Raymond James considers Evoqua Water Technologies and Enviva Partners to be strong buys.
Evoqua is North America’s largest publicly traded pure-play water treatment technology company. “The fragmented landscape and the company’s resilient free cash flow enable an active roll-up strategy, with any M&A providing incremental uplift to estimates,” the firm stated, adding that the infrastructure bill would be a bonus.
The company, based in Pennsylvania, has a market capitalization of $3.2 billion, and its shares are up 0.5 percent year to date.
Enviva Partners, on the other hand, is a biopower company that sells utility-grade wood pellets.
Although adoption has been strongest in parts of Europe, wood pellets are gaining popularity elsewhere. According to Raymond James, the company will benefit from an “increasingly broad customer base,” and there will be high-visibility growth in the future. The company’s stock is up more than 5% year to date.
Raymond James also likes the names Atlantica Sustainable Infrastructure, NextEra Energy Partners, Itron, and Sunnova Energy International. All four stocks have an outperform rating from the firm.
NextEra Energy Partners and Atlantica Sustainable are both yieldcos. A yieldco is a type of independent power producer that owns and operates operational low-carbon energy assets. They provide income-seeking investors with a way to enter the renewable energy sector, where dividends are almost non-existent.
The yields of the two companies are 4.4 percent and 3.2 percent, respectively.
Both Itron and Sunnova are betting on the continued expansion of solar energy.
According to Raymond James, Itron, an intelligent grid player, is another company that stands to benefit from Biden’s infrastructure bill. “Power grid modernization — a component of both climate mitigation and adaptation — is a theme to which Itron is uniquely positioned among U.S.-listed companies,” the company stated.
Raymond James is an appealing long-term growth story for Sunnova. However, the firm reduced its price target to $50 from a previous forecast of $55. The new target is 40% higher than where the stock closed on Thursday.
Despite disruptions caused by the pandemic, the solar industry in the United States grew at a record rate in 2020. Lowering costs is a major motivator for greater adoption. Solar panel costs have dropped by 89 percent over the last decade, according to RBC, and the firm expects that figure to continue to fall as technology improves.
“We believe that current pricing, combined with favorable state and federal incentives, makes rooftop solar a competitive alternative to traditional utilities,” the company stated. RBC also stated that grid failures caused by extreme weather conditions, most recently in Texas, should drive increased solar adoption.
Despite 2020′s record growth, Scotto believes we are still in the “early innings,” with rooftop solar penetration currently hovering around 4% in the United States. She predicts that the industry will grow by 13% by 2030, creating a significant opportunity for Sunrun.
Sunrun’s acquisition of Vivint Solar last year cemented the company’s position as the market leader in the highly fragmented rooftop solar industry. Sunrun’s size, according to RBC, provides numerous benefits for the company, including better access to supply chains and, crucially, low-cost tax equity to finance growth.
Sunrun’s power purchase agreements, which typically last 20 to 25 years, provide visibility into future cash flows, according to the company. Furthermore, given the company’s focus on renewable energy, it scores well in terms of environmental, social, and corporate governance, or ESG.
Sunrun shares hit an all-time intraday high of $100.93 on Jan. 12 after a 402 percent rally in 2020.
However, the stock has fallen 45 percent since its peak in January, owing to a sell-off in the market’s clean energy and growth-oriented sectors more broadly.
RBC set a price target of $81 for the stock along with its initiation, which is 44% higher than where shares closed on Tuesday.
Climate change is a central pillar of President Joe Biden’s plan, and his recently unveiled $2 trillion infrastructure plan includes renewable energy provisions. One such provision is a further extension of the investment tax credit, which was most recently extended in December.
Sunrun shares fell 3.5 percent on Wednesday and are down 22 percent for 2021.
The 2024 timeline
Despite a record earnings season that prompted companies and analysts to raise earnings forecasts, the stock market has largely traded sideways in recent months. This has caused earnings multiples to compress, mostly without harming investors, and this trend may continue in the future.
“The bottom line, as our strategists have laid out across major regions, is that valuations are likely to compress, and more of the burden of future price gains is set to fall on growing earnings as the market transitions from the ‘Hope’ to the ‘Growth’ phase,” according to the Goldman note.
However, given the macroeconomic conditions, the firm believes it is not necessary for this process to reduce valuations all the way to historical averages.
“These forecasts imply that macro conditions should continue to support much higher-than-normal valuation levels,” Goldman added.
The analysts developed a simple model that predicted the S&P 500 would rise in the long run based on the projected path of these macro variables. The model’s projections are distinct from the firm’s official forecast from strategist David Kostin, who currently expects the S&P 500 to reach 4,300 by the end of the year.
