Clean Energy Remains A Long-Term Leader

The global equity benchmark remains -21% off highs (-24%) to its recent June lows as shown in the Datagraph™ below.

Within the ongoing global bear market, finding areas of relative strength outside of defensive groups has been especially challenging. The equities sell off has hit all areas at some point during this decline.

· Of the areas that led prior to the Bear Market, many continue to trade not only substantially off highs, but also with very poor relative strength trends. These include software, e-commerce, recent IPOs, and small-cap growth, amongst others.

· Just a few segments were former leaders during the strong rally from March 2020 lows and are still leading over the trailing 52-weeks and on a YTD basis. These include Oil and Gas Producers, Agriculture-related, Infrastructure, and Clean Energy. However, the recent pullback in Oil prices and the sharp decline in the stocks raises questions about whether fossil fuel companies will be leaders in the next Bull Market cycle.

As seen in the table above, some of the strongest performers from the March 2020 low have suffered the most in the subsequent decline. In particular, E-Commerce stocks, new IPOs, and Biotechnology have been the biggest losers. In addition, over the last year, many laggards from the previous rise have outperformed strongly, especially those relating to the rise in inflation. Specifically, Oil and Gas Producers, Agricultural Producers, Infrastructure and Clean Energy did well in period from March 2020 till present period. The Datagraphs below demonstrate the strong absolute and relative performance of these four groups.

U.S. Oil&Gas Producers (XOP
XOP
)-Weekly Chart

Agribusiness ETF (MOO
MOO
)-Weekly Chart

U.S. Infrastructure ETF (IFRA)-Weekly Chart

Global Clean Energy ETF (ICLN
ICLN
LN
)-Weekly Chart

While not unprecedented, it would be unusual for the leaders of the previous cycle to be leaders in the next. However, Clean Energy has been one of favored global themes for the past couple of years and remains so now. Many industries are undergoing long-term shifts towards greener technologies with the most consequential end-markets will include Utilities, Transportation, and Construction/Building Materials. As a result, we believe this is one past leader that we think investors should keep at the top of their list of potential additions when a new Bull Market is underway.

We suggest looking at the ICLN ETF as a way to get exposure to the theme. This ETF is weighted towards clean energy (solar, wind, hydrogen) producers and product makers (another ETF more heavily weighted towards batteries, lithium, and semiconductors is the First trust Clean Energy-QCLN).

There are many macro drivers to Clean Energy. These are driven by both regulatory, economic and climate change issues. Some of these key figures are:

· According to the International Energy Agency (IEA), net renewable capacity additions set to expand by 8% in 2022 after 6% growth in 2021 and over 40% growth in 2020. Solar photovoltaic (PV) installations will remain the key driver, while wind is expected to recover after a down year in 2021. China will lead again with nearly half of new installations, while the U.S. lags behind on an uncertain regulatory environment.

· After years of per unit cost declines, both solar and wind new installation costs ticked higher in 2021 and are expected to rise again in 2022 on higher raw material and logistics costs. However, given an even sharper increase in fossil fuel prices, cost competitiveness of solar/wind continues to improve.

· In Bloomberg New Energy Finance’s ‘Green Scenario’, which is their most aggressive scenario in terms of renewable expansion, it targets 85% of primary energy from renewables by 2050 from just 12% in 2019. To reach this, the world would need to grow annual solar PV installs from 150GW/year currently to 630GW/year, grow annual wind installs from 100GW/year to 800GW/year. A massive increase in battery storage would be necessary to best compliment the solar/wind expansions. Also, hydrogen would become a key component, making up over 20% of the energy mix, from essentially zero currently.

· While the world is nowhere near the aggressive type of expansion that would be needed to reach the ‘green scenario’, the push to decarbonize has certainly accelerated, particularly in Europe.

• The European Commission (EC) is considering raising the target for its share of total energy from renewables to 45% from 40% by 2030, from 22% in 2020. Amidst the ongoing war in Ukraine, the EC is further considering a new proposal eliminate Russian natural gas and focus on accelerating growth in wind/solar and creating production goals for biogas and green hydrogen. Part of the path towards faster growth would be to speed up the regulatory process of new projects, which would seem to benefit established developers.

· The U.S. is on pace to achieve 33% of electricity from renewables by 2030 and many believe 50% in possible. President Biden administration has set a very aggressive target of 100% of electricity from renewables by 2035. While the Build Back Better (BBB) bill, which had heavy emphasis on clean energy, has been stalled, the Biden administration plans to take new measures in coming weeks.

