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Nov 1, 2023

How To Profit From Global Warming Part 3: Renewable Energy Slump Spells Opportunity

by Richard Morrison

Global demand for renewable energy is strong and growing, yet the share prices of solar and wind companies and the funds that hold them have fallen. That combination may be an investment opportunity for patient investors.

There is little doubt that extreme weather events are becoming more frequent, and governments around the world are scrambling to meet emissions targets by discouraging the use of fossil fuels and subsidizing clean energy. As a result, long-term demand for renewable energy is likely to increase, and the current slump in solar and wind stocks is likely to be short-lived.

In its Renewable Energy Market Outlook, the International Energy Agency (IEA) predicts global renewable energy capacity should grow by about 25% to more than 440 gigawatts (GW) this year from 333 GW last year. Renewable energy demand in Europe is benefiting from the scramble to find ways to lessen reliance on what the IEA calls “imported” fossil fuels, without mentioning Russia.

The solar sector should account for two-thirds of the increase in renewable energy, the IEA report says. Global solar photovoltaic generation increased by a record 26% in 2022, surpassing wind for the first time, the agency says. Wind turbine generation is on course to rebound by 70% in 2023 after two years of decline, the report said.

In the United States, all regions should see steady growth in renewable energy generating capacity for the next few decades, the U.S. Energy Information Administration (EIA) says in a recent report. The combination of declining capital costs and government subsidies should spur the renewables sector. Last year’s passage of the Inflation Reduction Act (IRA), for example, will direct about US$370 billion to renewable energy, including incentives and subsidies for the construction of solar and wind facilities. (Proposed Canadian tax credits to help the renewable energy industry have yet to be passed.)

Despite the increasing demand for renewable energy, investors are much less enthusiastic about the sector than they were a couple of years ago. Higher interest rates and production bottlenecks have made projects such as solar arrays and wind farms expensive, prompting utilities and oil companies to sell off their green assets to focus on more profitable areas. Local resistance to wind farms hasn’t helped either, and as a result, the share prices of green energy companies and the funds that own them have slumped.

A reflection of the extent of the downturn can be seen in the S&P Global Clean Energy Index, made up of 100 companies, which is down about 27% so far in 2023. For the solar sector specifically, S&P Dow Jones Indices’ Global’s MAC Global Solar Energy index, made up of the 44 largest publicly traded solar energy companies and their suppliers, is down about 34% in 2023. The volatile index had soared by 235% in 2020, fell by 26% in 2021 and slipped a further five per cent last year. Similarly, the Nasdaq ISE Clean Edge Global Wind Energy Index, made up of 55 companies in the wind sector, is down 13.4% so far this year.

A closer look at the performance of some of the individual names over the past year shows why the indexes are down. Between October 2022 and October 2023, Shoals Technologies Group (SHLS) had slipped by 32%, Nasdaq-listed Canadian Solar Inc. (CSIQ) was down 42%, Israel-based SolarEdge (SEDG) was off by 49%, Enphase Energy Inc.(ENPH) was down 57%, Maxeon Solar Technologies Ltd. (MAXN) was off by 60%, SunRun Inc. (RUN) down 64% and beleaguered SunPower Corp. (SPWR) shares were trading at more than 77% below where they were a year ago. A rare survivor has been First Solar Inc. (FSLR), described below, which is up about eight per cent over the past year.

Energy investors should understand the terms megawatt (MW) and gigawatt (GW). A megawatt represents one million watts, enough to power 725 average homes, while a gigawatt, or one billion watts, can power 725,000 homes. The U.S. Office of Energy Efficiency and Renewable Energy says as of 2022, there were more than 144 gigawatts of wind power and 110 GW of solar photovoltaics installed in the U.S., with most of the utility-sized solar panel arrays in the sunny states of California, Texas and Florida. Wind turbines have been getting larger and more powerful. The average wind turbine has a nameplate capacity of 3.2 megawatts, or enough to power 2,320 homes, the U.S. Department of Energy says.

Here are some clean energy funds and companies worth considering:

Exchange-Traded Funds (ETFs)

BMO Clean Energy ETF (ZCLN)

This relatively new fund was launched in January 2021 and has just $70 million in assets. The fund’s top holdings include First Solar Inc., Consolidated Edison Inc. and Enphase Energy Inc. At a recent price of about $15, the fund’s units are a full 50% cheaper than their $30 issue price. An investor who bought $10,000 worth of the fund’s units at its launch would have about $5,000 now. The fund carries a Management Expense Ratio (MER) of 0.4% but pays an annual distribution that yields about 1.2%.

