Alternative energy stocks are on a tear and there's more upside ahead, says JPMorgan

Published Sun, Oct 25 20206:39 AM EDT

(This story is for CNBC PRO subscribers only.) Alternative energy stocks, including those focused on solar, are on a tear this year due to falling costs as well as optimism around supportive policies from a Biden administration, and JPMorgan believes there's more upside ahead. "Long-term fundamentals for the overall space remain compelling, and we think the industry is more suited to long-term investors than at any prior time during our coverage," the firm said in a recent note to clients. JPMorgan noted that the stocks in its alternative energy coverage universe have gained, on average, more than 130% this year compared with the S & P 500's roughly 7% rise. Still, the firm said the risk-reward continues to look favorable, especially for companies involved in distributed power generation. Biden has outlined a $2 trillion climate and infrastructure plan that would push the U.S. to carbon-free power by 2035, with the country reaching net zero emissions by 2050. But even if President Donald Trump is reelected, or if Congress remains split, JPMorgan doesn't envision a drop-off for these stocks. The firm said that estimates and industry fundamentals would stay the same, although trading multipls could re-rate to levels seen prior to September's run-up. Here are some of JPMorgan's top picks ahead of third quarter results: Enphase Energy Solar panel equipment manufacturer Enphase Energy , which reports earnings on Tuesday after the close, is one of JPMorgan's top picks. The firm sees Enphase Energy growing market share, and said the company's energy storage business likely provided momentum in the second half of the year. That said, with shares of Enphase up nearly 300% this year, the firm noted that investors might want to wait for a pullback or until there's greater visibility after the election before buying the stock. "We believe that ENPH is best positioned within our coverage in the event of a Democratic sweep, owing to its geographic mix towards the US residential market, and ability to rapidly scale its outsourced manufacturing capacity," analyst Paul Coster said. Distributed generation is JPMorgan's top investment theme for investors looking for exposure to alternative energy, and the firm also has overweight ratings on shares of SolarEdge Technologies , Sunrun and Sunnova . These stocks have gained 198%, 308% and 144% this year, respectively. Hannon Armstrong Coster reiterated his overweight rating on Hannon Armstrong ahead of the company's earnings on Nov. 5 after the market closes. He believes that Hannon Armstrong, which is a capital and services provider for clean-energy focused companies, is a solid bet for investors looking for yield. "We believe the company's diversified asset portfolio, ability to flex toward off-balance-sheet securitizations, and large addressable market should position the company well for continued earnings and dividend growth. We believe the stock is undervalued and that risk/reward is favorable," Coster said. He also raised his target on the stock from $42 to $48. Shares of Hannon Armstrong are up 37% for 2020, and the stock has a market capitalization of $3.29 billion, according to FactSet. Meanwhile, for investors looking for exposure to the hydrogen theme, JPMorgan's top pick is Bloom Energy . Shares of the fuel cell technology company have gained 120% this year. - CNBC's Michael Bloom contributed reporting.

Arrays of photovoltaic solar panels are seen at the Tenaska Imperial Solar Energy Center South in this aerial photo taken over El Centro, California, U.S., May 29, 2020. Picture taken with a drone.

Bing Guan | Reuters

(This story is for CNBC PRO subscribers only.)

Alternative energy stocks, including those focused on solar, are on a tear this year due to falling costs as well as optimism around supportive policies from a Biden administration, and JPMorgan believes there's more upside ahead.

"Long-term fundamentals for the overall space remain compelling, and we think the industry is more suited to long-term investors than at any prior time during our coverage," the firm said in a recent note to clients.

JPMorgan noted that the stocks in its alternative energy coverage universe have gained, on average, more than 130% this year compared with the S&P 500's roughly 7% rise. Still, the firm said the risk-reward continues to look favorable, especially for companies involved in distributed power generation.

Biden has outlined a $2 trillion climate and infrastructure plan that would push the U.S. to carbon-free power by 2035, with the country reaching net zero emissions by 2050.

But even if President Donald Trump is reelected, or if Congress remains split, JPMorgan doesn't envision a drop-off for these stocks. The firm said that estimates and industry fundamentals would stay the same, although trading multipls could re-rate to levels seen prior to September's run-up.

Here are some of JPMorgan's top picks ahead of third quarter results: