Why Clean Energy Stocks May Be A Smart Buy

It’s been a tough few months for renewable energy stocks, but greener pastures may be in sight.

Clean energy stocks soared in the wake of Joe Biden’s presidential election last November as a rush of speculative capital gushed into the sector, fueled by expectations of Biden fulfilling his campaign promises to rejoin the Paris Climate Accord and fully decarbonize the power sector by 2035. The enthusiasm reached a fever pitch in January after two Democratic victories in Georgia’s Senate runoffs. 

To grasp the magnitude of this investor enthusiasm for green energy, just consider the performance of two popular gauges of the sector: The iShares Global Clean Energy ETF (ICLN) and the Invesco WilderHill Clean Energy ETF (PBW). These two indexes had climbed a mind-boggling 53% and 88%, respectively, from the beginning of November to February 1. 

But that enthusiasm was short-lived. Winter became spring and markets entered a broader period of self-correction, as hyped stocks like Tesla (TSLA) and Gamestop (GME) retreated. In the process clean energy stocks were wiped out: The two ETFs just mentioned are down 30% and 38%, respectively, from their all-time highs in the winter.

Hence, investors are now asking themselves two questions: Will clean energy stocks recover lost ground from the winter, and if so how long will that take? Judging by recent developments on Capitol Hill and within the broader energy sector, the answers to those questions may be “yes” and “soon."

Last week, the House of Representatives approved a budget resolution that included the framework for a $3.5 trillion spending splurge on infrastructure, overcoming concerns that disagreements among Democrat representatives would scuttle Joe Biden’s opportunity to pass a mammoth reconciliation bill (in addition to the smaller $1 trillion infrastructure bill that recently passed the Senate). 

Why should clean energy investors care? Because the reconciliation framework includes $135 billion earmarked for the Committee on Agriculture Nutrition and Forestry for the purpose of addressing forest fires, slowing carbon emissions and alleviating droughts. The plan also recommends $198 billion for the Energy and Natural Resources Committee, which includes instructions pertaining to the development and implementation of clean energy. 

Of course, the $3.5 trillion reconciliation package still needs to clear a divided Senate (including skeptical moderate Democratic Senators like Joe Manchin and Kyrsten Sinema), but the framework is one step closer to becoming law. If that comes to pass, there could be a bonanza of renewed enthusiasm for green stocks. 

“For an industry that has focused heavily on solar and wind, supportive federal actions could help progress timelines for further expansion into new technologies, including advanced batteries and other forms of storage, offshore wind, and green hydrogen technology,” according to Deloitte’s recent 2021 renewable energy industry outlook. “

But the impact of this spending package would transcend a one-time splurge. In addition to funneling hundreds of billions of dollars into the renewables sector through federal incentives and direct investment, the reconciliation bill would hasten the shift in investor mentality towards climate-friendly, ESG-aligned allocations. In that world, the recent dip in green stocks will become just a small blip in their upward ascend.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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