Goldman to RBC see a slow-but-sure European green stocks revival

Image: Vestas

European renewable-energy stocks, battered for much of this year, present a buying opportunity because their growth story remains intact. That pitch from Goldman Sachs is luring some investors — those not in a hurry, that is.

The way Goldman tells it, with governments promising to phase out fossil fuels and the environmental, social and governance mantra still resonating, the sector is bound to eventually provide rich rewards for the long-term investor. RBC Wealth Management concurs.

“For us, the recent correction represents a good opportunity to build strategic positions in these stocks, which should benefit from strong secular growth,” said Frederique Carrier, head of investment strategy at the firm. But “patience may be required,” she said.

After a stellar rise last year, renewables have fallen out of favour. The European Renewable Energy index is down 27 per cent from its January peak, and three of the 10 worst-performing Stoxx 600 constituents in 2021 are renewable-energy plays — tumbling an average of 35 per cent. Last year, they were among the best performers in the index, with Norwegian electrolyzer company Nel ASA more than tripling and solar power firm Scatec ASA more than doubling.

Many factors have coalesced to pull the sector down, leaving renewable-energy equities trading at a discount to other growth stocks. As the economy rebounds after the pandemic, cheaper value stocks are outperforming pricier growth shares. Also, prominent clean-energy exchange-traded funds are rebalancing holdings, putting technical pressure on some high-flying renewable names. Added to that are rising bond yields, inflation jitters and increasing competition in a sector where, as Carrier says, valuations got “a bit stretched.”

“Renewable companies have just been stuck in with all the other growth stocks,” said Randeep Somel, portfolio manager on the M&G Climate Solutions fund, suggesting that’s a mistake. Unlike tech stocks that benefited from a pandemic-driven demand boost, “it is the one area where you are guaranteed a positive growth trajectory,” he said.

That may be, but some still see renewables as pricey. For instance, even after declines this year, wind-turbine maker Vestas Wind Systems A/S trades at around 34-times forward earnings, while Siemens Gamesa Renewable Energy SA is at nearly 43-times, according to Bloomberg data. That compares with around 17 times for the Stoxx 600 Europe benchmark.

“What we’re not doing is just buying the very expensive pure-plays,” said James Sym, head of European equities at investment firm River & Mercantile. “They’re still expensive. I have no idea, and nor does anyone else, whether inflation proves to be transitory.” If it doesn’t, pricey clean-energy stocks could be “very vulnerable,” he said.

To investors like Martin Todd, those concerns look “misplaced” given the underlying growth story for renewables and as inflation fears and commodity prices ease.

“If anything, the investment case has strengthened,” said the portfolio manager at Federated Hermes.

© 2021 Bloomberg L.P.

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