The global universe of investable Clean Energy stocks is not vast, but it is expanding. We suggest focusing mainly on developers/producers and products companies which are growing their top-line consistently, and are profitable, while not succumbing to margin deterioration given many products cost declines. We also like Electric Vehicles (EV) as a theme within Clean Energy but suggest waiting for a better general economic environment before revisiting leading Auto MakerMKR
s/Parts Suppliers and EV Battery Material Providers.

Currently, our favored names are:

Top Solar Product Pick:

· Enphase EnergyENPH
(ENPH) – $29B market cap – N. America’s largest provider of microinverters by revenue. Microinverters are a key component in solar panels, used to convert energy generated from the sun into useable energy for households and commercial buildings. ENPH also sells battery storage systems and solar systems supporting communications equipment. By the end of 2025, ENPH expects in Serviceable addressable market (SAM) to rise to $23B from $4B in 2020. The rise in market size will be driven by new product launches, rising smart energy system integration, and geographic expansion (Europe, LatAm) in addition to continued double-digit annual rise in solar PV installations. Its five-year annual sales/EPS growth is 43% and 227%, respectively, and consensus expects ~50% top/bottom-line growth for 2022.

Top Hydrogen Pick:

· Chart Industries (GTGT
LS) – $6B market cap – Provides highly-engineered equipment for the energy market. Cryo-Tank Solutions (CTS, 33% of revs) include bulk and mobile storage, vaporization, and distribution equipment; Specialty Products (SP, 31%) include hydrogen/helium storage and transportation equipment, LNG vehicle tank systems, and carbon capture equipment. It expects SP segment total addressable market (TAM) to increase to $43B by 2030, from ~$7B in 2021 (raised TAM by 17% in Q1 2022). Major drivers will be hydrogen, carbon capture, water treatment, and LNG transport end market growth. Its five-year annual sales/EPS growth is 10% and 33%, respectively. Consensus expects acceleration to 33% sales and 90% EPS growth in 2022, followed by 23% sales and 555 EPS growth in 2023.

Top Wind Production Pick:

· Boralex (BLX.CA) – $4B market cap – Second-largest wind power producer in N. America. It has wind (83% of revs), solar (10%), and hydro (7%) production facilities in Canada, France, and the U.S. It sells power under mainly long-term, fixed contracts, which have an average of 12 years remaining. Over five-years through 2021, it doubled its installed capacity to 2.5GW. It targets 4.4GW of capacity by 2025, and 12GW by 2030. Wind/solar are expected to move to roughly equal weights, while the U.S. and France are the major growth markets. It also targets ~$825M in EBITDA by 2025, from $490M in 2020, a CAGR of 12%. Discretionary cash flows are expected to double from 2021 levels by 2025, to $250M.

Top Solar Production Pick:

· Solaria Medio y Ambiente (SEM.ES) – $2.5B market cap – One of the fastest growing solar farm developers in the world. Has roughly 1GW of capacity in operation mainly in Spain and Portugal, a more than 10xZRX
increase in just three years. Plans to reach 2GW by the end of 2022, and 18GW by 2030. Spain, Italy, and Portugal will be the key markets for expansion. The three countries are targeting 80GW of new solar installations by 2030 from a total of 40GW installed currently. Solaria‘s five-year annual sales/EPS growth is 30% and 33%, respectively. P/T margins reached an all-time high of 59% in 2021, from 17% in 2019. Consensus expects 2022 sales/EPS growth of 93% and 68%, followed by 2023 sales/EPS growth of 48% and 42%, respectively.

Additional names fitting the solid growth profile to consider include NextEra and SolarEdge-U.S., EDP Renovaveis-Portugal, OX2-Sweden, Neoen-France, Encavis and RWE-Germany, Alerion Clean Power-Italy, Acciona-Spain, Neste-Finland, and GCL Technology-Hong Kong.

In conclusion, while it is unusual for leaders of one Bull Market cycle to lead in the next, we believe Clean Energy has a unique set of fundamental investment drivers that make it likely to be one of the top groups in the next up cycle. These drivers include regulatory, economic and climate. It is important to note that for new energy builds, in many areas Clean Energy production costs are now par or below that of new build fossil fuels. While technically many of these stocks do not exhibit classic O’Neil chart patterns for purchase, we want to remain alert to improving relative and absolute price action with them. In this instance, we would prefer to be early rather than late, given the strong thematic backdrop.