Canada’s renewable energy sector enjoyed a remarkably strong performance in 2020, as stocks soared amid a global shift toward cleaner energy. Good news: Many observers believe this shift has further to go, offering a reason to stay bullish in 2021.
This year’s gains suggest that a number of renewable energy producers are enjoying broader attention beyond a base of investors who want to align their holdings with environmental principles.
Boralex Inc. (BLX), which has wind farms in France and is expanding into solar power, soared 63 per cent in 2020, as of late December. Northland Power Inc. (NPI), which owns offshore wind installations in Europe along with onshore wind and solar installations in North America, rose 59 per cent.
Brookfield Renewable Partners LP (BEP.UN), largely focused on hydroelectric power globally, gained 58 per cent, and marked the rise with a share split in December. And Innergex Renewable Energy Inc. (INE), which operates wind and hydro facilities in Canada and the United States, added nearly 50 per cent.
Together with Algonquin Power & Utilities Corp. (AQN), up 11 per cent, these renewable energy stocks powered ahead of major benchmarks such as the S&P/TSX Composite Index and the S&P 500, and they flew past regular utilities.
The gains underscored the idea that cleaner energy can be both good for the soul and the investment portfolio – and that the green transition persevered through the pandemic and can form part of the strategy for getting out of the economic devastation left in its wake.
“Social and environmental issues are now getting baked in to these conversations about our economic recovery,” said Tim Nash, founder of Toronto-based Good Investing, a fee-for-service financial planning firm that focuses on sustainable investments.
The rally has a downside, though: It has stretched valuations, as share prices raced ahead of profit growth.
According to CIBC World Markets, Canadian renewable energy stocks now trade at the high-end of their five-year valuation range (based on comparing enterprise value to EBITDA, or earnings before interest, taxes, depreciation and amortization). This ratio stands at 15.3, which is well above the five-year average of 12.4.
Canadian stock valuations are slightly ahead of their global peers, and there are no bargains in the bunch.
Is that a problem?
Some analysts are cautious about these stocks in the near term, especially if sentiment toward renewable energy and ESG investing principles (environmental, social and governance) takes a hit.
Ben Pham, an analyst at BMO Nesbitt Burns, pointed out in mid-December that Brookfield Renewable, for example, would be hard-pressed to squeeze out anything more than a 4-per-cent return over the next 12 months (at the time, the shares traded at about US$39 in New York). And that’s his best-case scenario. Worst case: The shares fall 42 per cent.
Still, many observers are willing to tolerate lofty valuations in favour of the bright long-term growth opportunities ahead in clean energy. The cost to produce wind and solar power continues to decline, reinforcing the economic viability of renewables, as coal is fazed out. And new leadership in Washington under president-elect Joe Biden could add a U.S. political push to decarbonization, which has been lacking over the past four years under President Donald Trump.
Companies that have recently updated their growth plans point to an encouraging outlook.
Northland Power’s current assets have a total operating capacity of 2.6 gigawatts, but the company has additional capacity of more than 1.4 GW under construction or advanced development, mostly in offshore wind. That’s an increase of more than 50 per cent.
Algonquin Power, a renewable energy and regulated utility company, has a 3.4 GW pipeline of opportunities in renewables and plans to invest US$3.1-billion in wind and solar projects through 2025.
“Looking forward, we don’t foresee risk that growth will slow for the renewable energy stocks. Rather, the strong policy support around the globe could enhance or extend the growth prospects,” Mark Jarvi, an analyst at CIBC World Markets, said in a note.
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David Berman