Pop music enters the clean energy inventory bubble

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Author: Tom Konrad, CFA Dr.

At the end of 2020, clean energy stock prices have risen sharply. Since the end of October, the election frenzy has promoted the Invesco WilderHill Clean Energy ETF (PBW) From the closing price of $63.32 on February 9th to $136, an increase of 114% in 100 days.

Joe Biden, like Donald Trump, is a big supporter of large fossil fuel companies, but even with the presidency and the two houses of Congress in control, the president’s work in a short period of time Also restricted. This is especially true when their top priority is responding to a pandemic.

Recognition of this reality seems to be building. As I wrote on March 5th, PBW has now fallen by nearly 35% from its high. If the Dow Jones Industrial Average or the Standard & Poor’s 500 Index fell 35%, it would be the abyss of a bear market. Clean energy stocks are usually much more volatile than the broader market, but even so, a 35% drop should still make investors sit up and get attention.

I focus on clean energy income stocks because they tend not to be subject to such large fluctuations. The benchmark I use is the Global X Renewable Energy Producer ETF (RNRG -before YLCO) Also fell by 26% from a high of $20.20.

Year-to-date (3/5/21) chart of PBW and RNRG.Source: Yahoo! Finance

Popular music!Towards the bubble

Since the decline is significant, it is time to evaluate the next step. Without panic among investors, such a big drop would not happen. As always, we need to evaluate:

  1. Fundamentally changed any reason for the decline or even further decline.
  2. When no one is frightened and sold, is panic about to surrender, or panic has a further way to go?

Fundamental

The biggest fundamental change is that interest rates are rising. This is a response to the expected expenditures in the Biden rescue plan, and concerns that we may see a surge in pent-up consumer spending because the vaccine allows the lock-in measures to end this summer.

Compared with bonds, these higher interest rates make the attractiveness of stocks, especially income stocks like the stocks that I look at, less attractive. Higher interest rates also make it more difficult for companies to use debt to raise new investments, thus lowering future earnings expectations.

Although all these things are correct, I hope their long-term impact will be limited. Most importantly, I don’t think the rate hike will be large. Interest rates have been at historically low levels: it will be much larger than I expected to bring interest rates to levels that are still not low.

There may be some demand-driven inflation in the summer, but I don’t think the surge in demand or inflation will continue.

Similarly, the impact of higher interest rates on future earnings is likely to be limited. In the recent low interest rate environment, most companies have been very active in refinancing, often proposing plans for future debt issuance. This means that if interest rates rise sharply, most people will have the flexibility to reduce borrowing in the short to medium term.

Will panic lead to more panic?

This is just a feeling that I have seen many market panics in a few years, but I feel that the panic seems to have reached the maximum. I think the short-term bottom will happen in the next few weeks.

I am buying (actually a put right to sell part of the cash sold), especially clean energy infrastructure stocks such as Yieldcos that have been sold due to high valuations in December and January.These include AY, Net present value, Agricultural Yearbook, with CWEN / A. The amount of each stock mainly depends on the size of my current position, which has less impact on the valuation of a single stock, and more related to market timing.

in conclusion

It’s time to put most of the cash that I have been telling people to stay on the sidelines in the final months of the game.

Disclosure: Long position in all the mentioned stocks.

Disclaimer: Past performance cannot guarantee or reliably indicate future results. This article contains the author’s current views, and these views are subject to change without notice. This article has been distributed for reference only. The forecasts, estimates and certain information contained herein should not be construed as investment advice or recommendations for any particular security, strategy or investment product. The information contained in this article was obtained from sources believed to be reliable but not guaranteed.

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