Pick these stocks to play 2022’s ‘climate rally,’ Oppenheimer says

Published Wed, Dec 22 20212:13 PM EST

Supply chain headwinds and policy uncertainty have hobbled clean energy stocks in 2021, but Oppenheimer believes next year will bring plenty of opportunities for investors to capitalize on the decarbonization theme. The firm anticipates that 2022 will be a stock picker's market as investors return to fundamental analysis. That means several factors will set companies apart from the pack: technology differentiation, cost of capital, management, and earnings power as opposed to top-line growth. Oppenheimer has a list of outperform-rated stocks that it believes checks each of these boxes. "Having seen some moderation of valuation metrics for the group during the year, we are also seeing improving fundamentals and evidence that long-term growth in the sector will not be derailed," the firm said. "We are continuing to see technology evolution and convergence drive efficiency in individual supply chains and, in turn, drive shareholder value." Analysts led by Colin Rusch added that support behind ESG investing — or investing based on environmental, social and governance factors — should provide additional tailwinds. Further, while the Build Back Better plan has stalled, it doesn't rule out future federal legislation that's supportive for clean energy. Alternative transportation and energy storage Oppenheimer pointed to several stocks within the alternative transportation and energy storage segments that it believes are poised to outperform in 2022, including Aptiv . The company designs and manufactures auto components, including for electric vehicles. Rusch envisions the stock rallying to $196. Shares closed at $158.02 on Tuesday. The firm also likes newly public ESS Tech , which is backed by Bill Gates and tackling energy storage. Plug Power is another top pick for Rusch. "Plug is really going to be a hydrogen fuel company on a go forward basis as it leverages its fuel cell technology," he said Tuesday on CNBC's "Power Lunch." "With Plug it's really a lot of execution here. They are growing out a large network of hydrogen fuel assets, and we're just seeing the first part of that execution happen late this year and early next year." Plug Power's share price is down roughly 16% for 2021. Oppenheimer has a $63 price target on the stock. Shares closed at $28.96 on Tuesday. Solar generation Within the solar parts manufacturer ecosystem Rusch likes Enphase Energy and Canadian Solar . The latter is down nearly 40% for the year amid weakness in clean energy stocks, while Enphase is one of the only solar stocks on pace to close out the year in the green. "We believe ENPH is the clear leader in microinverters and continues to grow with core markets while expanding its addressable market segments," he said in a Nov. 17 note to clients following the company's investor day. "We expect ENPH's energy storage solution to gain meaningful traction... as the company begins to sell on three continents and, in our view, is likely to drive upside to the shares." Sustainable finance Another category that Oppenheimer is watching within the renewable energy ecosystem is companies that finance green projects, which includes Sunrun . The company is the largest residential solar company in the U.S., recently topping 600,000 customers. The stock has come under significant pressure this year with shares losing about half their value. More recently, a proposed decision from California regulators that would slash incentives that have been instrumental to the industry's growth sent Sunrun shares tumbling nearly 20% last week. Still, Rusch believes the stock can jump to $70, which is roughly double its closing price on Tuesday. "We believe the company is benefitting from scale both from a purchasing perspective but also from a cost of capital perspective," the firm said in a Nov. 5 note to clients following the company's earnings report. "We anticipate the company will continue leveraging that scale with incremental offerings like virtual power plants and bidirectional EV charging," he said. Other stocks he pointed to include Ameresco , Clearway Energy and NextEra Energy Partners . - CNBC's Michael Bloom contributed reporting.

NextEra Energy recently passed Exxon Mobil in market cap with headlines citing the milestone for the "clean energy" company. It's also one of the biggest utilities in the world, but by combining its 20th century fossil-fuel power generation model with decades of investment in renewable energy, investors are betting it s model is the future.

ALFREDO ESTRELLA | AFP | Getty Images

The firm anticipates that 2022 will be a stock picker's market as investors return to fundamental analysis. That means several factors will set companies apart from the pack: technology differentiation, cost of capital, management, and earnings power as opposed to top-line growth.

Oppenheimer has a list of outperform-rated stocks that it believes checks each of these boxes.