8 renewable energy stocks to buy that will beat the bear market

  • Renewables can beat the bear market due to strong fundamentals, said Ecofin’s Michel Sznajer.
  • The sector is also characterized by low costs, resilient demand and strong pricing power.
  • Sznajer shared the top 8 stocks investors should buy to profit from the green energy revolution.

After a decade of disappointing returns, commodities have embarked on a tumultuous journey to the top of the stock market.

Energy stocks sold off earlier in June, betraying Wall Street fears of an impending recession alongside escalating regulatory and geopolitical risks. But now, with commodities recovering again, Michel Sznajer stresses that investors should not overlook a very important part of the sector: renewables.

Sznajer is a portfolio manager at sustainable investment firm Ecofin, which manages around $1.7 billion in assets and is a subsidiary of the $8.7 billion firm TortoiseEcofin. As of July 25, Sznajer’s fund, The Ecofin Global Renewables Infrastructure Fund (ECOIX) — which invests in low-carbon power generation assets — is down 6.4% year-to-date. , easily outperforming the broader S&P 500, which is down 16.77%. in this same period.

Renewables look attractive in bear market

Sustainable energy stocks haven’t received much attention from investors in the past, but Sznajer pointed out that buying these names makes even more sense given the current bear market.

“The concern with the broader market is that you are in a situation where you have slower growth due to the downturn in the cycle. This generally takes away the pricing power of companies, puts pressure on margins and drives down earnings, which causes stock prices to go up,” he told Insider in a recent interview. “But with renewables, the demand isn’t cyclical, it’s really structural – so it’s there and it’s getting worse, somewhat regardless of what’s going on around it.”

This structural change, Sznajer explained, is the obvious migration to cleaner energy, whether driven by corporate or government-imposed guidelines. Utility companies have even started to migrate to renewable energy sources because they are cheaper to run than traditional coal or gas-fired electricity, he added.

“You’re investing in an industry with steady growth and pricing power, so your earnings are growing very solidly and so you continue to have very good profit margins and earnings growth, unlike the broader market,” said Sznajer. This is why 71% of companies in the ECOIX portfolio have revised their earnings forecasts positively at the end of the first quarter of this year, compared to around 54% of companies in the S&P. 500, he continues.

A structural shift towards renewable energies

Net inflows for U.S.-listed sustainable funds set a new annual record by hitting $70 billion in 2021, up 35% from 2020 inflows, according to Morningstar. But Sznajer believes that investors have barely unlocked the full potential of the renewable energy sector.

“Over the next 20 to 30 years, the way we produce and consume energy will change dramatically, from fossil fuels to electricity and therefore from molecules to electrons,” he said.

According to Sznajer, today about 79% of energy in the US market comes from fossil fuel sources like coal, oil and natural gas, while nuclear and renewable energy sources make up the remaining 21%. . Going forward, he strongly believes that ratio will reverse, citing recent survey data that 50% of car buyers under 30 said their next purchase would be an electric vehicle. He predicts that the U.S. electric car market will eventually catch up with those in China and Europe, as consumers will be able to choose from a greater supply of more affordable models.

More advanced technology and better scaling have been the two main drivers for reducing the cost of renewable energy sources, Sznajer said. Even though the new wind turbine blades are both taller and longer than previous models and therefore more expensive to build, the amount of power they generate per unit makes them much cheaper overall, Sznajer estimating that the costs of onshore and offshore wind farms have fallen by around 50% over the past 10 years.

Moreover, energy independence has become a much more pressing topic given the ongoing conflict between Russia and Ukraine, Sznajer added.

“Europe suddenly realized it needed faster energy independence to wean itself off its dependence on Russian gas, and the alternative is again renewables,” he explained. “The difference between the oil and gas sector and the renewable energy sector is that the latter is a kind of local business – the beauty is that you are not dependent on imports of raw materials. Most countries have some kind of resource , whether solar, biomass, geothermal or wind.

According to Sznajer, the adoption of more renewable energy sources will be extremely beneficial for countries like Germany and Japan, which are traditionally net importers of natural gas. And because natural resources like wind aren’t 100% reliable, he predicts that in the future, countries’ networks will be much more interconnected in terms of resource sharing and transmission.

Sznajer’s 8 Stock Picks

Sustainable energy stocks may have a bad rap, but Sznajer says some of their relative underperformance can be attributed to what investors classify as “renewable energy.” For example, OEMs of renewable assets like wind farms or solar farms have traditionally struggled to balance supply and demand in a cutthroat industry that leaves players fighting for market share rather than for profitability. These stocks, Sznajer said, have traditionally followed a boom and bust pattern with little or no added value.

For this reason, Sznajer prefers to invest in the developers and operators behind these assets, sectors which he believes have performed much better than OEMs.

“Because they don’t take on the volatility of the gear, they’re actually the beneficiaries of that decreasing cost curve of that gear,” he explained. “These companies are very predictable because they’re setting up these solar farms and wind farms, and they’re signing long-term inflation-indexed or 10, 20-year contracts. So they’re giving a lot of visibility into the assets existing ones, and then they invest the cash flow for growth on top of that.”

This strategy, which Sznajer has personally followed since 2015, has a reputation for delivering 13% compounded returns per year to investors, he added.

Renewable companies are also able to provide an “unusual combination of return and growth” as they ensure that half of their returns are reinvested for growth, while distributing the other half to shareholders. This strategy is more sustainable than the high dividends of traditional oil and gas companies, which have significantly reduced investment in their businesses to allow investors to pay, Sznajer added. Even with renewable companies reinvesting half of their returns in their fundamental growth, the average dividend yield of the ECOIX portfolio is around 3.5%, which he said was higher than the S&P 500 average of less than 2. %.

To that end, Sznajer has identified his top eight renewable energy stock picks, which are listed below, along with each company’s ticker symbol, market capitalization, and applicable commentary.

Garland K. Long