Looking on the Bright side
Renewables - What’s going on?
The global solar energy market is huge and growing. Sources estimate its value in 2018 to have been $52bn; and projected to be $223bn by 2026. The International Energy Authority expects solar PV capacity to reach nearly 107GW (gigawatts) in 2020, 117GW for 2021.
Forecast of demand for solar PV through to 2024
ESG investing has grown in increasing scale and importance since the early Noughties. Recent evidence shows that ESG investing outperforms conventional fund investing. It has further propelled “Sustainability” into mainstream investing. This year it has become a significant political instrument as commitments were initiated by the leaders of three powerful economic regions:
1. The EU committed to raise its greenhouse gas emissions reductions target by 2030. This brings the EU a step closer to becoming a climate neutral economy.
2. In September 2020 China improved on its climate ambitions committing to carbon neutrality by 2060.
3. Then Vice President Joe Biden campaigned with a climate change ticket with trillions expected to be budgeted for.
Interestingly, it now seems that President elect Biden is expected to defer his infrastructure bill till spring to resolve more immediate state-wide funding matters.
In 2020 it seems the listed markets woke up to renewable investing as indicated by the fact that the largest active renewable ETF share price went up by almost 300%. This important sector to the world
campaign for balancing climate emissions has received a good deal of interest from the media. However, for the markets, other than Tesla, many similar companies have not reached significant size for them to become household names.
Company selection
We, at Gate, are assessing the Renewables landscape for investment opportunities. To that end, we have created a list of leading companies, all of which are taken from the largest most active renewable ETFs. Using this list, we screened these companies using a model slightly different from our favoured “Fundamental analysis” model. This is mainly since these companies:
1. Have not been listed for that long, and
2. Are in an earlier phase of growth than the list of indices-based companies we usually monitor.
Global Clean Energy ETF price development
The screening process has been adjusted to include sales and general administration costs (as a proportion of forecast EPS growth). This screen looks to replicate (as best we can, given the data available), the ‘magic formula’ often used by early-stage investors. The screen is used as a guide to the underlying quality of each company, relative to its peers. On the right-hand side of the screen are momentum indicators.
Selection commentary
Many of the names listed have had an exceptionally good run throughout 2020 as expressed from the high RSI levels. For example, you will notice Enphase (ENPH) is top of the screen list. Enphase produces microinverters that go into solar panels to convert the power from DC into AC, which is used by the electricity grid. The shares rose 200% last year and still look to have strong growth dynamics. It is interesting to note that other solar panel producers (ie SEDG and JKS), while not on our list have also risen. More recently, the market has focussed significantly on the future potential of the Electric Vehicle market. Investors have benefited from these rapid appreciations.
Gate’s Renewables target list
From our research the total relevant universe currently is 142 companies. We will actively monitor and add any other companies that have a related activity within the Renewables space. As an example, Albemarle is a speciality chemicals business. Approximately 40% of its revenues come from the lithium segment. It is primarily for this reason the company is included in this list.
It is possible that President Biden’s decision to defer the infrastructure bill may act as a catalyst for the renewables market to take a breather from its rapid rise.
We will be monitoring these names as time goes by and are happy to discuss their progression should any clients enquire.
©Simon Abel
simonabel@gatecapitalgroup.com
The views expressed are those of the author alone.
Any financial promotion or investment advice contained herein has been issued and approved by Gate Capital Group Ltd ("Gate Capital"); a firm authorised and regulated by the Financial Conduct Authority ("FCA"). It is for informational purposes and is not an Official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of Gate Capital. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only.