment,” says GMO’s White.
The small-capitalization stock, with a market value of $4 billion, trades at 18 times estimated 2021 earnings, which is “not crazy expensive,” White says, and should appeal to investors looking for fairly valued ESG plays. In five-plus years, the current price might look like a bargain, White says.
This year could be a bounce-back year for earnings as the economy recovers. Analysts expect profits to jump a whopping 66% over 2020 levels and sales to rise 15%, according to Refinitiv. The stock will get a lift again this year from the government’s $1-per-gallon biodiesel-mixture tax credit for trade and business users, which has been extended through 2022.
Water is vital for life. But less than 1% of the water on earth is usable by people, and one in three humans lack access to safe water, per research from Fidelity Investments. Xylem (XYL, $98), a water-technology firm, is focused on combating a water scarcity crisis that experts blame on population growth, climate change and aging infrastructure.
Xylem uses innovative methods to upgrade infrastructure and to deliver clean water to people in 150 countries. Xylem’s digital, data-driven approach to water usage (think smart meters and sensors that detect pipe leaks, for example) helps industrial firms, utilities, municipalities and homeowners conserve and manage water. The company’s technology also helps reduce the amount of “non-revenue water,” a term for the 30% to 40% of water worldwide that’s lost due to pipe leaks, unauthorized use and inefficiencies. Xylem’s treatment technologies remove harmful pollutants from water and wastewater.
Growth catalysts for Xylem include a more climate-minded regime in the U.S. and continued expansion in emerging markets, including China, India and Brazil, as well as strategic acquisition opportunities. And Xylem’s backlog of projects to be delivered this year is “up by more than 30%,” according to Morningstar analysts. Those pluses should help boost revenue growth by 5% to 6% in 2021, according to CFRA, following a sales drop of about 9% last year due to COVID-related project delays and a decline in commercial infrastructure spending as the economy slowed. Rebounding from two years of shrinking profits, Xylem could see earnings increase by a hefty 34% in 2021, says CFRA, which recommends the stock.
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