Mark the date of January 6thth, 2021 as the infamous day the US Capitol was attacked by insurgents. That day marked the date of Joe Biden’s certification as the new President of the United States. Since that date, renewable energy stocks have also depreciated dramatically. Between January 6thth and March 22ndnd, Renewable energy stocks have fallen by over 20%.
Many DSR members have written to me asking what is happening. While renewable energy companies are struggling in the market, both the TSX (+ 9.4%) and the S&P 500 (+ 4.5%) are doing well. The utilities sector is generally lagging behind, but it hurts when you’ve moved your money towards the “future” in late 2020.
Is this a classic case of “buy the rumor, sell the news” where investors waiting for Biden official certification were late for the party? After all, Biden and his team have a climate change plan that includes around $ 2 trillion (we’re now hearing about a $ 3 billion deal!) In investments, subsidies, or tax breaks for clean energy. That should be enough to stimulate this industry for a while. Well, as is so often the case, it’s more complicated. Let’s dig deeper, shall we?
It’s time to put things in perspective
First things first, whenever you email me and ask why Company XYZ is down 20%, I keep hitting the pause button. First of all, please note that I cannot (legally) answer this type of question in a personal email as I am not your financial advisor. I usually collect such questions and write a newsletter about the topic or discuss the topic in one of our monthly webinars. Second, I always look at full stock history before digging deeper into why a stock is down 20% at any given point in time. If you take a closer look at the renewable energy sector, you find that these companies have been on a solid uptrend for about a decade.
With many stocks growing more than 400% over the past decade, it’s only normal to see a “small correction” from time to time. Some investors who have mastered this wave for over 10 years may have simply chosen to earn some of their profits for a variety of reasons. In the past three years alone, most of these companies have achieved total returns of 75% to 90% (Brookfield Renewable offered its shareholders 195%). You can’t expect stocks to generate an annualized return of 20% + over long periods of time. Sooner or later a correction is inevitable and will bring the price closer to a “reasonable” level. This does not mean that there are no reasons why renewable energy utilities have a hard time.
Here is a full list of all the clouds that are gathering in this industry:
- Rising interest rates. Future projects will be more expensive and therefore less profitable.
- Profit-taking by some investors (reduces market interest in general). There is Valuation concerns generally after such a bullish run.
- Biden’s 2-tonne climate protection plan could meet with resistance by Republicans after not long ago they passed a $ 1.9 billion stimulus package. We also need to take into account the current US budget deficit.
- Result disappointed many in the last quarter. The recession has damaged all companies, including trendy ones. This also cooled market expectations for future earnings.
- There is currently a positive sentiment with regard to classic oil and gas stocks and some of the Money moves from one sector to another.
- The clean energy race has created a lot of competition. Many fear that we will reach a level of Oversupply with falling energy prices.
As you can see, these dark clouds are mostly related to short-term events. Aside from the interest rate situation (which management teams are familiar with), all clouds should go away if you focus on the long game. And the only game I want to play as an investor is the long game!
Investing in renewable energy stocks makes sense as our countries are obviously heading in this direction to meet our ever-growing energy needs. In this video below, I discussed my favorite renewable energy stocks.
The race for renewable energy will continue for the next decade. While this will remain a growth sector, there will be winners and losers. Competition will be fierce and some businesses will fail even if we are all trying to use cleaner energy. Remember, these companies are capital intensive and not all management teams can manage debt efficiently. Because of this, focusing on a strong dividend triangle before making your decision will ensure that you are about to acquire quality stock.