Harvest Clean Energy ETF (HCLN)

This tiny fund was launched the same month as BMO’s but has attracted only $30.4 million in assets. The fund is equally weighted among the 40 largest clean energy companies as measured by market capitalization (shares times share price) and is reconstituted and rebalanced semi-annually. 

The fund’s constituent holdings have an average price/earnings ratio of 39 times and an average market cap of $10 billion. HCLN’s units lost 25% of their value in 2021 and another 20% in 2022. Like the BMO fund, an investor who put $10,000 into the fund at its inception would have about $5,000 now. The Harvest fund carries an MER of 0.4%, the same as BMO’s.

iShares Global Clean Energy ETF (ICLN/NASDAQ)

This fund, launched in 2008, has US$3.14 billion in 129 companies tied to the green energy sector. Major holdings include First Solar Inc., Enphase Energy Inc. and Vestas Wind Systems. Units in the fund soared during the pandemic, peaking at more than US$30 in January 2021. Since then, however, ICLN is down about 50% to about US$15 a share. The fund’s units trade at less than 14 times the average earnings per share of its constituent holdings and only 1.7 times book value per share. The fund carries a MER of 0.41%.

Invesco Solar ETF (TAN/NYSEArca)

Launched in 2008, this fund has US$1.472 billion allocated among a list of 48 companies that is rebalanced quarterly. While most of its holdings are based in the United States, almost 20% come from China. The fund’s major holdings include several names whose shares have plunged over the last couple of years, which means the fund’s portfolio trades at an average forward price-earnings ratio of about 14.5 times and an average price-to-book ratio of two times per share. The fund’s total expense ratio is a relatively high 0.69%.


Vestas Wind Systems A/S (VWSYF/OTCPink)

Denmark-based Vestas designs, builds and services wind turbines that generate more than 169 GW in 88 countries. The company employs 29,000 and has a market capitalization of US$21.71 billion.

The number of new orders for Vestas’ wind turbines has been suffering because of permitting processes and regulatory uncertainty, and although supply chain disruptions are easing, the company expects disruptions to continue through the rest of the year, Vestas said in its August presentation to investors.

In the second quarter 2023, wind turbine orders improved by eight per cent to 2.3 GW. Revenue for the second quarter was 3.429 billion euros, up 3.8% over the second quarter of 2022. Free cash flow, however, fell to 140 million euros, down from 362 million euros in the second quarter of 2022. Vestas lost 115 million euros or -0.8 euros per share in the quarter, an improvement over the results in the same quarter of last year.

Vestas shares, which trade on the over-the-counter market in the U.S., reached a peak of US$46.87 in December 2020 but slipped to US$18.54 in September 2022. On two occasions in 2023, the stock touched US$30 but has been on a slide since May and now trades at about US$20. Analysts expect the company to turn profitable this year and have an average target price of US$29 on the stock, the MarketWatch site says.

First Solar Inc. (FSLR)

Based in Tempe, Arizona, First Solar is the largest maker of solar panels in the United States, with a market capitalization of US$17 billion.

First Solar produces thin-film solar modules using a proprietary semiconductor technology. The company’s manufacturing capacity is centred in the United States, Vietnam and Malaysia, which, given the current political climate toward China, gives First Solar an advantage over competitors that rely on Chinese components.

The company’s second-quarter 2023 results were strong. Net sales for the second quarter were US$811 million, up US$262 million from the prior quarter, driven by more modules sold at higher prices. The company reported second-quarter net income per diluted share of US$1.59, compared to US$0.40 in the first quarter of 2023. First Solar’s net cash balance slipped to US$1.5 billion from US$2.0 billion at the end of the first quarter, largely due to capital expenditures related to manufacturing capacity expansions.

First Solar’s shares traded at less than US$100 for years until the IRA was introduced last year. Last spring, the shares traded at more than US$200 but have slipped back to the US$160 range. At a recent price of about US$146, the company's shares trade at a lofty 100 times trailing earnings of US$1.46 per share, making it suited only for momentum investors.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.