For those enjoying summer too much to have noticed, the Inflation Reduction Act that just passed is a blockbuster effort that by all think-tank estimates will slash greenhouse gas emissions by 40% or more by the end of this decade. This remarkable move will put the U.S. close to its commitment to slash emissions by 50% – and we may very well get there because states should find it easier to implement their own carbon-controlling regulations. This is great for the planet – and great for investors.
The Inflation Reduction Act commits some $369 billion to promote the manufacturing and purchasing of electric vehicles and EV chargers, production and use of clean energy, mining and refining of rare earth metals, plus research into longer term efforts like carbon sequestration and green hydrogen production – all with an emphasis on favoring U.S. companies. It’s the largest bill promoting Greentech ever, surpassing last year’s infrastructure bill, which I calculate as directing over $300 billion to the sector when you also count monies for water and nuclear power efforts.
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As I wrote last month, Greentech doesn’t need government support to thrive, because it is inherently deflationary. The raw material, so to speak, for solar, wind, hydro and geothermal energies are free, plus capital costs for getting new production online keeps going down. Once a renewable energy project is producing, it only gets cheaper as initial capital costs are recouped. By contrast, fossil fuels are inherently inflationary – oil and natural gas keep getting harder to pull out of the ground, often requiring more refining to put into useable form. Plus, since they are globally priced in dollars, it means they have to increase in price over time, because even in the best of times, the dollar loses a bit of its value every year.
I follow roughly 250 U.S. Greentech companies that are publicly traded, and they nearly all leapt when news of the Inflation Reduction Act came at the end of July. And for good reason – reportedly it includes $7,500 in buyer incentives for new EV purchases, extends out 10 years tax credits for solar energy as well as credits for production of photovoltaic panels, energy storage, and wind turbines – it incentivizes both consumers and producers to go green and its decade-long horizon provides long-term policy certainty many businesses had been seeking.
As editor of Cabot’s SectorXpress Greentech Advisor advisory, I’m further excited by the bill, because it comes well-timed as a second boost to the sector’s recent lift-off from an important line of support it held in May. After rallying to an all-time high by the end of 2020, Greentech experienced a necessary (and healthy) retracement since. Here is the 10-year monthly chart of the WilderHill Clean Energy ETF (PBW), which I used as a proxy to gauge the sector.
There have been hints the bears had exhausted themselves – I’ve been telling my subscribers in recent weeks that Greentech has been giving the appearance of having bottomed in May. My most recent issue alerted them that Greentech had turned bullish. Now the Inflation Reduction Act comes in and, to echo hedge fund managers when they see a bull surge coming, the action is “unleashing the animal spirits” for U.S. clean energy stocks.
Over the last month, Greentech stocks surged about 15%, blowing away the last, lingering stench of the exhausted bear market. We have four stocks on our Watch List, at least two of which we will enter soon, given they will be leaders in U.S. solar and EV efforts bolstered by the new bill. We already sit with profits on a few leaders – 93% in two months on warrants for Altus Power (AMPS/WS), which installs and operates rooftop solar in the overlooked U.S. commercial and industrial buildings segment, 13% on nuclear power generator Constellation Energy (CEG) and, in less than a week, a 6% gain on Ormat Technologies (ORA), a leader in U.S. geothermal power. They’re all still good bets today. The next leg up for clean energy stocks is just getting started.
Has the Inflation Reduction Act prompted you to consider increasing exposure to Greentech stocks?
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