In a year marked by significant downturns for clean energy stocks, Citigroup strategists are sounding the alarm for further potential declines. Prominent players in the sector, including the largest clean energy exchange-traded fund, iShares Global Clean Energy (ticker: ICLN), and its lesser-known peer, the Invesco Global Clean Energy ETF (PBD), have witnessed roughly a 25% drop over the past year. Despite a mid-year surge following the passage of the Inflation Reduction Act, which funneled billions into clean energy initiatives, the funds have struggled in the face of waning demand and other market pressures.
The solar-power equipment firm Enphase Energy (ENPH), a major component of the iShares fund, has been particularly vocal about the challenges facing the industry. The company has repeatedly warned shareholders of a slump in demand due to high interest rates leading to reduced customer spending. Citigroup strategists Drew Pettit and Scott Chronert identified stocks at the greatest risk within the clean energy sector as those exhibiting "most evident declines in cash and negative free cash flow."
Clean Energy Stocks Are On The Decline, Warn Citigroup Strategists
Over the past year, clean energy stocks have significantly decreased in value, causing Citigroup strategists to raise concerns about further declines in a handful of these stocks. iShares Global Clean Energy, the largest clean energy exchange-traded fund, together with its smaller counterpart, the Invesco Global Clean Energy ETF, have seen a decrease of around 25% over the past year. This decline follows a mid-year gain prompted by the Inflation Reduction Act, which assigned billions of dollars in support of clean energy initiatives.
The Impact of Waning Demand
One of the key reasons behind this selloff is the diminishing demand for clean energy. Enphase Energy, a solar-power equipment firm and one of the largest holdings within the iShares fund, has frequently warned shareholders about the decline in demand. This is attributed to high interest rates causing customers to reduce their spending.
Stocks Most At Risk
In a recent report, Citigroup strategists Drew Pettit and Scott Chronert identified the stocks within the clean energy sector most at risk of further losses. These are the stocks displaying the most significant declines in cash and negative free cash flow. The strategists analysed clean energy stocks globally, selecting those with the most noticeable decrease in free cash flow and cash burn or spending over the previous 12 months.
Companies in the Danger Zone
Eight companies made the strategists’ list. The identified companies include clean fuel cell companies Plug Power and Ballard Power Systems, electric vehicle-related stocks Rivian Automotive, ChargePoint Holdings, and Fisker, solar companies SunPower and Sunnova Energy International, and energy company ACEN. These companies have significantly depleted their cash reserves over the past year with Rivian Automotive recording the highest cash burn of $4.7 billion.
While the Citigroup strategists acknowledge that a decrease in interest rates, among other factors, could help these stocks improve, they advise careful consideration when selecting stocks within this subcategory. However, they also suggest Renault as a potential gainful stock in the clean energy sector when it gains more widespread acceptance. Similarly, BofA Securities Global Research team recently identified TPI Composites and Sunnova as stocks that could benefit from increased federal spending on clean energy.
The declining performance of clean energy stocks is a concern for investors, especially with the uncertainties surrounding economic and market conditions. While Citigroup strategists warn of further declines, they also present opportunities for selective gains. As with any investment, careful research and consideration are essential when making decisions in this volatile sector. It’s also worth noting that the clean energy sector’s long-term potential remains, especially with the increasing focus on sustainability and climate change mitigation worldwide.