The Call for Cleantech Optimism

Pockets of cleantech are suffering from stock market disappointment, despite promising growth and excitement a few years ago, even while the broader market continues to reach new heights. Through April 30, 2024, the WilderHill Clean Energy Index had a one-year total return of -42.7%, lagging the broader market as measured by the MSCI World Index, which had a total return of about 19% for the same 12-month period.

In hindsight, it is relatively easy to point to several factors that have presented headwinds for cleantech companies, including rising interest rates, inflationary cost pressures, a near-term slow-down in electric vehicle sales and renewable power installations, a slow rollout of key facets and funding of the Inflation Reduction Act, and more. Currently, cleantech stocks are deeply out of favor.

In light of this pervasive pessimism, it would not be unreasonable to ask ourselves why we are still committed to this effort. However, in my view, pervasive cleantech pessimism actually represents an incredible opportunity.

The current sentiment around cleantech stocks today is reminiscent of the traditional energy sector in 2020.  In 2012, the Energy sector accounted for more than 12% of the total weight of the S&P 500 Index, but by the end of 2020, it had fallen to less than 3% of the weight of the broad index. At the end of 2020, the S&P 500 Energy Index was the absolute worst-performing sector for five of the prior ten years and the second worst-performing sector for an additional two years during that period. The sector was loathed and under-owned, ironically for many of the same reasons that cleantech is shunned today: poor historical returns, lack of profitability, volatility of results, and bankruptcy of poorly capitalized companies.

However, since then, the energy sector has been the best-performing sector in the S&P 500 Index through March 31, 2024 – even outperforming the tech sector since the end of 2020. To paraphrase Howard Marks, Co-chairman of Oaktree Capital Management, optimism is called for when pessimism is excessive. Cleantech has now reached this point.

We see encouraging signs of recovery in cleantech. For example, with the market’s seemingly singular focus on artificial intelligence, sell-side and buy-side analysts alike seeking AI-related plays are realizing that strained and outdated electrical grids are a potential bottleneck to growth. The GEOS team has been discussing, analyzing, and investing in energy efficiency, power technology, power generation, and grid stabilization technologies for several years now. Elsewhere in our portfolio, we have seen increasing demand for clean water and greater implementation of factory automation solutions driven by the onshoring of manufacturing and the need to control costs given inflationary costs. These are merely a few examples of the strong underlying secular growth trends underpinning the cleantech opportunity.

Cleantech pessimism is pervasive and unquestioned. As Howard Marks has stated: “That doesn’t mean that it can’t decline further, or that a bull market’s about to start. But it does mean that the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing.” Even as the market underestimates the cleantech opportunity at hand, investors would do well not to overlook it.