Goldman expects net zero investment to hit $6 trillion annually — and has some stock picks to cash in

Published Wed, Oct 20 20219:28 PM EDT

Analysts at Goldman Sachs have named a slew of less obvious stocks they expect to outperform as green investment booms. While investors have been paying close attention to clean energy stocks amid the so-called green transition, Goldman Sachs says they can also benefit from exposure to companies further upstream in the green solutions supply chain. "We believe Green Capex will be the dominant driver of global infrastructure over the next decade, with $6 trillion of investment needed annually to decarbonize the world, address water needs and shore up transportation and other critical systems," Goldman's analysts, led by Brian Singer, said on Oct. 11. "We expect rising focus and investor support for the Greenablers (Green Enablers) — sectors where Green Capex is needed more urgently to help alleviate future supply-chain bottlenecks and/or reduce execution risks." Amid the looming climate emergency, companies are facing greater scrutiny to reduce their carbon footprint and do more to mitigate the effects of climate change. Against this backdrop, Goldman noted that equity markets have rewarded companies that continue to deliver favorable returns while investing in, or having exposure to, customers' investments in green capex (capital expenditure). This trend is expected to continue, the analysts said. Stock Picks All of the following picks are buy-rated by Goldman Sachs. The bank likes semiconductor firm Advanced Micro Devices as a "standout performer in the global semiconductor universe." The firm's products provide stronger performance and are more energy efficient than competing products, the analysts said, and contribute to energy efficiency improvements across multiple tech hardware segments. It has a 12-month price target of $127 on the company. Shares were trading around $116 on Oct. 19. Michigan energy company CMS Energy is a "best-in-class regulated growth story" with "visible growth upside potential from proposed generation de-carbonization plan," the analysts said. The bank expects the company to grow at a faster pace than its peers, while its accelerated transition to clean energy sources will provide further earnings upside potential through 2025, the analysts noted. The bank puts the company's price target at $72, up from around $60 on Oct. 19. Power management technology provider Eaton is another Goldman pick for its exposure to trends such as electrification, energy transition and digitalisation. The company should also benefit from various catalysts such as government stimulus measures and increasing electrification, which should drive growth of 4-6% in the longer-term, the analysts said. The company could generate revenue opportunities to the tune of $500 million by 2025, they added, as the world shifts towards higher electrical content. Goldman has a price target of $184 on the company. It was trading around $161 on Oct. 19. In Asia, air-conditioning manufacturer Daikin Industries is rated highly by Goldman for its growth prospects. The blue-chip stock has a track record of delivering "sustained high returns" and has the highest growth potential among the bank's Japan machinery sector coverage, the analysts noted. It is expected to deliver sustained strong profit growth amid greater environmental awareness and a macro recovery, the analysts added. The company is also a leader in energy-efficient systems, the bank noted, putting a price target of 34,000 Japanese yen on the stock, up from 27,300 Japanese yen on Oct. 20. Denso , a top supplier to auto giant Toyota , is one of Goldman's top picks among auto parts companies for exposure to green capex, given the company's role as a "significant enabler of sustainability goals." The firm, a component provider for electric vehicles and hybrid powertrains, will benefit from growth in these areas across the U.S., China and Japan, while reaping the benefits of its upfront investments in research and development and capex, the analysts said. Goldman has a price target of 9,600 Japanese yen on the stock, which closed at 7,878 Japanese yen on Oct. 20. German technology behemoth Siemens is one of the biggest names on the Goldman list. The company derives nearly half of its sales from its range of decarbonization products that span energy, smart infrastructure and mobility. The company is undervalued relative to its peers, the analysts said, while boasting attractive valuations across its free cash flow and price-to-earnings metrics — both of which are closely watched by investors. The analysts expect Siemens to deliver top-quartile returns to shareholders and dividend yield of approximately 3.5% in 2022. Goldman has a target price of €177 on the stock. Siemens was trading around €143 on Oct. 20.

A Goldman Sachs sign at at NYSE.

Brendan McDermid | Reuters

Analysts at Goldman Sachs have named a slew of less obvious stocks they expect to outperform as green investment booms.