Clean energy has burned many investors when easy money choked, according to Citi Research, but in the near term, a Fed shift and rate cuts could still be a catalyst for the broader green theme.
“We are still not broad-based buyers of ‘green’ per se, but we see opportunities within the broader theme where profitable companies can benefit from ongoing secular investment trends,” analysts at Citi Research said in an Aug. 30 note.
On the surface, the corporate focus on green initiatives has become less novel and more integrated into normal business practices, expanding potential opportunities.
A shift by the US Federal Reserve and subsequent rate cuts would support relative performance, as well as potential political ramifications.
Recent data suggests that a Democratic president may be more supportive of “green,” but there are nuances, the bank added. Democratic policies are more direct in supporting clean technology implementation, but are less likely to increase deficit spending without a comprehensive goal. For Republicans, the Inflation Reduction Act is unlikely to be repealed, and a deregulatory/tax-friendly investment policy could make projects more palatable.
However, Citigroup said interest rates and political stimuli alone were unlikely to support “green” stocks in the medium term.
“Therefore, we focus on three key fundamental characteristics: positive cash flow, visible profitability, and accelerating sales/EBITDA growth. Clean water, energy efficiency, and nuclear power stand out as the most attractive, while electric vehicles and energy storage may be the most challenging.”
Citi added buy-rated names to Ecolab (NYSE:) and IDEX NYSE listed the company on its recommended 30-topic list for clean water exposure, saying it has reasonable growth potential and moderate degrees of political sensitivity.