Investors have been pouring money into environmental, social and governance (ESG) stocks and exchange-traded funds at a record pace this year. The run-up in share prices has been particularly strong in pure-play electric vehicle stocks and in alternative energy companies with a focus on hydrogen power generation.
The United Kingdom, for example, has banned sales of new fossil-fuel-powered vehicles beginning in 2030, and California Governor Gavin Newsom has issued an executive order requiring all vehicles sold in the state to produce no carbon emissions by 2035. Combined, the two orders affect more than 100 million people.
On Tuesday, Morgan Stanley issued a report naming 15 ESG stocks to buy for next year. Most of the firm’s picks were cyclical stocks, and many trade only over the counter in the United States. Morgan Stanley’s picks have outperformed European stocks by 20% in 2020, done 46% better in the United States and a whopping 77% better in Asia.
The outlook for ESG stocks in 2021 has brightened thanks to the election of Joe Biden. In a campaign document, the president-elect has promised to invest $2 trillion over four years to “build a new American infrastructure and clean energy economy.” Included in that promise is a $400 billion increase to federal procurement in his first term to purchase clean energy products like batteries and electric vehicles.
A major influence expected in 2021 is the adoption of the European Green Deal, a European Union initiative that has the goal of making Europe climate neutral by 2050 by implementing green technologies like hydrogen and fuel cells. The European Commission proposed a budget of $2.1 trillion through 2027, including a $920 billion pandemic-recovery package.
Here we focus on five U.S.-traded stocks that made Morgan Stanley’s list.
Tesla Inc. (NASDAQ: TSLA) will be joining the S&P 500 index on Monday, and its year-to-date share price increase of more than 640% is likely to grow even more by the end of the year. The world’s largest producer of electric vehicles is targeting delivery of 500,000 vehicles this year, and many analysts expect deliveries will double to 1 million vehicles in 2021.
Tesla stock has traded between $600 and $640 recently, but it has a 52-week range of $70.10 to $654.32. The consensus price target on the stock is just $389.79, which indicates that analysts overall believe the stock is seriously overvalued. Based on estimated earnings per share (EPS) of $3.86 next year, Tesla’s multiple is about 101 times its current price. The company does not pay a dividend.
Nio Ltd. (NYSE: NIO) has seen its share price jump by more than 1,000% this year, with most of the gain coming since mid-June. The Shanghai-based automaker delivered just over 5,900 vehicles in November and has delivered 36,721 for the year to date, more than doubling its deliveries in 2019, and the company is racing to expand production capacity to meet rising demand.
Nio stock was trading near $44, in a 52-week range of $2.11 to $57.20. With a price target of $40.96, the stock is slightly overpriced, and an estimated net loss per share of $0.29 next year implies a 50% improvement compared with 2020’s expected net loss. Nio does not pay a dividend.
Plug Power Inc. (NASDAQ: PLUG) stock has added about 800% so far in 2020. Investor interest in hydrogen has soared as estimates of the cost of green hydrogen (made from renewable sources) is projected to drop to near natural gas costs as a fuel for power generation over the next decade.
On Thursday, Plug Power rose above $30 for the first time in a year. With a price target of $24.52, the shares are overvalued, and a projected net loss of $0.25 per share in 2021 doesn’t sound too good either. That projected loss, however, is an improvement of 20% year over year. The company pays no dividend.
AES Corp. (NYSE: AES) is a power generation and utility company that produces more than 30 gigawatts of electricity worldwide. Morgan Stanley was impressed with the company’s “transformation in developing renewables and storage.” In November, AES reported that it had retired 1.2 gigawatts of coal-fired generation in the United States and Chile and the utility’s total generation capacity from coal has dropped below 30%. Through the first three quarters of 2020, the company has delivered or awarded 2.1 gigawatts of new renewables and energy storage. For the year to date, AES shares have added nearly 14%, a steep comedown from the high-fliers, but in-line with the performance of the S&P 500.
AES traded a couple of bucks shy of its $24.48 52-week high on Thursday. The 52-week low is $8.11. The consensus price target of $22.75 implies a potential gain of less than 4% from the most recent close, and even less at Thursday’s trading price. The utility trades at a multiple of 14.7% to its expected 2021 EPS of $1.55. AES also pays a dividend yield of 2.7%.
Verisk Analytics Corp. (NASDAQ: VRSK) has seen its share price rise by 32% so far in 2020. The data analytics firm gets Morgan Stanley’s nod based on its energy and climate offerings, which include energy industry analysis firm Wood Mackenzie. Third-quarter revenue in Verisk’s energy and specialized markets segment rose nearly 17% year over year.
Shares rose to $200 on Thursday, in a 52-week range of $116.61 to $206.83 and with a consensus price target of $206.53. The most recent closing price implies a potential upside of about 5.5%. The stock trades at about 38 times its expected 2021 EPS, and Verisk pays a dividend yield of 0.55%.