The Renewable Energy “Bear Market”?

Mark the date of January 6^th, 2021 as the infamous day where the U.S. Capitol building was attacked by insurrectionists. That day was the date of Joe Biden’s certification as the new President of the United States. It is also since that date that renewable energy stocks have fallen in value dramatically. Between January 6^th and March 22^nd, renewable energy stocks have fallen over 20%.

Many DSR members wrote to me asking what is happening. After all, while renewable energy companies have a hard time on the market, both the TSX (+9.4%) and S&P 500 (+4.5%) are doing well. The utility sector is lagging in general, but it hurts if you moved your money towards “the future” at the end of 2020.

Is this a classic case of “buy the rumor, sell the news” where investors who waited for Biden to be officially certified were late to the party? After all, Biden and his team have a climate change plan including around $2 trillion (we now hear about a $3T deal!) in investments, subsidies, or tax breaks for clean energy. This should be enough to stimulate this industry for a while. Well, as is often the case, it’s more complicated than this. Let’s dig deeper, shall we?

It’s Time to Take Things in Perspective

First things first, when you send me an email asking why company XYZ is down 20%, I always hit the pause button. First, please note that I cannot (legally) answer this type of question in a one-on-one email because I am not your Financial Advisor. I usually gather such questions and write a newsletter about the topic or discuss the subject in one of our monthly webinars. Second, I always look at the overall stock history before digging deeper as to why a stock is down 20% at any given moment in time. When you take a close look at the renewable energy sector you realize those companies have been on a solid bull trend for about ten years.

With many stocks showing more than 400% growth over the past decade, it’s only normal to see a “small correction” from time to time. Some investors that have ridden this wave over 10+ years may have simply decided to cash some of their profit for various reasons. Over the past three years alone most of these companies have seen their total returns of around 75% to 90% (Brookfield Renewable even offered 195% to its shareholders). You can’t expect stocks to show a 20%+ annualized return for extended periods. Sooner or later, a correction is unavoidable and will move the price closer to a “sane” level. This doesn’t mean there are no reasons why renewable energy utilities are having a hard time.

Here’s a complete list of all the clouds gathering around this industry:

• Rising interest rates. Future projects will be more expensive, therefore, less profitable.
• Profit-taking by some investors (reduces the interest from the market in general). There are valuation concerns in general after such a bullish run.
• Biden’s $2T climate change plan may hit resistance from Republicans after passing a $1.9T stimulus package not too long ago. We also must consider the current U.S. budget deficit.
• Earnings disappointed many in the last quarter. The recession hurt all companies, even the trendy ones. This cooled down the market’s expectations for future earnings as well.
• There is much positive sentiment around classic oil & gas stocks right now, and part of the money is moving from one sector to another.
• The race for clean energy created much competition. Many fear we will reach a level of oversupply where energy prices will decline.

As you can see, these dark clouds are mostly related to short-term events. Besides the interest rate situation (which management teams are used to dealing with), all clouds should disappear if you focus on the long game. And the only game I’m interested in playing as an investor is the long game!

Investing in renewable energy stocks makes sense as our countries are obviously going in that direction to meet our ever-increasing need for energy. I’ve discussed my favorite renewable energy stocks in this video below.

Final Thought

The race for renewable energy will continue over the next decade. While this will remain a sector of growth, there will be winners and losers. The competition will be fierce, and some companies will fail even if we all want to use cleaner energy. Keep in mind these businesses are capital intensive and not all management teams can manage debt efficiently. For this reason, focusing on a strong dividend triangle before you make your decision will ensure that you are about to acquire a quality asset.

 

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