Renewable energy stocks have punched well above their weight over the past five years, an analysis by S&P Global Market Intelligence found, with the biggest players tripling in value in that period as oil and gas production company stocks held steady.
An equally weighted basket of the 20 largest publicly traded stocks of North American companies that make and sell renewable power — geothermal, wind and solar energy sellers — gained 201% over the past five years as of Aug. 31. Meanwhile, the equally weighted value of the 73 firms in S&P's Oil & Gas Exploration and Production Index — energy providers — gained 2% over the same period.
Of the 20 renewable stocks, with a total market value of $34 billion, 65% gained in value over the five years, while only 30% of the 73 S&P oil and gas index companies, a group totaling $1.36 trillion in market cap, were in positive territory after five years. The broader benchmark S&P 500 index grew 40% over the five years.
A 35% slide in the price of crude oil has not helped the E&P stocks, which are historically closely tied to the commodity, while renewable stocks have tracked more closely with the tech sector, said Deanna Zhang, an energy tech and renewables analyst for the energy investment bank Tudor Pickering Holt & Co.
"I think the performance differential is largely due to commodity swings in the oil and gas sector. That being said, renewables are still outperforming as fund flow in the oil and gas space has been particularly weak as of late," she said. "There was a big rotation in the midst of the [2014-2016] downturn and many funds that were oil-and-gas-focused blew up — those dollars are coming back but at a more gradual pace than expected. Renewables [are] likely tracking tech, which has run with the market."
Raymond James & Associates Inc. oil and gas analyst Pavel Molchanov agreed that the market rewards high-growth stocks and renewables. Largely based on new and improving technologies, renewable energy companies are benefiting from the same trend that has exploded the value of such high-tech issues as Amazon.com Inc. and Facebook Inc.
"Oil prices are still meaningfully lower than they were five years ago — even after their rebound over the past two years — [so] it is intuitive that many oil-centric stocks are lower, as well," he said. "Concurrently, broader market trends for most of the past five years have been clearly favorable to high-growth story stocks, and plenty of clean tech names benefited from the momentum trade."
Tim Fox, a renewables policy analyst with ClearView Energy Partners LLC, said any direct comparison ignores the huge market cap differences between the two indexes.
Fox cautioned against being too quick to compare two numbers and declare a trend. "The rapid growth of renewable companies may overstate their performance relative to a large, stable base of mature E&P companies (large gains from a small base can still correspond to less overall value than modest gains from a large base)," he said in an email. Fox and ClearView analyze the impact of government energy policy decisions for investors but do not make specific investment recommendations.
High flyers in the renewable index, such as Canadian solar power producer Gencan Capital Inc., with a 3,700% gain in five years, were offset by spectacular losers such as Canadian geothermal power company Polaris Infrastructure Inc., which lost 96% of its value over the same period.
Weighing down the performance of oil and gas stocks has been the dramatic loss in value among shale gas pioneers such as Southwestern Energy Co. (-85%), Chesapeake Energy Corp. (-83%) and Gulfport Energy Corp. (-80%). Two of the top three largest U.S. oil and gas companies by market capitalization, supermajors Chevron Corp. (-2%) and Exxon Mobil Corp. (-9%), also lost value over the past five years.
As with oil and gas, the fortunes of renewable energy generators are linked to changes in law and policy. Analysts said the sector's growth is being fueled in part by state governments adopting rules requiring utilities to purchase renewable power and corporations looking to burnish their "green" brands by investing through long-term contracts.
"It is not surprising that renewable stocks have outperformed the E&P index over the past five years," said Vishal Shah, a partner with Hudson Sustainable Investments LLC, a $3 billion private equity fund. "[A] combination of positive industry fundamentals and favorable global policy support have resulted in this outperformance for renewables."
"Corporate renewables and storage plus renewables, along with the strong growth of distributed generation, are the main drivers for strong fundamentals in the renewables sector for power generation," Shah said.
Most of the gains in renewable stocks have not gone to the public, which overwhelmingly invests in its retirement money in large, passively managed index funds. Solar and wind company market caps are too low for most funds to consider them for inclusion.
Investors need a trail guide, several analysts said.
"The WilderHill Clean Energy Index — clean tech's main benchmark index — was the best-performing energy subsector of 2017, up 38%, and it marked the fourth year in five of clean tech's relative outperformance," Molchanov said. "More so than in oil and gas, clean tech remains a stock picker's market, so it simply does not lend itself to making broad calls."