This year’s gains in US stock markets have owed much to the significant outperformance of US tech, more perhaps than any other sector.
While all the headlines have been focused on the likes of Apple, Amazon, Microsoft and Alphabet, all who have achieved $1trn valuations to send the S&P 500 and Nasdaq indexes to record highs, there has been another sector that has performed just as well, without the same level of fanfare: renewable energy.
For most of this year, the performance of renewables had more or less tracked the wider market. However, as Covid-19 caused widespread lockdowns across the global economy, we suddenly saw a much greater interest in this emerging sector, as it became apparent that the traditional way of doing things was about to undergo a seismic shift.
Renewable energy stocks making inroads
Over the last few years, renewable energy has slowly been making inroads into the energy mix of various countries across the world, as concerns about global warming and climate change have increased as a result of extreme weather events.
Some of the big energy providers, and oil companies in particular, have been a little slow in embracing these new technologies, apparently content to rely on the business model that has generated so much cash for the last 50 years.
Recent events look set to offer a catalyst for much more rapid change than was expected the beginning of this year, leading to outperformance in areas of the market that were previously thought of as being a bit niche.
Climate emergency a hot topic during US election
For most of this year, renewable energy was just another sector, particularly given where the US economy was in January. President Trump was odds on to win another term against a backdrop of his own particular brand of climate scepticism, and support for the US oil and fracking industry.
The coronavirus pandemic was a game changer, which if Trump had handled differently could have seen a rather different outcome to the Joe Biden win in last month’s US election.
Once it became apparent that Trump's handling of the pandemic was starting to hurt his polling numbers, people started to look a lot more closely at the Democrats’ “build back better” economic programme, with its focus on renewables and a green deal. Then, we started to see a much greater divergence in renewable valuations relative to the other big winners from the pandemic.
Renewable energy vs tech 2020 comparison chart
Source: CMC Markets
As can be seen from the chart above, this divergence started to accelerate away from the other big performers at the beginning of August, as Biden started to open up a widening poll lead and has continued to outperform as we head towards 2021, and a Biden inauguration.
The much greater focus on renewables over the next four years is now set to become a fact of life in US energy policy and this shift is now being reflected in some really decent percentage gains in our Renewable Energy share basket, which has blown the trillion-dollar valuations of big tech, remote lifestyle as well as driverless cars into the weeds.
The Renewable Energy basket contains companies that specialise in the following renewable technologies of wind power, solar and hydroelectric, along with the development of battery technology. Of the 17 companies in the share basket, the biggest five make up 57% of the total weightings. They are:
Enphase Energy – 16.91%
Enphase makes all-in-one solar panel systems for residential and commercial use across North America, with 85% of its sales in the US. It does operate in international markets, including the UK, France, China and Australia. With a market cap of $16bn, compared to $3.2bn in 2019, the company has annual revenue of $624m, and is already ahead of that at $719m year-to-date.
Maxeon Solar Technologies – 15.59%
Spun-off from SunPower in August, Maxeon concentrates on manufacturing the solar panels, and operating the SunPower brand in global markets, while SunPower itself focuses on the US and Canada. Maxeon operates in over 100 countries, focussing on residential and business customers. The company also designs panels for operation in solar plants. One of its key semiconductor suppliers is Zhonghuan in China which has raised concerns about tariffs on its supply chain. In its latest Q4 outlook the company anticipates revenues of $210m to $260m, however annual EBITDA is expected to record a loss of $82m. Total revenues for 2020 are expected to come in at $838m.
First Solar – 12.5%
Unlike its peers, First Solar makes solar panels that are primarily used in solar farms, with the US market making up to 85% of its sales. One of the biggest solar power companies with a market cap of over $9bn its revenue growth has been patchy in recent years, and says it is on track to post annual revenues of between $2.6bn and $2.9bn in this current year, below last years $3bn. Despite this underperformance, the shares are still up over 40% year to date.
Sunpower – 6.44%
Sunpower specialises in the installation of solar panels systems, as well as the battery storage systems for residential and commercial buildings in the US and Canada. It has two divisions, energy services and technologies. Energy services accounts for half the company revenue and the technologies division is the other half. Annual revenues have been in decline in recent years, with the split with Maxeon likely to exacerbate that in the short term. Losses should improve however with expectations for a full year loss of $0.26c a share, a big improvement on last years -$1.32c loss.
Plug Power – 5.52%
Plug Power has been a standout performer this year. The company designs, develops and manufactures fuel cell systems for electric, forklifts, trucks and other vehicles. Focussing on hydrogen fuel cell systems that power electric motors, its main clients include the likes of BMW, Carrefour and Walmart. In the last 12 months the stocks have risen over 600% giving it a market cap of over $10bn. Total revenues for the year are expected to increase from $230m in 2019 to $303m, however the company still trades at a loss, and that doesn’t look like it’s going to change anytime soon. Management want to increase revenues to $1.2bn by 2024, which is a laudable goal, however it needs to get on top of its cost of sales.
High on innovation, still low on profit
As can be seen from the examples above there is a huge amount of interest in the renewable energy sector, with a lot of innovation, however when looking at the fundamentals, there isn’t that much in the way of profit, for any of the companies here, which suggests that investors are taking a much longer-term view when it comes to future income.
This of course begs the question, given this year’s massive outperformance, of how much extra growth can be realistically priced in? In normal circumstances you would have to say not much, however these are not normal times; a company like Tesla, which has annual sales of less than 500,000 cars, can only make a profit by selling carbon credits and not the cars it makes, is valued higher than a company like Toyota, which has annual sales of 10.7m vehicles, and expects to make $12bn profit this year
The next two years are likely to be interesting for renewables with winners and losers alike. In times like this spreading your risk is safer than adopting a pick and mix approach to investing and trading baskets can be helpful in spreading that risk.