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Are renewable energy stocks a no-brainer buy?

Solar panels fields on the green hills
Solar panels fields on the green hills

My investments and interest in renewable energy stocks are based on optimism for a greener future. Moreover, 2022 has highlighted the risks in fossil fuel dependency. Due to climate change and energy security concerns, there’s huge investment from public and private sectors into a variety of renewable energy sources.

Thinking ahead 25 years, it’s hard for me to imagine a world that hasn’t significantly shifted towards renewables. However, the returns I might get from an investment in such stocks are less predictable. Let’s asses the cases for and against investing in them today.

Volatility

The S&P Global Clean Energy Index can be considered a benchmark, aiming to measure the performance of companies in global clean energy-related businesses. This year the index has declined 11%. That’s a dismal return considering fossil fuel giants like BP, Shell and Exxon are up 33%, 40% and 74%, respectively. The index has also been hugely volatile over the last decade.

Year

Total Return

2012

-18.01%

2013

58.37%

2014

3.96%

2015

22.15%

2016

-19.86%

2017

13.04%

2018

-0.16%

2019

37.75%

2020

137.82%

2021

-23.84%

My main case against buying renewable energy stocks today is this volatility. To clarify, I’m not just talking about the fluctuations in stock prices but the uncertainty that these trends may represent. Will future energy be sourced from batteries, hydrogen, nuclear, solar, wind, a combination of all the above or something else entirely? This is unclear to me. Even if I’m able to accurately predict this, which company or companies will come out on top?

For example, hydrogen looks like a promising alternative to fossil fuels. If it becomes a key piece of a net-zero puzzle, will innovative UK companies such as ITM Power and Ceres Power be the beneficiaries? Or will today’s leading energy companies lead the way?

They certainly have the financial resources to do so. Last quarter, Exxon smashed records when reporting its highest quarterly profits ever. Other fossil fuel energy companies are enjoying similar windfalls. Perhaps the best investment in renewable energy stocks today is actually an investment in the oil and gas juggernauts.

Needle in a haystack

I believe there are comparisons with the dotcom bubble in the 1990s. There were a number of innovative companies within a new and largely misunderstood tech sector. However, many went bust or their share prices never returned to their highs. Despite this, an investment in the tech heavy Nasdaq Composite would have rewarded patient investors over two decades.

Renewable energy stocks aren’t in a bubble. Yet this example suggests I may be wise to invest in a promising sector rather than betting on individual stocks. Why find the needle in the haystack when I can just buy the haystack? It also highlights the importance of taking a long-term approach.

One option is to invest in the iShares Global Clean Energy ETF. It’s one of the most popular renewable energy ETFs and aims to reflect the returns of the S&P Global Clean Energy Index. I’d be happy adding it to my portfolio in the coming months. But if I do, I’ll strap myself in for a long and bumpy ride.

The post Are renewable energy stocks a no-brainer buy? appeared first on The Motley Fool UK.

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Nathan Marks has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022