Given the global transformation toward clean energy, now might be a good time to look at stocks in the industry.
The iShares Global Clean Energy ETF (ICLN) has dipped 2% year to date and 6% over the past 12 months.
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A major supporting factor: the U.S. Inflation Reduction Act. It represents the government’s largest renewable-energy investment ever, with more than $400 billion in subsidies for clean-energy technology.
“The clean-energy industry is fast-growing, and it’s good for the planet -- an attractive combination for investors,” Morningstar says in a research report.
“So what’s the catch? With so much hype in the space, it’s not as simple as it might sound to find companies with the two-pronged attributes of being focused on green energy and trading at valuations that offer the prospects of solid long-term investor returns.”
Looking at pure clean-energy investments, such as solar stocks, they have “tended to be volatile, overpriced, and largely commoditized,” Morningstar said. “On top of that, these green-energy pure plays make up a tiny portion of the North American [energy] market.”
Looking ahead, “renewable energy, particularly solar power, is going to grow by leaps and bounds over the next 20 years,” says Brett Castelli, clean-energy-equity analyst at Morningstar. “But investing in the space isn’t easy.”
There’s a lot of competition in the clean energy space, he notes. “It’s very important to find companies with some kind of differentiation that are trading at the right valuations.”
Three Investment Opportunities
Here are three renewable-energy stocks trading substantially below Morningstar’s fair-value estimates.
Ballard Power Systems (BLDP): Castelli assigns the company no moat (durable competitive advantage) and puts fair value for the stock at $7.50. It recently traded at $5.60, a third below fair value.
Ballard has a long history in the fuel-cell industry, with a focus on transportation applications.
The company now emphasizes providing fuel cells to the bus, truck, rail, and marine industries. Among those, “the bus sector is the furthest along in adopting zero-emission technology,” Castelli said.
Brookfield Renewable Partners (BEP): Castelli gives the company no moat and puts fair value for the stock at $32. It recently traded at $26, 23% below fair value.
It holds ‘a well-diversified global portfolio of clean-energy-technologies assets,” he said. “The company targets 12% to 15% returns via a combination of organic growth and mergers and acquisitions.”
While Brookfield’s portfolio “has historically been heavily weighted toward hydro generation, that has changed in recent years given outsize growth in wind and solar,” Castelli said.
Plug Power (PLUG): Castelli assigns the company no moat and puts fair value for the stock at $23. It recently traded at $14.30, indicating 61% upside to fair value.
“Plug Power seeks to be a leader in the green hydrogen economy,” he said. “The company’s strategy is centered on its vertical integration approach to provide customers a complete hydrogen solution—from fuel cell technology to green hydrogen fuel.”
While that strategy “brings greater capital intensity, it positions Plug as the only all-in-one provider within the industry,” Castelli said.
