While U.S. GDP growth slowed to a 2.0% annualized pace in the third quarter, investors are struggling to assess the economy’s direction and prospects for 2022. However, clean energy’s strong secular growth both in America and abroad, combined with the recent passage of a landmark bipartisan infrastructure bill by the U.S. government, provides areas to invest in that should prosper regardless of the health of the overall economy.
The Infrastructure Investment and Jobs Act passed Congress on November 5 and was signed into law by President Biden on November 15. Total outlays associated with the plan are $1.2T spread over 10 years, with more than $550B in new federal investment. Significantly, it includes:
$284B for transportation:
- $110B for roads and bridges, major infrastructure, including $40B for repair/replacement with an emphasis on climate effects.
- $66B for passenger/freight rail.
- $42B for airports ($25B), ports, and waterways.
- $38B for public transport.
- $15B for EV infrastructure (50%) and transit (50%).
- $11B for transport safety efforts.
$266B for core infrastructure:
- $65B for broadband infrastructure.
- $65B to modernize the electricity grid, including expanding renewables.
- $55B to upgrade water infrastructure.
- $48B for resiliency, including cybersecurity, flood/fire mitigation, etc.
- $21B for environmental remediation/legacy pollution.
There are many companies that will benefit from this spending and offer investors attractive opportunities over the next few years. These prospects are reflected in the Datagraph™ of the U.S. Infrastructure Development (PAVE) ETF below, which is clearly in an uptrend and broke out to new highs at the end of October. For investors looking to benefit from the Infrastructure Act, this ETF represents a diversified list of 101 holdings.
Many building-related companies should benefit from the spending boost, including engineering, consulting, and construction firms Jacobs Engineering, Quanta Services, and Aecom. Materials companies should see increased demand for their products; I like Sika, Martin Marietta Materials, and steel manufacturer Cleveland Cliffs. Also, I favor companies that provide the equipment and tools that will be needed to complete the work outlined in the Infrastructure Act, such as United Rentals, Eaton, and Ingersoll Rand. Other industries set to benefit include telecom infrastructure, water/electricity infrastructure, security software, and environmental consulting.
Other names that should benefit from infrastructure spending include:
Let’s take a closer look at a few of these companies:
SIKA (SIKA SW; $55B market cap) is the largest global provider of chemicals for construction, such as cement mixes, mortars, adhesives, thermoplastics, sealants, water/fire-proofing, roofing, flooring, and others. Many of its products have a sustainability component or can decrease customers’ carbon footprint because they last longer and are more efficiently made. One-quarter of revenues are from North America, but a recent acquisition that adds 33% to its top line also increases its exposure to the region.
Jacobs Engineering (J; $18B market cap) provides technical and construction services mainly in the U.S. (75% of revenues). The U.S. government accounts for 33% of revenues. It has exposure to several key areas of the infrastructure bill, including transportation, water management, and environmental health/safety, and is increasing technology-driven solutions offerings through recent acquisitions. The company’s FY21 year-end backlog increased 12% y/y to $26.6B. It expects about $10/share in adjusted earnings by 2025, up from $6.29/share in FY21.
Quanta Services (PWR; $17B market cap) generates 70% of revenues from the electric power infrastructure segment, mainly in the U.S., providing upgrade and maintenance services and repair services, including emergency restoration for weather-damaged electric power. It constructs smart grids (grid modernization) and is involved with the construction of substations and transmission infrastructure to interconnect renewable energy sources like wind, solar, and hydro. Its backlog as of Q3 2021 was $9.8B, up 21% y/y.
Tetra Tech (TTEK; $10B market cap) provides consulting and engineering services, including environmental restoration/remediation, disaster response, water treatment, renewable energy infrastructure, green building design, and climate change analytics. U.S. federal, state, and local governments account for about half of revenues. Q4 FY21 (September) backlog increased 7% to $3.5B. The company has seen sales growth accelerate for three quarters to 18% y/y in Q4, its fastest growth in five years.