The model predicted that the S&P 500 would remain near 4200 through March 2022 before rising to roughly 4450-4500 by March 2023 and then 4600-4700 by March 2024, indicating that investors could benefit from healthy gains in the years ahead despite valuations that appear high by historical standards.
Analysts cautioned that a change in economic conditions, such as a rise in long-term inflation expectations, could cause these forecasts to fall.
Biden’s infrastructure plan
According to Raymond James estimates, $628 billion has been set aside for climate spending, including $174 billion to boost the electric vehicle market and $100 billion for the power grid.
The initiative is one of the federal government’s most significant efforts to reduce emissions. Although it will almost certainly face opposition, it demonstrates the new administration’s commitment to prioritizing climate-related policies.
An increase in the value of green ETFs and stocks.
The iShares Global Clean Energy ETF and the Invesco WilderHill Clean Energy ETF both gained more than 5% last week as investors awaited Biden’s plan to outline clean energy spending.
Each fund is still losing money for the year, and there is widespread weakness in the market’s growth-oriented sectors. On Monday, both ETFs were down more than 1%.
“I’m not concerned about the pullback; in fact, we see it as an opportunity to add quality positions,” said Peter Krull, CEO of Earth Equity Advisors, which manages about $150 million in assets.
“This is where the economy is going,” he added, noting that it is difficult to assess the total potential of the clean energy market in light of what he refers to as a “completely new economy.”
QuantumScape, a maker of solid-state batteries, is one of Krull’s top picks in the space.
He cited the company’s contract with Volkswagen as a positive catalyst for growth. “Anytime you have the opportunity to buy a good, clean energy or next-generation company, you really have to take advantage of it,” Krull said, noting that the company’s batteries charge faster and last longer.
Krull also has a stake in ChargePoint, the world’s largest charging network, in the electric vehicle space. Cowen initiated coverage on the stock with an outperform rating, describing it as a top pick in the space.
According to The Brattle Group, the number of electric vehicles in the United States is expected to increase from 1.5 million in 2020 to as many as 35 million by 2030. This will necessitate massive infrastructure investment. According to Biden’s plan, at least 500,000 electric vehicle charging stations should be installed in the United States by 2030.
QuantumScape and ChargePoint are both new to the public market, having been acquired by a special purpose acquisition company. Both stocks have suffered significant losses this year, falling 42 percent and 26 percent, respectively.
Krull stated that these stocks should be expected to experience short-term volatility, but that they have “the greatest long-term opportunity and implications.”
Benefits from tax credits
Biden’s bill also calls for the extension of tax credits that have aided in the increased adoption of renewable energy, with the ultimate goal of achieving an emissions-free power sector by 2035.
The White House issued a fact sheet outlining the measure’s high-level goals, dubbed the American Jobs Plan.
Some details are still unknown, but the policy would include a direct-pay option in place of tax credits. This would hasten renewable deployment for companies that do not have access to tax equity investors, or investors who put money into these projects and receive federal and state income tax breaks.
The American Jobs Plan also includes a $35 billion investment in climate-related research and development.
“The extension of the solar investment tax credit, combined with the initiation of a storage credit, would be highly beneficial for the group, as it provides a line of sight to strong demand throughout the decade,” said Kashy Harrison of Simmons Energy.
Enphase Energy was named the firm’s top pick, and the policy has “favorable ramifications” for all of the solar stocks covered by the firm.
JPMorgan also likes Enphase, which it considers to be overweight. The microinverter manufacturer, along with Sunnova and Sunrun, are said to be “best-positioned for trickle-down” from the infrastructure plan.
Goldman Sachs, meanwhile, has a similar view on Sunrun, which it has recently upgraded to a buy rating.
“We remain bullish on fundamentals,” Goldman analyst Brian Lee said of the company, which he downgraded to a neutral rating due to valuation concerns in September.
“We expect the company to outperform in the near term as a result of market expansion,” he added, “while we look for potential positive financing catalysts and ongoing growth acceleration to buoy shares in the near-to-medium term.”
Sunnova, which is on Goldman’s list of convicted companies, is also favored by the firm. However, Lee believes that when it comes to solar stocks, investors should be cautious.
Rising interest rates have recently weighed on growth-oriented sectors of the market, and clean energy is no exception. Furthermore, some believed the company was pricing unrealistic earnings expectations following 2020′s record run.
In 2020, the Invesco Solar ETF gained 233 percent, far outpacing the S&P 500′s 16 percent gain.
Last year, some names in the sector performed much better, including Sunrun and Enphase, which gained 402 percent and 570 percent, respectively.
Morgan Stanley described the recent pullback, combined with strong policy support, as a “rare buying opportunity” for clean energy names.
The firm prefers companies with high entry barriers and strong cash flows. AES Corporation, TPI Composites, and SolarEdge Technologies all fit the bill, and each stock has an overweight rating from the firm.