Morgan Stanley's best stock picks to play the transition to clean energy

Published Wed, May 31 20233:09 PM EDTUpdated Wed, May 31 20234:08 PM EDT

The transition to clean energy won't be equal across sectors, according to Morgan Stanley Research. This presents an opportunity for investors as the transition results in winners and losers, according to analysts led by Stephen Byrd. The Wall Street bank broke down segments of the energy transition that will benefit and others that will be challenged by the transition to clean energy. For this list, CNBC picked stocks Morgan Stanley thinks stand to benefit from the move toward clean energy, with a special focus on shares with overweight and equal weight ratings. The stocks in this list fall into one of four categories: — Energy storage and fuel cells. — Clean hydrogen and ammonia opportunities. — Carbon capture and storage stocks. — Stocks linked to higher demand for electric vehicles. "Not all incumbent utilities will gain from the energy transition," Byrd wrote Wednesday. "The perception is that incumbent utilities will be at the center of the transition to renewable energy, and will not be negatively affected." But this won't be the case for the entire country, Byrd says, and will likely only disproportionately benefit the Midwest, at the same time as the "economics of energy storage are better than appreciated and will drive increased adoption of distributed energy resources (DERs) in places like California and the Northeast." SPWR YTD mountain Morgan Stanley is overweight on solar provider SunPower. Shares are down nearly 42% from the start of 2023. Byrd highlighted solar stocks including Sunrun and Sunnova , as well as equal weight-rated SunPower. In clean hydrogen, the market is experiencing "tremendous confusion," according to Byrd. The Inflation Reduction Act provided ample support for a transition to clean hydrogen, he said, which has helped keep prices in the U.S. low and make the domestic market "one of the most cost competitive regions." But "the market isn't pricing this opportunity in clean tech stocks," Byrd noted. APD YTD mountain Air Products and Chemicals Inc is one of two gray hydrogren producers highlighted by Morgan Stanley. The analyst specifically singled out stocks including Linde PLC as well as Air Products and Chemicals , which both produce gray hydrogen and ammonia-adjacent projects. "Energy companies will play a crucial role in decarbonizing the economy via carbon capture, utilization, and storage (CCUS) technology," Byrd said. He picked out Occidental Petroleum (equal weight) as offering "the most direct exposure to CCUS," while Exxon Mobil (overweight) and Chevron (equal weight) "have also led investment in the technology." XOM CVX YTD mountain Oil giants Chevron and Exxon Mobil made the cut for Morgan Stanley's picks to benefit from carbon capture and storage. Meanwhile, "large energy companies, as a part of their suite of low carbon investments, have begun to offer decarbonization solutions as a service to other industries. More specifically, they are leveraging their experience in carbon capture to eliminate hard to abate CO emissions," Byrd said. Demand for energy to power electric vehicles isn't yet a "needle mover for most utilities," Byrd said, especially since sales of EVs are far outpacing the growth seen in the cost of actually powering the cars. "Much of this power will be used at night when grid utilization is low (utilities do not need to do much upgrading for this power demand), plus many EV customers will power their vehicles with local solar," he said. Still, the bank is bullish on the space, albeit over a very long-time horizon, as "needle mover opportunities are a decade out, in our view." Byrd picked out utilities Sempra and Pacific Gas and Electric , both rated equal weight, as well as underweight-rated Edison International .