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Clean Energy Stocks Suffer Amid Higher Rates, But BofA Identifies Buying Opportunities

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Bank of America Identifies Value in Renewable Energy Stocks Despite Recent Sell-Off

Renewable energy stocks have faced a significant sell-off following NextEra Energy Partners' downward revision of its growth forecast. The cleantech sector has experienced several days of decline, with NextEra Energy Partners' stock falling approximately 27% and its parent company, NextEra Energy, down 15% over the same period. Bank of America analyst Julien Dumoulin-Smith acknowledges the "collapse in confidence" in NextEra but believes there is still value to be found in renewable energy stocks, despite concerns about higher interest rates dampening demand for such projects.

Confidence in the Future of Renewables

Dumoulin-Smith maintains that there will be "significant utility scale growth in renewables in the coming years" and argues that returns are still viable despite higher interest rates. He points to the near doubling of purchase price agreement (PPA) prices from 2021 to the present as evidence that the cost of capital pain has been universal. Dumoulin-Smith believes that rate pressures will continue to be passed through and that the outlook for renewables as an asset class remains positive.

Stocks Worth Considering

Given the recent decline in the Utilities Select Sector SPDR Fund (XLU), there may be opportunities to invest in renewable energy stocks. Dumoulin-Smith favors solar equipment providers that specialize in utility-scale equipment, such as First Solar, Array Technologies, and Nextracker. He anticipates these companies will benefit from improved growth in the upcoming year. Within the utility sector, Dumoulin-Smith's top defensive pick is Consolidated Edison. Bank of America maintains a $283 per share price target on solar panel manufacturer First Solar, representing a potential upside of more than 86% from its recent close. While First Solar stock has experienced a slight decline since the beginning of the year, Dumoulin-Smith believes the company can maintain a competitive position in the near term.

Forecasts and Potential Upside

Bank of America has set a $45 per share price target on Nextracker, indicating a potential upside of over 26% from its recent close. Dumoulin-Smith suggests that shares could rise even higher if solar panel projects gain momentum or if there is a meaningful decline in the cost of steel and freight transportation. Nextracker stock has already seen an increase of more than 9% since the start of 2023. The firm maintains a $30 price target on Array Technologies and a $96 price target for Consolidated Edison. These forecasts represent potential upsides of over 47% for Array and approximately 14% for ConEd. Bank of America highlights Consolidated Edison's above-peer growth and "uniquely clean balance sheet." While ConEd stock has experienced a decline of about 12% since the beginning of the year, and Array shares are down nearly 2%, a normalizing business outlook in 2024 is expected to boost Array stock, while ConEd will benefit from capital appreciation across the utilities sector. In conclusion, Bank of America remains optimistic about the value to be found in renewable energy stocks, despite recent sell-offs. The firm identifies specific stocks within the sector that may present buying opportunities, emphasizing the potential for growth and positive returns in the coming years.

Implications of Renewable Energy Stocks Sell-Off on New Business Formation

The recent sell-off in renewable energy stocks, triggered by NextEra Energy Partners' revised growth forecast, has sent ripples through the cleantech sector. This development could have significant implications for new businesses in this sector, particularly those reliant on investor confidence and market stability.

Challenges and Opportunities Amid Market Volatility

Market volatility, as evidenced by the decline in renewable energy stocks, can pose challenges for new businesses seeking investment. The "collapse in confidence" in NextEra, as noted by Bank of America analyst Julien Dumoulin-Smith, could potentially deter investors from backing new ventures in the cleantech sector. However, despite the current market turbulence, Dumoulin-Smith sees value in renewable energy stocks and anticipates "significant utility scale growth in renewables in the coming years."
Investment Prospects in the Cleantech Sector
This optimistic outlook could provide a silver lining for new businesses in the cleantech sector. Even with the recent decline in the Utilities Select Sector SPDR Fund (XLU), opportunities for investment in renewable energy stocks remain. Companies specializing in utility-scale equipment, such as First Solar, Array Technologies, and Nextracker, could be particularly attractive to investors, given their potential for improved growth in the upcoming year.

Future Growth and Market Resilience

Despite current market challenges, Bank of America's price targets for renewable energy stocks indicate potential upsides, suggesting that the sector could rebound. This resilience could bode well for new businesses in the cleantech sector, offering them a more stable environment to operate and grow in. In this context, the recent sell-off in renewable energy stocks could be viewed as a temporary setback, with long-term growth prospects remaining intact.
Story First Published at: https://www.cnbc.com/2023/10/05/higher-rates-are-killing-the-clean-energy-stocksbofa-says-these-are-worth-buying.html
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