The infrastructure bill also accelerates the transition from fossil fuels to clean energy with its focus on modernizing the U.S. electrical grid and the expansion of renewable energy power plants. Like infrastructure, the clean energy space has been performing strongly, reflected in the below Datagraph of the First Trust Clean Green Energy (QLCN) ETF, which has 60 holdings.
The Biden administration is pushing to fight climate change through increased use of clean energy. At the recent United Nations climate conference, President Biden laid out the goal of cutting U.S. greenhouse gas emissions 50–52% by 2030 from 2005 levels and achieving a 100% carbon-free power sector by 2035. The goal is for the nation to be net zero carbon output by no later than 2050.
With that backdrop, solar is the fastest growing renewable energy segment. It currently makes up 4% of total electricity but is growing 40% annually and is 80x larger than it was only 10 years ago. The goal is to have solar produce 30% of electricity by 2030. To put this in perspective, in 2020, the U.S. added 20 GW of solar power generation, but will need to add more than 80GW annually by the end of the decade to be on pace for this massive transition. Because of this, solar is now 56% of all new generating capacity. In terms of stocks, I favor large solar developers like NextEra Energy and profitable solar product manufacturers like Enphase Energy.
Wind will be another major factor in the transition from fossil fuels to renewable energy. U.S. wind power generation is actually twice as large as U.S. solar power generation, representing 8% of total U.S. electricity production and 43% of overall renewable energy production. Wind electrical generation is up an astonishing 60x from 2000 levels and expected to grow more. The Biden administration is targeting 30GW from offshore wind by 2030. To reach the previously mentioned net zero carbon target, the country will also need to add ~300GW of onshore wind by 2030.
In addition to transforming power generation, the U.S. and the world are moving from internal combustion engines to electrical vehicles (EV). EV still represent only 2% of total vehicle sales, but the Biden administration targets 50% of new cars to be EV by 2030. To help achieve this, the number of EV charging stations will need to grow 30x or more by 2030. All this should benefit EV manufacturers like Tesla (TSLA), Rivian Auto (RIVN), and Lucid Group (LCID) as well as lithium battery manufacturers and lithium suppliers like Livent (LTHM).
Below I list a few names of interest in the clean energy space (including emerging areas like hydrogen/fuel cells and companies like Plug Power). These are good names to watch—every investor should include this dynamic area in their portfolios.
In particular, I like:
Enphase Energy (ENPH; $33B market cap) provides microinverters and energy management systems for the residential and commercial markets. Driven by a growing market (solar installation up ~20% the past two years) and new product launches (IQ8 microinverters, storage systems, portable energy, EV charging, fuel cells), the company expects its serviceable addressable market to grow to $20.5B by 2025 from ~$8B in 2022. One of the top performing stocks in the market the past five years, it has grown annual sales and EPS 58% and 203% over the past three years, respectively.
Livent (LTHM; $5B market cap) is the third-largest North American-based lithium miner, with a production base in low-cost Argentina. It supplies lithium compounds that were historically used in various industries but are now mainly used in EV batteries. It is doubling its lithium carbonate capacity by 2023 and increasing its higher-density lithium hydroxide capacity 20% by 2022 to meet the growing EV demand. Forward catalysts could be the renewal of supply contracts, including with Telsa, in 2022. All-time high lithium prices are leading to a sharp acceleration in expected growth ahead of the additional capacity.
Kenley Scott, Director, Global Sector Strategist at William O\’Neil + Company, an affiliate of O’Neil Global Advisors, made significant contributions to the data compilation, analysis, and writing for this article.
No part of the authors’ compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein. O’Neil Global Advisors, its affiliates, and/or their respective officers, directors, or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein.
The authors of this article own shares of the First Trust Clean Green Energy (QCLN) ETF and manage a product that owns shares of Cleveland Cliffs (CLF), United Rentals (URI), Ingersoll Rand (IR), Tetra Tech (TTEK), Enphase (ENPH), Livent (LTHM), and Plug Power (PLUG).