Four Pick And Shovels Stocks

The last three months of 2020 brought an explosion in clean energy stock prices.

Solar stocks (as measured by the Invesco Solar ETF (TAN), nearly tripled.  So did the Invesco Wilderhill Clean Energy ETF (PBW), which includes a broader spectrum of companies.  Wind stock rose 61%, and even the relatively sedate Yieldcos were up 32%.  The stars of the last half of 2020 was undoubtedly Tesla (TSLA, up 246%) and other electric vehicle stocks.

Money Flows Out of Fossil Fuels and Into Clean Energy

I believe that the cause of the current rise in stock prices is largely the fossil fuel divestment movement, which gained significant momentum in 2020. Not only have I been hearing greater interest in divestment from individuals, but major money managers like Blackrock and the New York State Pension Fund have stated their plans to divest from fossil fuels over time. If you have not already taken your money out of fossil fuel stocks, you are late to the game. As I wrote in 2014, when it comes to divestment, the last one out loses.

The same goes for investing in clean energy stocks. While not all the money taken out of fossil fuel stocks flows into clean energy stocks, some of it does. The market capitalization of clean energy stocks is quite small compared to the amount of money flowing into the sector: Demand for shares in clean energy companies is rising faster than companies are going public or issuing new shares.

Issuing New Shares

Economics 101 tells us that when demand increases faster than supply, the price rises. This is exactly what we have seen in clean energy stocks in the second half of 2020. We also learned that when price rises, it induces increased supply: More clean energy companies will go public and/or issue new shares.

Rising stock prices bring more than just stock market profits, they are also significant for the companies. Companies will refrain from raising money in secondary offerings unless they are confident that the offering will be “non-dilutive.” A non-dilutive share offering is one in which the money will be invested in a way that increases earnings more as a percentage than the number of shares is increased. This allows the offering to have the effect of increasing future earnings per share, despite the increase in the number of shares.

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Disclosure: Long VLEEF, UMICF, SALT, VEOEF

Disclaimer: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the ...

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