Green energy capex is on the rise following a surge in renewable energy stocks in the last three years
A pause in 2021, however, brought about a modest valuation reset while thematic interest in ESG remains robust
Though traditional energy represents the deep value play, clean energy stocks could be poised for more investor fund flows if we see near-term share price breakouts
Following up on last week’s Coming Capex Boom, where we left readers with a brief insight into the renewable energy landscape, this week’s edition of the Weekly Macro Themes report dived deeper into clean energy stocks - this post presents some of the findings.
Perhaps it’s time to review where this niche within the energy sector stands. Alternative energy equities outperformed in 2020 as money poured into the ESG thematic play, but once popular ETFs tracking renewable energy companies have fallen sharply since January. These ETFs now appear to be basing as downside momentum slows, but work needs to be done to establish new uptrends.
Real Investment Follows Financial Investment
Getting back to our capex piece last week, we noticed something interesting in green energy—investment flows into the sector have historically preceded capex jumps by about two years. Hence, the boom in tickers like ICLN, TAN, and FAN last year may portend a significant jump in alternative energy capex (as a percent of total energy sector capex) in the coming years. This brings us to our featured chart. At the very least, it’s something to watch, particularly as coal, natural gas, and power prices jump in Europe.
ESG Theme Going Strong
Moreover, interest in ESG investing continues to be top of mind among investors. We like to keep a pulse of what people are Googling. Search Trends for “ESG Investing” surged in 2019 and 2020, and remain at elevated levels. This is no fad—ESG was once again mentioned at a record clip in the last earnings season.
2021—Not the Year of Green Equities
Clean energy stocks have been a lousy place to park money this year though. The space peaked in early January and never bounced. The winds could be changing following a 30% reset from the highs, but the chart of ICLN still has work to do after stabilizing in the low-$20s. The good news is valuations are more reasonable today. Looking through the charts and data we found that the price to book ratio is slightly below the long-term average while the forward PE is still a smidgen on the expensive side.
New Energy vs. Old Energy
Investors now face a decision—go with traditional energy or dip their toes into an overweight to renewables? Alternative energy equities command a valuation premium. (Not surprising given the “tech” nature of some clean energy firms.) Looking back, the valuation premium today is higher than it was during much of the 2010s. Traditional energy is the value play, so you’d be paying up to own clean energy stocks’ long-term growth potential -i.e. clearly, there is an ESG demand premium in the price.
Near-term, something to watch in the coming months is how green energy stocks perform in a world that could be on the brink of sustained higher coal and power prices. There’s no doubt that oil and gas names prefer high commodity costs, but that should also bode well for green energy capex and share prices given the substitute effect. For perspective, renewables stocks performed well relative to oil/gas/coal equities during the commodity boom from 2003-2008 before a major bust.
Bottom Line: While thematic investors look to “do good” by investing in renewable energy companies, the niche is not for the faint of heart. Booms and busts are common over the last 25 years. At the moment, the alternative energy space is riding the wave of interest in ESG. Emerging trends and future capex growth could spawn further investor flows after a dismal relative equity performance so far this year.
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