The headlines are filled with stories about how important it is for the world to shift toward clean energy. That remains true even as oil prices, and the shares of oil stocks, rally thanks to geopolitical tensions and lingering supply/demand disruptions from the coronavirus pandemic. And yet clean energy stocks, using iShares Global Clean Energy ETF as a proxy, are still roughly 20% below their late-2021 highs. For long-term investors, that could spell an opportunity. Here's why.
1. The trend is your friend
Every carbon energy company will tell you that the energy landscape is changing. Some companies, like Europe's TotalEnergies, BP, and Shell, are looking to change too, buying and building clean energy assets with the cash flows provided by oil and natural gas. In fact, even Chevron and ExxonMobil are talking more about clean energy, though they aren't nearly as far along as their European peers in the transition process.
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This should tell you something. Clean energy is clearly going to become increasingly important. That said, the transition isn't going to be quick, because it takes time to build out new energy infrastructure. But that's also good news, because it means that there's a long runway for success for pure-play clean energy companies with the financial wherewithal and business models strong enough to ride the trend.
2. Always too excited
But the drop-off in the shares of clean energy stocks is worth keeping in mind, too. Wall Street has a very bad habit of taking a good story way too far. That's pretty much what happened in the clean energy space, and it was time for a cooling-off period.
This isn't exactly a new phenomenon. When too many players chase a hot trend, returns fall and profitability drops. Then the returns that once-hot companies produce don't live up to expectations. Investors dump shares. Some conservative players in the energy space have basically been warning about this trend for a couple of years now.
However, if you are careful, you can still find strong dividend payers in the clean energy sphere with the wherewithal to get through this rough patch. Two names that come to mind are Brookfield Renewable (BEPC -0.09%) and Hannon Armstrong (HASI 1.25%). They are currently offering generous dividend yields of 3.5% and 3.9%, respectively. For comparison, the S&P 500 Index yields just 1.3%.
And both of these stocks are well off recent highs. Brookfield Renewable is down 17% from its late 2021 high. Hannon Armstrong is off a huge 37%.
3. Unique businesses
The thing is, investors need to make sure they focus on good businesses. Brookfield Renewable is backed by Canadian asset management giant Brookfield Asset Management (BN 0.40%). It has a strong history of buying, operating, upgrading, and selling infrastructure assets, with Brookfield Renewable a key vehicle for investing on the clean energy side of things.
Meanwhile, Brookfield Renewable's portfolio is roughly half hydroelectric power, which is a highly reliable base load power provider. It is using this core to expand into other areas, like solar, wind, and storage. It is a business with a solid foundation backed by long-term contracts, and it has plenty of room to grow in the future.
Hannon Armstrong is a bit different, given that it is technically a mortgage real estate investment trust (mREIT). What backs the company's loans, however, are clean energy assets. And those assets generally have long-term contracts underpinning them. So Hannon Armstrong has a very clear line of sight with regard to the cash flows that back its loans.
There's no particular reason to think that the industry's ups and downs will hamper it much. In fact, if institutional investors back off from investing in the space, it might actually find it has more opportunities to put capital to work in advantageous ways.
Think a little deeper
Wall Street is painfully mercurial at times, often taking both good and bad news too far. It seems like the long-term trend toward clean energy is something that got investors a little too excited, too quickly. The pullback in the prices of clean energy stocks, however, doesn't seem like it is speaking to the long-term potential here, which remains quite large. If you can pick out a few good names with unique strengths, like Brookfield Renewable and Hannon Armstrong, it might be worth considering this pullback as a buying opportunity -- not a reason to run for the hills.
