The Inflation Reduction Act (IRA) recently celebrated its one-year anniversary, marking a significant milestone in the clean energy sector in the U.S. This legislation has allocated billions of dollars for various clean energy initiatives, ranging from electric vehicles (EVs) to solar panels. The massive influx of spending from both the federal government and private entities will undoubtedly have a lasting positive impact on several industries.
Opportunity for Investors
For investors looking to capitalize on this growing trend, BofA Securities Global Research team has identified numerous stocks that are poised to benefit from the IRA’s implementation. Out of their selection, twenty-four stocks across three key themes have stood out as potential winners.
The Success of the IRA
According to a recent report by BofA, the IRA has already demonstrated its effectiveness. Since the bill’s passage in the summer of 2022, there have been over 270 new clean energy projects announced, amounting to approximately $130 billion in investments. While the U.S. government’s contribution is significant, totaling around $500 billion, it is evident that the private sector’s commitment will amplify these efforts.
Stocks with IRA-Linked Potential
Among the highlighted stocks in the renewable energy theme, BofA’s analysts have rated a dozen as Buy. These include solar technology companies such as Array Technologies (ARRY) and FTC Solar (FTCI), engine manufacturer Cummins (CMI), electrical equipment supplier Eaton (ETN), industry leader General Electric (GE), Honeywell International (HON), ON Semiconductor (ON), utilities Public Service Enterprise Group (PEG) and Vistra (VST), solar panel providers Sunnova Energy (NOVA) and Sunrun (RUN), as well as wind energy player TPI Composites (TPIC).
Energy Storage and Grid Management
The IRA also allocates funds for energy storage and grid management. In this space, there are several Buy-rated stocks that stand to benefit. These include Cummins, Eaton, GE, Honeywell, ON Semiconductor, Vistra, Ameren (AEE), plant automation provider Aspen Technology (AZPN), fuel cell manufacturer Bloom Energy (BE), construction equipment giant Caterpillar (CAT), engineering solutions provider KBR (KBR), electronics supplier Teledyne Technologies (TDY), and utility company Xcel Energy (XEL).
E=estimate; N/A=not applicable
Electric Transportation: A Thriving Industry
Electric transportation is becoming an increasingly popular theme within investment circles. While Tesla (TSLA) surprisingly didn’t make the recent BofA list of stocks for the clean vehicle theme, there are still some noteworthy options for investors to consider.
BofA analyst John Murphy rates Rivian Automotive (RIVN), General Motors (GM), and Ford Motor (F) shares as Buy. These companies have shown promising growth potential in the electric vehicle market. In addition, there are other stocks that align with this trend, including Cummins, Eaton, Honeywell, and ON Semi. These companies play a crucial role in supplying light and heavy-duty vehicle manufacturers.
One crucial aspect of clean vehicles is their reliance on lithium-ion batteries. Livent (LTHM) and Sigma Lithium (SGML) have both made the BofA list as lithium producers, highlighting their importance in this growing industry.
When looking at the average price-to-earnings ratio based on earnings estimates for the next 12 months, it currently stands at 24 times. The figures range from a low of six times for GM stock to a high of 152 times for FTC Solar. Notably, companies such as Sunrun, Sunnova, TPI, Rivian, and Bloom are not expected to be profitable in the upcoming year.
Over the past 12 months, these stocks have generated an average return of 28%. This outperforms the S&P 500 and Nasdaq Composite returns of approximately 18% and 24%, respectively. The standout performer in this group has been Sigma Lithium, boasting an impressive return of 169%. On the other hand, Rivian has faced some challenges, experiencing a decline of 22%.
This eclectic mix of stocks is expected, as the BofA list is based on a theme rather than focusing solely on growth rates or price-to-earnings ratios.
It’s important to note that a stock screen like this acts as a starting point for investors. If the theme and ideas presented here resonate, further research should be conducted.