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GREEN ENERGY STOCKS CRASHED, BUT THEY ARE STAGING A COMEBACK

By  Earl Carr November 25, 2021, 4:07 p.m. EST 4 Min Read
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Valuations do not matter – until they do. As the pandemic was in full swing
during 2020, green energy stocks and the ETFs that hold them did incredibly
well. BlackRock Inc.’s Global Clean Energy ETF (ticker ICLN) and the Invesco
Solar ETF (TAN) were up 71% and 125%, respectively, before the 2020 election.
When it became clear that Biden would become president, and Democrats would
retain their majority in the House and possibly gain enough seats to get a
majority in the Senate, the green energy complex got an additional boost. After
Pfizer’s announcement of an effective vaccine last November 9, the surge in
green energy stocks continued until the beginning of February of this year. TAN
was up 76% between the November 3 election and February 9, when it peaked with
most green energy stocks and ETFs.

Like many other growth stocks in the market, green energy stocks started to go
the opposite direction of rising long-term treasury yields in the spring.
Investors who had been willing to pay for growth at any cost were suddenly
hesitant when treasury yields were no longer at just a few basis points. The
rationale goes something like this: if interest rates rise, a higher discount
rate is used to value these businesses. And companies valued more on what they
will hopefully one day earn far out in the future, such as growth stocks, are
worth less relative to companies that earn their profits now when discounted
back to a value today.

The 10-year yield on U.S. treasuries went from 0.9% at the start of the year and
peaked at 1.7% at the end of March. Although the move was significant because
the yield almost doubled, it was nowhere near its 10-year historical average of
2.2%. But what sparked the selloff was the velocity of the move in rates, with
investors now fearing elevated inflation. They started to pile into cyclical
stocks that would benefit from a rising-rate environment. Green energy stocks
quietly fell anywhere from 40% to 70% from their most recent highs in February
to the middle of May of this year.



Although the move down may have been justified considering the surge in green
energy stocks throughout 2020 and into the beginning of 2021, it may have seemed
counterintuitive because of the green energy policy President Biden supports
compared to the fossil fuel energy policy his predecessor backed. While the
green energy space of the market cratered during the spring, fossil fuels
soared. But a similar pattern occurred when President Trump took office. Bank
and energy stocks rallied as investors expected deregulation and tax cuts.
Still, the State Street Energy Select Sector SPDR Fund (XLE) spent much of
Trump’s presidency below the high it made in December of 2016. The State Street
Financial Select Sector SPDR Fund (XLF) was up more than 50% between the 2016
election and late January 2018 but had fallen over 25% by the end of 2018.



Is the lesson here to go against what seems rational to most investors? Maybe
not. Stocks and their valuations get ahead of themselves all the time. If they
do, there are generally periods to follow where the stocks come down, and
companies must grow into their valuations. If the underlying business is still
doing well, and there are tailwinds for the industry in which it operates, the
company will likely grow into its valuation. After green energy stocks came down
from their highs, they have started to stage a comeback since mid-May, and the
valuations in the space seem more reasonable now than they were at the beginning
of the year.

A Quaker immigration divestment list and the growing scope of ESG data
American Friends’ new database joins the expanding research and products on the
marketplace, which experts say is at $17 trillion in assets — with room to grow.

Enphase Energy Inc. (ENPH), a company that makes solar microinverters, is back
to making all-time highs after its 50% drawdown. At the same time, the company’s
enterprise-to-sales multiple has gone from 29 times sales at the beginning of
this year to 26 times sales now, per Bloomberg. But many stocks in the ICLN and
TAN ETFs are still far off their highs, and the ETFs themselves are down more
than 20% from their highs in February.

A low valuation is not a good reason to buy an asset. Still, investors should
ask themselves if the accelerating green energy trend and the massive drawdown
the sector has seen this year does not present a buying opportunity. With world
leaders announcing goals of making their countries carbon-neutral in the coming
decades at the recent 26th UN Climate Change Conference of the Parties (COP26),
some renewable energy companies are here to stay and help those countries
transition. In the long run, investors should see the rewards of having at least
some allocation to green energy as the underlying trend of governments and
businesses converting from fossil fuels to renewables is on a global scale. And
as ESG investing is becoming the standard, more funds are likely to flow into
the area. There are few regulations concerning sustainability and ESG investing
today. Yet, if the U.S. is following in Europe’s footsteps, more will come, and
green energy companies might benefit from their sustainable line of business.

For comparison, consider the early days of the internet. If you bought Amazon
(AMZN) at its IPO in 1997, you saw the stock surge for a couple of years after
that. However, you had to endure a 95% drawdown from the peak in 1999 to the
trough in 2001. One should not forget that there were also stocks in 1999 that
never recovered from their highs and companies that went out of business
altogether. Still, there was a great buying opportunity in many businesses after
their valuations had come down. The transition from fossil fuel to renewable
energy is arguably on par, if not a stronger trend than the internet. Not all
green energy companies today are Amazon, but when stocks and valuations come
down like they have, yet the underlying trend is still intact, it is worth
looking at as investors.

Gustav Andersson contributed research, editorial and infographics.

Earl Carr
Chief Global Strategist, Pivotal Advisors
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