Many experts think now is a good time to invest in infrastructure and renewable energy.
In the U.S., the government is handing out major subsidies for both areas. And there is a worldwide shift from fossil fuels toward renewable energy.
Asset manager Ecofin is bullish on the two sectors. Its Ecofin Global Renewables Infrastructure Fund (ECOAX) -), begun in August 2020, returned 5.07% in 2021, negative 11.13% in 2022 and negative 4.32% year to date through July 5, according to Morningstar.
That compares with 17.66%, negative 8.55% and 3.91% for the Morningstar Global Infrastructure index.
We recently spoke with Matthew Breidert, senior portfolio manager of the Ecofin fund, about investing in global renewable infrastructure. He sees the industry continuing to grow, as the shift toward renewable energy rolls on.
Electrification offers lower costs, lower emissions and lower volatility, he said. Infrastructure for renewable energy has stable cash flow, most of which is contracted or regulated, Breidert said.
Here are his thoughts, including stock picks.
TheStreet.com: What’s your investment philosophy?
Breidert: It’s fundamentals-based. We’re looking for companies with good long-term earnings growth, companies in great secular-growth areas associated with the transition to clean energy.
We look for companies with something unique -- opportunities to grow their business beyond current expectations. That includes companies selling clean electricity for products such as green hydrogen and electric vehicles.
Ecofin
TheStreet.com: What makes clean-energy-infrastructure stocks attractive?
Breidert: It’s the growth characteristics of an industry in secular change. Electrification will take market share from fossil fuels for decades. That’s thanks to issues of policy, cost, efficiency and energy security.
Electrification offers a lot of economies – lower intensity of cost, emissions and volatility. You can see on the demand side, with transportation, it’s just getting started. Renewables are taking almost all of the growth in electricity use.
The covid period showed that electricity is a defensive industry. There was a decline in demand for fossil fuels, but the impact to electricity demand was modest.
Investment in infrastructure involves assets that last 15 to 30 years. They have stable cash flows, most of which is contracted or regulated. It’s like how utilities make money. Because renewable technology continues to improve, the unit cost is likely to decline over time. Energy infrastructure typically sees a downward cost curve.
There is raw-material-cost exposure, but unit costs look contained. If demand rises faster than expenses, there’s not a cost problem.
TheStreet.com: What’s the biggest obstacle to investing in clean-infrastructure stocks?
Breidert: It’s an industry that requires significant capital. You can’t scale it like software. Projects require a lot of materials, logistics and people.
And the cost of capital has increased in the last 12 to 18 months. That’s a headwind for the industry and is why equity prices aren’t keeping up [with the overall market.] It’s not fundamentals: it’s just the rate environment increasing the cost of capital.
For example, [renewable energy] market leader NextEra Energy (NEE) -) has grown earnings 8% to 10% each of the last two years, but the stock has gone sideways.
There’s an opportunity if you believe we’re approaching the end of the interest-rate cycle. That might be an attractive entry point for the stocks.
TheStreet.com: What segments of the renewable-energy infrastructure industry offer the best opportunities now?
Breidert: The industry benefits from its incredibly competitive association with equipment makers. For example, in the wind industry it’s hard for equipment makers to make money. But buyers of equipment benefit from the technological improvements. The cost of capital is a headwind, but it offers opportunities.
TheStreet.com: Can you discuss three of your favorite stocks?
We like rooftop solar, including Sunrun (RUN) -) and Sunnova Energy (NOVA) -). These are companies with very challenging businesses to evaluate. They have complex finances. The base business is manufacturing power at home, and the economics are getting better and better.
If you can self-regulate your energy consumption, move it during the day, there are going to be cost savings, especially if you attach an electric vehicle. This is an industry in transition. We were skeptical for a long time, but now we are more positive. The stocks are volatile, but the potential business growth is quite powerful.
I mentioned NextEra above, that its earnings are rising while its stock is flat. So the valuation is cheaper.
The structural integrity of its growth looks good. There is potential upside for the conversion of renewable assets to products such as e-fuels. Companies that want to decarbonize will call for renewable energy. NextEra can partner with them.
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