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Industry Spotlight

Will renewable energy stocks be the breakout industry of 2020?

A number of corporates have started the year by announcing their green intentions for 2020 and beyond, increasing the momentum behind renewable energy stocks. How far could they run?

The start of 2020 has seen a slew of companies announce a commitment to renewable energy. On 26 February, mining behemoth Rio Tinto said it is aiming to become carbon neutral by 2050, following plans to power its operations through giant solar farms.               

Morgan Stanley, meanwhile, has increased its financial commitments to renewable energy projects in its latest earnings report and Warren Buffett reaffirmed his commitment to switching his energy companies to 100% clean energy – with Iowa based MidAmerican set to be powered by 100% renewable energy by the close of 2020.

While these moves are commendable, they also highlight the increasingly unfavourable attitude governments and regulators are taking towards big businesses that are not doing their part for the environment. In the UK, the Court of Appeals outlawed the building of a third runway at Heathrow based on the fact it would go against the government’s climate commitments. So, how has such a sentiment change affected the stocks of the companies affected?

This narrative hasn’t gone unnoticed by stock markets, with 2020 bringing a rally in solar power and other renewable energy stocks. Before coronavirus hysteria began to impact the global financial markets on 21 February, the Invesco Solar ETF [TAN] had gained 33.5% up to 20 February, while the iShares Global Clean Energy ETF [ICLN] had popped by 20.4%.

33.5%

Invesco Solar ETF rise prior to coronavirus

 

Strong performing stocks in the renewable energy sector for the same period included Brookfield Renewable Partners [BEP] (up 21%), TerraForm Power [TERP] (up 38%), SolarEdge Technologies [SEDG] (up 47%), Ballard Power Systems [BLDP] (up 72%) and Enphase Energy [ENPH] (up 123%).

 

What’s behind the renewable energy surge?

Analysts point to the phenomenon of sector rotation, whereby money is moved out of one out of favour sector, into another that’s more in vogue. In this case, it looks like the move has likely been from traditional energy into renewable energy – not only does general sentiment back clean energy, falling oil prices have led to a fall in the value of oil company stocks, making them even less attractive to investors.

Just as renewable energy stocks and ETFs bounced at the start of 2020, traditional, oil-dependent energy stocks have fallen. Take the Energy Select Sector SPDR Fund [XLE], which has fallen 22.3% year-to-date.

22.3%

Amount the Energy Select Sector Fund has fallen year-to-date

  

Exxon Mobil [XOM], ConocoPhillips [COP] and Chevron [CVX] fell 24%, 25% and 20% respectively during the period.

The dramatic drop in global markets caused by coronavirus concerns have of course put a stop to the clean energy rally in recent weeks. However, once the hysteria is over and business as usual resumes, there is a chance of the trend continuing, with extra upside potential due to recent devaluation.

 

Two renewable energy stocks to watch

Enphase Energy [ENPH]

The firm is a top performer for 2020 among renewable energy stocks, and is currently up 75% for the year, despite plunging 13% since 21 February amid coronavirus concerns.

The 2020 momentum follows gains made in 2019, when the stock was the best performing energy pick of the year, rising 464% in value. The company, which produces the technology for home energy including solar micro convertors and battery storage, also has solid fundamentals.

464%

Enphase Energy's rise in value in 2019

 

It’s recent earnings report on 18 February beat analyst’s adjusted earnings per share estimates for the quarter by 18%, coming in at $0.39 versus $0.33, which was also a massive 875% year-on-year gain from $0.04 for the same quarter a year ago.

At $0.95 per share, EPS for 2019 also outpaced analyst’s estimates of $0.89 of the year, while revenues of $624.3m for the year beat out analyst consensus estimates of $619.1m. Gross profit for 2019 came in at $77.9m, up 176.2% from $28.2m in 2018.

 

Brookfield Renewable Partners [BEP]

While Brookfield Renewable Partners hasn’t had the same lightening gains as Enphase Energy, it did surge a significant 80% in 2019 and 21% before the coronavirus plunge.

Arguably, it’s a less risky renewable energy play compared to Enphase. With a market cap of around $9bn and a sizeable 19,000-megawatt capacity, the firm is not only one of the world’s largest pure-play renewable energy firms, but it is also 60% owned by the 120-year-old renewable energy holding company behemoth, Brookfield Asset Management, which has a market cap of $63bn.

80%

Brookfield Renewable Partners share price rise in 2019

 

The firm has also posted impressive numbers for 2019, reporting funds from operations growth of 13% for 2019.

Brookfield Asset Management is meanwhile currently locked in a 50:50 partnership with GLP to roll out 300 megawatts of solar panel power in China, as part of a wider one-gigawatt development pipeline.

Having reached consistent new all-time highs and an RSI reaching 89, the firm was looking overbought in mid-February, so the current pullback could also represent a welcome buying opportunity that may not have otherwise surfaced.

 

 Enphase EnergyBrookfield Renewable Partners
Market Cap$6.331bn$9.634bn
EPS (TTM)1.23-0.05
Operating Margin (TTM)16.87%35.64%
Quarterly Revenue Growth (YoY)127.60%-6.90%

Enphase Energy & Brookfield Renewable Partners share price vitals, Yahoo Finance, 03 March 2020

Disclaimer Past performance is not a reliable indicator of future results.

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The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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