Green stocks are white hot. Stocks poised to profit from an expected multi-decade transition to clean energy, renewable power, electric-powered transportation and zero pollution emissions have skyrocketed in popularity—and in price. That means environmentally minded investors who want to grow their wealth by investing in the planet should tread carefully. // Many green stocks are up two-, three-, four-fold and more over the past year. Shares of electric car maker Tesla have risen 480%, for example, and the stock of solar-energy company Enphase Energy has surged 423%. From the start of 2020 through late January, a basket of U.S. renewable-energy stocks has outgained the broad S&P 500 index by more than 200 percentage points, with the median price-earnings ratio of the renewable names, based on projected profits, 40% higher than the S&P 500’s, according to Goldman Sachs. Analysts at investment bank Raymond James call this a “breakout moment” for green investing but advise investors “not to throw caution to the wind.” // That means brace for a pullback in the short term, but don’t let passing clouds eclipse an overall bullish outlook. “A shakeout is inevitable,” says Chris Marangi, co-chief investment officer of value investing at Gabelli Funds and comanager of its new Love Our Planet & People exchange-traded fund. Interest in stocks with an environmental focus, he says, has reached a level reminiscent of past manias. Given the lofty P/Es, a price decline of “30%, 40% or even 50%” is possible for green stocks that have doubled, tripled or quadrupled in value, says Lucas White, manager of GMO Climate Change Fund.
Multi-decade megatrend. But long-term investors have little call to avoid green stocks altogether. A stock that looks expensive today, White says, might turn out to be a bargain in the future, as profit and revenue growth catch up to share prices. Given the world’s heightened focus on climate change, the green investing trend has “barely reached adolescence,” Marangi says. Wealth manager Credit Suisse dubs it a “multi-decade megatrend.”
Wall Street and, increasingly, corporate America are on board in a big way in the fight against climate change. In a letter to CEOs in January, Larry Fink, CEO of BlackRock, which manages nearly $9 trillion and is the world’s largest asset manager, used his clout to call on the nation’s top executives to confront the global threat. “There is no company,” Fink wrote, “whose business model won’t be profoundly affected by the transition to a net zero economy,” which he defines as net zero greenhouse emissions by 2050. Firms that don’t act, he warned, “will see their businesses and valuations suffer.”
Many of America’s top companies are pledging to do more. General Motors, the nation’s biggest automaker, for example, recently said it will phase out vehicles that run on gas by 2035. And investors are voting green with their investment dollars. Buying stock in companies that in some way protect the environment is becoming as common as buying shares of smartphone makers, vaccine developers and banks. Flows of money into U.S. stock funds with a focus on environmental, social and governance factors—ESG funds—are hitting record highs, and the E in ESG is the top focus of investors in the fast-growing ESG movement, according to a BlackRock survey.
Sustainable investing will certainly be in the spotlight during 2021, given the Democratic sweep of the White House and Congress. President Biden’s planet-friendly agenda favors renewable energy, electric cars and green buildings, and addressing climate change is now a focus in virtually every corner of his cabinet. Expect more public spending on green initiatives amid Biden’s push to make the U.S. a 100% clean-energy economy by 2050. E stocks are also benefiting from social activism and public policy support abroad, such as mandated zero-emission targets in Europe and China.
To honor Earth Day this month, we’ve highlighted seven leading stocks on the environmental front. Due to the big rally, it’s tricky to gain green exposure while also managing risk. It makes sense to wait for a dip in price before buying first-in-class green stocks that now carry nosebleed valuations, such as solar-tech firm Enphase Energy, whose shares sport a triple-digit P/E. Other candidates for a watch list include solar-energy-system designer and installer Sunrun, with a P/E of 84, and TPI Composites, which makes blades used in wind turbines and trades at 47 times earnings.
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