Here's what could keep boosting solar, hydrogen and other clean energy names

Published Fri, Oct 15 20217:30 AM EDTUpdated Fri, Oct 15 202110:50 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Concerns about a winter fuel price shock are helping two groups of stocks — the traditional fossil fuel names that rise with oil prices and the alternative energy companies that are looking to replace oil and gas. U.S. oil prices are up about 68% this year; natural gas is up more than 115%, and shares of oil and gas producers have gained about 51%. Yet clean energy stocks are lagging in 2021 . Since the beginning of October, alternative energy names have been performing better, though there was some profit-taking in the group Thursday. The prospect of more government support has been lifting the sector, as have other factors around specific names. But the outlook for higher oil and gas prices has also been a big element driving the stocks in recent sessions. For instance, the SPDR S & P Kensho Clean Power ETF is down 7% for the year, but it was up 6.5% in the last five trading sessions. Its top holdings are First Solar , Tesla and Sunnova Energy International . TAN, the Invesco Solar ETF is down 14.9% for the year, but it has gained more than 10% in the last five sessions. HJEN, the Direxion Hydrogen ETF is also up more than 10% over the five-day trading period. Its top holdings include Plug Power and Ballard Power Systems . BTIG's Julian Emanuel said the recent gains could be in part from the perception that the Biden agenda on clean fuels will move forward. "But we would also say it's really the same reason that oil prices rose in response to rising natural gas prices," said Emanuel, the firm's head of equity and derivatives strategy. "Whether you're looking short-term, medium-term or long-term, you're looking for energy substitutes, where the supply story across many types of fuels is going to be challenged over the next couple of years," he said. "It's not at all a surprise to us that those stocks have been rising. Further progress in those names is also as much a function of advancing a legislative agenda as it is of rising energy prices." Oil and gas prices have been rising all year, but more recently there have been concerns about shortages of natural gas and coal in Europe and Asia. U.S. natural gas prices, not as impacted by foreign markets, have risen less dramatically and they are higher on concerns the supply of U.S. gas is below normal levels for this time of year. In Europe and Asia, prices are surging to record levels, fueled by worries there will not be enough supply, especially if the winter is cold. Europe has failed to put sufficient gas into storage, as liquified natural gas shipments went to Asia, Russia cut back on some pipeline gas, and wind energy did not deliver what was expected. Consumers, like power companies and manufacturers, are now expected to be switching to oil from gas in Europe and Asia and that could help drive oil prices higher. The U.S. is the biggest producer of natural gas, and that helps insulate American consumers to some extent, even as the U.S. exports liquified natural gas to other parts of the world. Alternative rally The recent stock market gains in everything from solar to hydrogen stocks may be the precursor of more to come, particularly as the world makes the transition to more renewable power sources and demand for oil and gas remains. Analysts say clean energy stocks have more often risen on government support than worries about shortages of supplies and price squeezes in traditional commodities. Biju Perincheril, energy analyst at Susquehanna, said one reason is the clean energy industry has become more mature. "The renewable sector on a stand alone basis was not profitable, but they are now so you can sort of look at the economics and say that traditional energy being high-priced is really a benefit for alternative energy names. I don't think you would have made that argument as clearly before," he said. Perincheril expects investors to focus on earnings for the group shortly, and there are headwinds from supply chain shortages, cost increases and uncertainty around imports and tariffs. But he sees demand as robust, and the group has relatively more attractive valuations than it had. The group could also get a boost as Congress heads towards reconciliation legislation, which is expected to include benefits for clean energy, he said. "I don't think the rally in gas and oil is going to derail the transition to renewables, and the need to transition to renewables. The question is how do you make it more resilient, more reliable. That's where some of the subsectors like energy storage could see some support," Perincheril said. "Green hydrogen could get more support." Stem is one stock he likes in the storage sector. He also likes First Solar because it has U.S. production, and it is building a second plant. "My view is the strength in the traditional commodities is a long term positive for alternatives. If you're making the decision whether to buy an EV or combustion engine car, you're going to look at gasoline prices," he said. "For the traditional energy names, that's already been reflected in higher prices. ... for renewables I think it will be a longer term tailwind," he said. "I think it's a longer term positive for the renewables. It's a chance to get to the net zero target. A lot more investment has to take place, and I think the government policies are already moving in that direction." Analysts say they are being selective in the clean energy space. "These names tend to be volatile. They ramped up out of this world at the end of 2020," CFRA energy analyst Stewart Glickman said. "They started to fall at the beginning of 2021. I wonder if this is expectations of the sticker shock that's going to be come to people who are heating their homes with fossil fuels." Glickman said he is neutral on the clean energy space as a whole, but likes some names. One of them is Enphase Energy, a solar inverter play. "They're kind of the leaders in residential micro inverters. It is seeing some cost pressure, but that's true across the board. They've been taking market share and we like where they're at," he said. Traditional plays Glickman also follows oil and gas companies, and he sees the group as attractive, even with solid gains this year. The Energy Select Sector SPDR ETF is still trading below where it was in January, 2020. Even before Covid slammed oil prices in 2020, energy stocks were out of favor, particularly with investors focused on environmental, sustainable and governance, or ESG investing. But analysts say the s tocks could still have some upside, and do not reflect the current price of oil, which is above $80 per barrel for the first time since 2014. "Near-term, I would say I favor upstream oil and gas. When I'm looking at any of these names, I'm looking at everything with a 12-month time horizon," Glickman said. "I think, sure renewables should be a much bigger piece of the pie over the medium to longer term, but I think it's going to be a slower build than perhaps people would like. I think in the intermediate term, people are going to do whatever they can to make sure the lights are on and the heat is going. I think that's going to mean more reliance on fossil fuels. Fossil fuels will continue to be important to everyday life." Perincheril also follows oil and gas names, and is positive on some in the group, like Devon Energy. He expects the sector to keep its focus on conserving capital, rather than spending to ramp up production dramatically as it might have done in the past when oil prices rose. Oil companies have been holding back on production increases, and looking instead to put capital into dividends and share buybacks. "Companies are facing a lot more pressure from investors to hold the line and not increase activity," said Perincheril. "I don't see the supply response like we've seen in the past." —CNBC's Michael Bloom contributed to this report

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