What happened
Shares of Lucid Motors (LCID 0.41%), Plug Power (PLUG 1.26%), and NextEra Energy Partners (NEP -0.89%) had rallied by 6.6%, 11.1%, and 8.3%, respectively, as of 2 p.m. ET Tuesday.
These three companies have two big things in common. First, each is at the forefront of the clean energy revolution -- Lucid as a designer and manufacturer of luxury electric vehicles, Plug Power as it builds out an end-to-end clean hydrogen ecosystem, and NextEra as a partner to clean energy-focused utility NextEra Energy (NEE -1.36%).
Second, all three of these companies are still dependent on outside funding to some extent, given they are all still in their growth phases. Thus, they have been battered by the rapid rise in long-term interest rates in the market in recent months.
However, dovish comments from a Federal Reserve official and a sharp reversal in long-term bond yields led to a bit of relief for their stocks on Tuesday.
So what
Perhaps the key element driving Tuesday's rally was the decline in long-term Treasury Bond yields. The 10-year Treasury bond yield was down about 16 basis points to 4.645% as of this writing, and down from a high of 4.887% in recent days.
It's never easy to pinpoint exactly why bond yields move one way or the other. However, investors sometimes view long-term Treasuries as "safe haven" assets in times of uncertainty. It's possible that the weekend's tragic geopolitical events are spurring the move. It's also possible that the prior rapid rise in yields has simply exhausted itself.
Additionally, Atlanta Federal Reserve Bank President Raphael Bostic spoke on Tuesday at an American Bankers Association convention, and said he doesn't think the Federal Reserve will need to raise interest rates any further to get inflation back to its 2% goal. He further said he does not think the U.S. economy is going to slip into a recession.
The Federal Reserve doesn't set long-term interest rates as it does short-term interest rates, but the fact that Tuesday saw both lower long-term rates and an indication that we have reached peak short-term rates lit a fire under many rate-sensitive stocks.
These three clean energy names are those types of stocks, both from valuation and operational standpoints. Lucid and Plug Power are unprofitable growth companies that are losing lots of money on their bottom lines. Therefore, all of their value lies in their future theoretical profits. And when long-term interest rates rise, that depresses the present-day value of future earnings.
In addition, all three companies are either in need of outside capital now or may need more in the future. While Lucid just announced that it began deliveries of its new Lucid Air Sapphire on Sunday, the production ramp for it is costly. Last quarter, Lucid missed revenue estimates and had a huge operating loss of $838 million.
While Lucid does have a large benefactor in the Saudi Arabian Public Investment Fund, if its stock price goes lower and the company needs to raise more capital, any equity raise from the PIF would be even more dilutive to shareholders.
Image source: Getty Images.
Similarly, Plug Power is building out an ambitious vertically integrated ecosystem of standing hydrogen-powered electricity, liquifiers, cryogenic tanks, and hydrogen fuel cells for vehicles. There is a massive opportunity ahead in hydrogen power, but Plug's ambitious vision is also quite capital intensive. While revenue grew by more than 72% last quarter, the company's operating losses also expanded by 59% to $233.8 million.
And while NextEra Partners is "profitable," its entire business model is predicated upon tapping the capital markets. As a yieldco, the company is set up to sell equity and/or debt to buy renewable energy projects, then pay out an ever-rising dividend. However, NextEra's stock has fallen too low for it to issue equity and buy projects profitably. Therefore, its entire model has become stuck until it is able to raise cash again, either through equity or debt. For that condition to be met will likely take either lower interest rates or for its stock price to go back up -- and the stock might not head back up meaningfully until rates drop.
Given how rate-sensitive each of these stocks is, it's no surprise to see a ripping "relief" rally as interest rates and rate expectations are coming down.
Now what
It may be tempting to bottom-fish in these beaten-down names. However, investors should realize that while these stocks have tantalizing upsides, they also have high risks. While all stocks carry interest rate risk to some degree, these three are highly dependent on rates and access to outside capital -- factors that are largely out of their control. So to succeed, not only do these companies have to execute well, they also need a bit of luck.
