Morgan Stanley picks 5 global stocks to play the gas price crisis

Published Sun, Sep 26 202111:26 PM EDT

Analysts at Morgan Stanley have chosen renewable energy stocks to buy right now, saying current weakness in the market provides an entry point for investors as gas prices soar. A combination of higher demand and lower supply has driven gas prices higher, caused by factors such as higher use of air conditioning in parts of the U.S., less gas in storage for the winter months and more demand from Asia as countries open up after Covid-19 lockdowns. Natural gas prices, using the European TTF Hub benchmark, are up more than 250% since January , causing a crisis in countries including the U.K., with several smaller energy firms at risk of collapsing. Last week, Spain introduced tax cuts to help consumers tackle rising energy bills and announced a 2.6 billion euro ($3 billion) " claw back " from utilities that benefit from increased gas costs, including those focused on renewables. Investors are concerned that such measures might spread to other countries, Morgan Stanley said in a research note published on Sept. 17, but added that the risk of this "appears overdone." Instead, the bank said this could be an "interesting entry point" for investors into utility companies, such as Danish wind firm Orsted and Spain's Iberdrola . "Buy Orsted (Overweight) and Iberdrola (Overweight) on weakness: We recognise that the recent gas clawback will have a negative impact on 2021 and 2022 earnings for Iberdrola … triggering EPS downgrades. However, this appears well priced in with Iberdrola's market cap," the analysts stated. EPS refers to earnings per share, a measure investors use to analyze a stock's value. The bank said Orsted has an estimated 34% potential upside to its price target, while for Iberdrola the figure is 38.7% — the timeframe for Morgan Stanley's price targets is 12 to 18 months. "We see RWE (Overweight), EDF (Overweight) and Engie (Overweight) as our preferred names to play the strength in power prices, with limited contagion risk from political intervention," the analysts added. RWE has a potential 35.4% upside to Morgan Stanley's price target, the analysts estimated. For EDF the figure is 58.1% and for Engie it is 44.5%. CNBC's Chloe Taylor and Patti Domm contributed to this re