- Renewable energy 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 8 top stocks investors should buy to take advantage of the green energy revolution.
After a decade of underwhelming returns, commodities have taken a tumultuous journey to the stock market’s top.
Energy stocks sold off earlier in June, betraying Wall Street’s fears of an impending recession alongside escalating regulatory and geopolitical risks. But now, as commodities rally once again, Michel Sznajer stresses that investors shouldn’t overlook one very important portion of the sector: renewables.
Sznajer serves as a portfolio manager at sustainable investment firm Ecofin, which manages around $1.7 billion in assets and is a subsidiary of $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, handily outperforming the broader S&P 500, which is down 16.77% in that same time period.
Renewables look attractive in the bear market
Sustainable energy stocks haven’t received much attention from investors in the past, but Sznajer emphasized that buying into these names makes even more sense given the current bear market.
“The worry with the broader market is you’re in a situation where you have slowing growth because of the cycle slowing down. That typically takes away the pricing power from the companies, puts pressure on margins, and depresses earnings, which drives share prices to come down,” he told Insider in a recent interview. “But with renewables, the demand is not cyclical, it’s really structural — so it’s there and it’s compounding, somewhat irrespective of what’s happening around.”
This structural change, explained Sznajer, is the obvious migration towards cleaner energy, whether it’s driven by corporate- or government-mandated guidelines. Utility companies have even begun migrating to renewable energy sources because they’re cheaper to operate than traditional coal or gas-powered electricity, he added.
“You’re investing in a sector with steady growth plus pricing power, so your revenues are very much solidly growing and therefore you continue to have very good earnings margins and earnings growth, unlike the broader market,” said Sznajer. Focusing on stocks with lower costs, strong pricing power, and resilient demand is why 71% of the companies in the ECOIX portfolio positively revised their earnings forecasts at the end of the first quarter this year, compared to about 54% of companies in the S&P 500, he continued.
A structural shift towards renewables
Net inflows for US-listed sustainable funds set a new annual record when they hit $70 billion in 2021, up 35% from flows in 2020, according to Morningstar. But Sznajer believes that investors have barely unlocked the renewable sector’s full potential.
“Over the next 20 to 30 years, the way we produce and consume energy is going to change dramatically away from fossil fuel into electricity and so away from molecules into electrons,” he said.
According to Sznajer, today about 79% of energy in the US market is derived from fossil fuels sources like coal, oil, and natural gas, while nuclear and renewable energy sources make up the other 21%. In the future, he firmly believes that this ratio will flip, citing recent survey data that 50% of car buyers under 30 years old claimed that their next purchase would be an electric vehicle. He foresees the US electric car market eventually catching up to those in China and Europe, as consumers enjoy a greater quantity of more affordable models to choose from.
More advanced technology and better scaling have been the two key drivers for lowering the costs of renewable energy sources, said Sznajer. Even though newer wind turbine blades are both higher and longer than previous models and thus more expensive to build, the amount of energy they generate per unit makes them much cheaper on the whole, with Sznajer estimating that the costs of both onshore and offshore wind farms have come down around 50% over the last 10 years.
Additionally, energy independence has become a much more urgent topic when considering the ongoing Russia-Ukraine conflict, added Sznajer.
“Europe suddenly realized it needs faster energy independence to wean off its dependence on Russian gas, and the alternative is renewables again,” he explained. “The difference between the oil and gas business and the renewable business is that the latter is kind of a local business — the beauty is you’re not dependent on imports of the feedstock. Most countries have some sort of resources, whether it’s solar, biomass, geothermal or wind.”
According to Sznajer, adopting more renewable energy sources will be massively beneficial for countries like Germany and Japan that have traditionally been net importers of natural gas. And because natural resources like wind aren’t 100% reliable, in the future he predicts that 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 reputation, but Sznajer says that part of their relative underperformance can be attributed to what investors categorize within the “renewables” sector. For instance, the equipment manufacturers of renewable assets like wind farms or solar parks have traditionally struggled to balance supply and demand within a cutthroat industry that leaves players fighting for market share rather than profitability. These stocks, said Sznajer, have traditionally followed a boom-and-bust pattern with little-to-no value added.
For this reason, Sznajer prefers to invest in the developers and operators behind these assets, sectors which he said have performed much better than equipment manufacturers.
“Because they’re not taking the volatility of the equipment, they’re actually beneficiaries of that declining cost curve from that equipment,” he explained. “These businesses are very predictable because they install those solar parks and wind farms, and they sign long-term contracts that are indexed to inflation or set for 10, 20 years. So they provide a lot of visibility on the existing assets, and then they invest the cash flows for growth on top.”
This strategy, which Sznajer has personally followed since 2015, has a track record of providing 13% in compounded returns per year to investors, he added.
Renewable firms are also able to deliver an “unusual combination of yield and growth” because they’re careful to reinvest half of their returns 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 substantially reduced investments back into their businesses to afford investor payouts, Sznajer added. Even with renewable firms investing half of their returns back into their fundamental growth, the ECOIX portfolio’s average dividend yield is around 3.5%, which he said was above the S&P 500’s average of below 2%.
To that end, Sznajer identified his eight top stock picks within the renewable energy sector, which are listed below, along with each company’s ticker, market capitalization, and applicable commentary.
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