"One of the biggest trends of the 2020s decade will likely be an unfortunate one: climate change," I wrote in an opening to a January 2020 article in which I chose three top climate change stocks to consider buying: water utility giant American Water Works ( AWK 0.74% ), swimming pool supply wholesaler Pool Corp. ( POOL -2.13% ), and backup power specialist Generac Holdings ( GNRC -5.14% ).
I feel even more strongly about that statement nearly two years later, as the effects of climate change have recently become even more obvious. In June and July, the Pacific Northwest was scorched by a heatwave that shattered numerous all-time records. Late last month, Hurricane Ida not only left more than 1 million homes and businesses without power in Louisiana alone, but its remnants also caused catastrophic, record-breaking flooding in the densely populated Northeast.
As a combined portfolio, my three climate change stock picks have crushed the market over the past 20 months by returning an average of 158%, or more than four times the S&P 500's 37.2% return. (Stock chart follows below.) All three stocks are still worth considering buying if you're a long-term investor.
3 of the best climate change stocks: Overview
|Company||Market Cap||Dividend Yield||Wall Street's Projected Annualized EPS Growth Over Next 5 Years||1-Year Stock Return||10-Year Stock Return|
American Water Works
|Generac Holdings||$27.5 billion||N/A||
American Water Works
What's one thing that every human is naturally driven to do to cool down when temperatures rise? Drink more water than usual, of course. As climate change continues to push up average global temperatures, demand for fresh water will also continue to grow. And we're just one of the many living things that will require more water. So, too, will crops farmers grow, especially in the drought-prone U.S. Southwest.
Climate change is also impacting the supply side of the supply demand equation. As temperatures increase, fresh water supplies tend to get more expensive to access because of factors such as evaporation. This supply-demand picture isn't a positive for consumers, as water rates are likely to continue to climb faster than inflation. But it's an ideal situation for investors in publicly traded regulated water utilities, which have legal monopolies in their territories to sell a product that has no substitutes.
American Water Works remains the best choice in the water utility space for most investors, in my opinion. It's the largest and most geographically diverse publicly traded water and wastewater utility in the United States. That makes it best positioned to capitalize on the consolidation trend in the industry.
American Water provides regulated and market-based drinking water, wastewater services, and other related services to about 15 million people in 46 states. Its regulated business will include 15 states once it closes on the sale of its New York state operation. In the first half of 2021, its regulated business accounted for nearly 91% of the total net income generated from its two business segments.
The preceding picture is a particularly refreshing scene to me, since my region of the country, like some others, has been having what's being referred to as "July temperatures in September." That means an extended swimming season for people in my area who have pools. As climate change continues to cause average global temperatures to tick up, and extends the period in which many folks can enjoy their pools, the benefit-to-cost equation of installing a pool should look more attractive to more consumers.
Climate change isn't the only factor that should increase demand for pools. People were spending more money on their homes -- inside and outside -- before the start of the pandemic, which accelerated this nesting-at-home trend. With interest rates still very low, this trend should continue.
As the world's largest wholesaler of swimming pool supplies, Pool Corp. is best positioned to profit from rising demand for pools. The company has also shrewdly expanded into related outdoor living products, such as landscaping and irrigation products.
Wall Street has been doing a poor job projecting Pool Corp.'s earnings growth. This type of situation can often benefit a smart investor because the market often prices a stock based largely on the Street's estimates. In the past four quarters, not only has Pool Corp. beat the consensus earnings estimate in every quarter, but it has crushed it by an average of 63%.
Climate change has been increasing the frequency and severity of many adverse weather events, including hurricanes, tornadoes, torrential rain, and wildfires. These weather events often cause power outages, which have generally been unintended until recent years. In the past couple of years, electric utilities in California have instituted several preemptive power outages during windy and dry conditions. These moves are aimed at lessening the probability that their equipment will start wildfires.
As people lose power in their homes or businesses more frequently or for longer durations, more consumers and business owners should be driven to buy backup generators. This is even more true in this age of people increasingly working from their homes, where lights and a computer are usually essential to getting work done.
In the second quarter, Generac's shipments of home standby generators nearly doubled from the year-ago period, and the company is ideally positioned to continue to benefit from strong demand for backup generators because it's the largest player in this market. It's also a major player in the commercial and industrial standby generator space. Moreover, in recent years, the company has expanded into the clean energy market. It makes battery storage systems, which can be can store energy from solar panels or the electric grid, and related products.
Wall Street analysts have been continuously underestimating Generac's earnings growth potential. So there's good reason to believe that the company's earnings growth will exceed the 8% average annual growth that analysts expect over the next five years. In the last four quarters, the company exceeded the consensus estimate in every quarter, with two of the beats being sizable ones.
I'll conclude with a sentence from my article of nearly two years ago: "American Water, Pool Corp., and Generac are all long-term winning stocks and should continue to perform well even if climate change comes to a halt relatively soon (which seems extremely unlikely)."