The best climate change stocks to buy are suddenly looking even better.
Last week's dire United Nations report dramatically ramped up the sense of urgency to fight climate change. The report, authored by the UN Intergovernmental Panel on Climate Change (IPCC), warned that time is running out to avoid the worst effects of climate change.
Even full implementation of the 2015 Paris Agreement won't be enough to avoid catastrophic damage to the environment, it said.
This makes climate change stocks - companies with technology and services aimed at mitigating the effects of climate change - an even stronger buy as money pours into their solutions.
The IPCC report warns the world will have to reduce carbon emissions by 40 to 50% by 2030 - just 12 years away - to avoid economic damages from lost productivity, health issues, and weather pattern changes that will run into the hundreds of billions of dollars.
The short timetable will encourage more spending in the short to medium term on low carbon technologies, boosting the profits of the companies that provide them. It's a shift that will benefit both the businesses and the environment.
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"[Climate change] has gone from being an environmental problem that we have to deal with in order to minimize damage, to a driver of growth, innovation, and opportunity," Mark Kenber, the Chief Executive of UK-based Mongoose Energy and a 20-year veteran of the climate change economy, told Natural Capital Partners last November.
And this opportunity will be worth trillions of dollars...
This Market Could Grow to $1 Trillion per Year
From an investing standpoint, climate change represents a broad range of opportunities. It includes everything from renewable energy stocks to water stocks to companies that specialize in energy efficiency.
Estimates of the spending on climate change technology vary, but tend to run into the trillions of dollars.
In 2015, the Low Carbon Technology Partnerships initiative estimated that a serious, organized attempt to combat climate change would require the investment of between $5 trillion and $10 trillion over the next 12 years.
The International Energy Agency (IEA) has estimated the world will collectively need to spend an average of $1 trillion per year until 2050 on carbon emission reduction. For the past several years, investment has hovered around $400 billion - an increased sense of urgency will push spending up by hundreds of billions a year.
While governments and businesses have been reluctant to increase spending, they'll start to change their tune as it becomes apparent that investing in these solutions will be the cheaper alternative.
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The IPCC report estimates the economic damage of the earth warming by 1.5 degrees Celsius by the end of the century at $54 trillion. If temperatures rise by 2 degrees over that span, the IPCC estimates the damages at $69 trillion.
Now let's take a look at the kinds of companies most likely to benefit from rising climate change spending...
Stocks to Buy as the World Invests in Climate Change
Clearly the first and largest category is renewable energy stocks, particularly solar stocks.
After a strong year in 2017, the solar sector has struggled this year in the wake of tariffs on imported panels imposed by U.S. President Donald Trump. But that means many solar stocks are bargains; over the long term, demand resulting from the need to transition from fossil fuels will drive prices much higher.
A less obvious category is energy efficiency stocks. These companies develop technology that reduces overall energy use. This in turn reduces carbon emissions from fossil fuels, while making renewable energy stretch further.
But while all of these stocks stand to prosper from an increasing global focus on climate change, we like two better than any I've mentioned so far. That's because both of these companies have earned the highest possible Money Morning Stock VQScore™.
That tells us they're the best climate change stocks to buy now...
Two Top Climate Change Stocks to Buy
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Pattern Energy Group Inc. (NASDAQ: PEGI)
Just six years old, up-and-coming Pattern Energy builds and operates renewable power projects in the United States, Canada, and Japan. Operating in three of the wealthiest countries in the world positions it for potentially tremendous growth as these countries spend more to combat climate change.
In its brief history, PEGI has shown it can deliver growth too. The 2.9 gigawatts of renewable power assets it owns is three time larger than the portfolio it had when the company went public in 2013. It has 10 gigawatts in its development pipeline now and continues to look for the new opportunities climate change is creating.
Meanwhile, cash flow has increased by 135% over the past four years. Pattern Energy has aggressively hiked its dividend accordingly - the current yield is an eye-popping 8.95%. But the company's eagerness to reward shareholders has pushed PEGI's payout ratio to a precarious 112.5%.
However, Pattern Energy's vast growth potential means it could "grow into" that dividend provided it curbs its increases (which is exactly what it's done over the past year). The company's target payout ratio is 80%.
Another side effect of PEGI's focus on growth is that it quickly took on a lot of debt while issuing additional stock. This one-two punch has suppressed the Pattern Energy stock price. Shares currently trade at about $18.80, almost 22% below the IPO price.
But with a price/earnings (P/E) ratio of just over 15 and an attractive PEG ratio of .0597 (anything below 1 is considered favorable), PEGI has major upside potential.
The one-year consensus target price is $21.68, but investors will want to hold Pattern Energy for the long term to see the benefit of all that growth. Increased cash flow will solidify the balance sheet and make this stock very attractive over the next two to three years, in which the price easily could double.
Canadian Solar Inc. (NASDAQ: CSIQ)
Founded in 2001, this Canada-based solar power company designs and sells solar cells in addition to building power plants.
Although CSIQ isn't as well-known as say, First Solar, it is one of the largest solar companies in the world. In 2017, Canadian Solar's $3.39 billion in revenue ranked second among the major solar companies.
Canadian Solar is no stranger to impressive growth. Since 2006, its shipments of solar modules have had a compound annual growth rate (CAGR) of 74%.
The company also has global reach. Over the past five years, the number of countries where it does business has tripled from less than 20 to more than 60.
One big CSIQ advantage going forward is the homegrown technology it uses to build the modules it sells. This tech is well regarded for its efficiency and allows the company to charge a slight premium. Canadian Solar continues to invest in better tech to maintain that edge.
Canadian Solar also has a healthy 6.7 gigawatts of projects in its early- to mid-stage pipeline.
Wall Street remains wary of CSIQ; the company's P/E is just 6.65, perhaps because it accumulated a lot of debt. But it has begun to reduce that debt as of 2018, and figures to further strengthen its balance sheet as demand for its products accelerates over the next few years.
As the company's numbers improve, so will its price. One analyst, Philip Shen of Roth Capital Partners, has a 12-month price target of $24 on CSIQ stock. That represents a 61% gain from the current price of $14.90. But like Pattern Energy, Canadian Solar shares are likely to go much higher as climate change issues drive more customers to its door.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.