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It didn’t make many big news channels, but back on January 1, 2023, the government released $391 billion. The destination: a select group of companies whose stocks could see double-digit gains this year.
This isn’t your usual pork-barrel spending. This is the Inflation Reduction Act (IRA), a sweeping bill designed to ease Americans’ pocketbook-pinch. But, if you dig just beneath the surface of the IRA, you find a particular emphasis on clean and renewable energy initiatives. There’s a focus on achieving climate-related goals through the advancement of clean energy via tax credits and incentives.
Under the Act, Americans will be eligible for thousands in discounts and credits on electric cars, solar panels, induction stoves, and furnaces, as the U.S. seeks to slash greenhouse gas emissions by 40% compared with 2005 levels. This would put the United States on the path to net zero by 2050.
Under the IRA, a decade of funding starts right now. The companies will offer the discounts, but Uncle Sam is picking up the tab, which will boost earnings for these companies - and boost their share prices.
These are the five stocks that could benefit the most…
IRA Target No. 1: NextEra Energy Inc. (NYSE: NEE)
NextEra Energy Partners is the largest wind and solar energy producer in the world - and it’s gearing up for dramatic growth over the next three years. The IRA, which provides material incentives for clean energy growth, will help provide the windfall. .
The clean energy titan is going all in on plans to lower its carbon footprint. NextEra plans to invest at least $85 billion from 2022 to 2025 to dramatically grow its operating portfolio.
As of the end of Q3 2022, NextEra has 63 gigawatts (GW) of energy-generating assets in operation, and is set to expand past the 100 GW mark in the near future. They also plan to boost storage capacity from its current 1 GW to 8GW.
During the NextEra’s most recent earnings call, there was a major focus on the IRA, given the billions worth of incentives given its impact on the energy industry. For all intents and purposes, the Act is a blank check for low-emissions industries like NextEra for years to come; that will accelerate their rollout even faster.
The company is profitable and with an attractive cash dividend yield of 2.01% and a history of dividend growth, NEE stock makes an attractive addition to any portfolio.
Our Recommendation: Buy NEE at the current market price and watch for any dips near $70, as that has been a price floor for the last two years.
IRA Target No. 2: Sunnova Energy Internationl Inc. (NYSE: NOVA)
Residential solar companies have a huge growth opportunity in a market that’s still relatively untapped; solar occupies about 4% of the market today, and it was already expected to more than triple by the 2030s, but the IRA could accelerate this growth. The U.S. residential solar industry is seeing the most favorable, most bullish regulatory environment the market has ever seen. The tailwinds pushing it along easily bowl over the short-term bearishness.
The IRA brings the solar investment tax credit (ITC) back up to 30%, which means homeowners who install solar energy systems can reduce their federal tax liability by 30% of their total solar installation costs. This makes home solar significantly more affordable - and attainable for millions more households.
This should create a significant revenue boost for Sunnova, a leading national residential solar company, as customers look to upgrade their home energy infrastructure - especially in light of ongoing utility rate increases and grid instability.
While there are dozens of residential solar companies currently trading in public markets, Sunnova is in a prime position with an attractive growth profile.
The last two quarters saw over 100% revenue growth rate and Wall Street projects the next two quarters could see similar growth. Meanwhile, the company’s net profit margin is set to improve along with its cash position, which doubled between Q2 2022 and Q3 2022.
Some estimate Sunnova’s customer base could expand by 40% in the next two years. Over that same time frame, revenue could grow at a compound annual growth rate (CAGR) of 50%. Add in new product enhancements, and the stock price could skyrocket.
What to do: Right now, NOVA stock is trading near its 52-week lows as consumers grapple with high inflation, but the current incentives for solar could boost this stock through 2023. This stock is a “Buy” anywhere between $15-$18 a share.
IRA Target No. 3: FREYR Battery SA (NYSE: FREY)
Tesla isn’t the only game in town when it comes to massive “gigafactories.” FREYR Battery recently teamed up for a 50/50 joint venture with energy conglomerate Koch Industries to build a multibillion-dollar battery gigafactory in Georgia. The Wall Street Journal said the two companies “will likely invest more than $2.6 billion in two phases for the Georgia plant, which will supply batteries primarily for the U.S. power grid.”
This could be an extraordinarily productive, impactful factory, given the lack of supply for the U.S. power grid and the rapid rollout of wind and solar without storage. Right now, the Tesla and Panasonic gigafactory has a capacity of 39 gigawatt-hours (Gwh), and the first phase of this new project will bring on 34 Gwh of annual cell production, with a second phase that will outstrip Tesla by “a significant margin.”
The Inflation Reduction Act has significant subsidies, and battery suppliers will get $35 million for every gigawatt-hour of cell storage capacity they produce, which could be over $1 billion saved.
While FREYR is still an early-stage, pre-revenue company, its partnership with one of the largest private companies in the United States could make this an excellent “moonshot”-style investment. They also have their supply chain and tech in place, which will help them execute and see revenue from customer qualification early in 2023. If this all looks good, we could see a battery behemoth emerge.
Game plan: FREYR Battery is a new company with big aspirations and thus FREY is a moonshot stock for any portfolio. It’s trading for $9 as of early 2023 and if you have a high-risk tolerance, you can average into the stock as the company hits production milestones.
IRA Target No. 4: Darling Ingredients Inc (NYSE: DAR)
The Inflation Reduction Act includes fundamental changes to the renewable energy tax incentives regime and that’s extremely bullish for Darling - one of the largest agricultural processors and renewable energy producers in the world. Darling’s management is set to seize this once-in-a-lifetime opportunity to expand its massive production of sustainable fuels. To be clear, we’re talking about Darling’s biofuel and “green diesel,” produced from used cooking oils, plants, and animals as a key way to transition the energy industry away from fossil fuels.
One major IRA benefit is that it extends to biodiesel, renewable diesel, and sustainable aviation fuel (SAF) by extending the $1/gal federal biomass-based diesel blending credit. SAF can reduce emissions by at least 50% compared to standard jet fuel, so there should be a huge demand for it.
Darling Ingredients is in great financial shape heading into 2023. Its cash position has almost doubled from $67.2 million in Q3 2021 to $126 million Q3’ 2022, and earnings per share (EPS) is up 37.5% over the same time period. With revenue continuing to trend upward, Darling will be a great stock for playing our increasing reliance on biofuels in 2023.
Our suggestion: Darling Ingredients is a well-known company and has continued to grow earnings on a regular basis. DAR shares are trading just above $63, at the low end of their 52-week range, so this looks to be an excellent time to start averaging into a position.
IRA Target No. 5: iShares Global Clean Energy ETF (NASDAQ: ICLN)
The Inflation Reduction Act will have a massive impact on energy-related spending as clean energy becomes the rule, not the exception. It will accelerate the structural growth trends behind these technologies - technologies being developed by dozens of companies. There’s investment in wind, solar, hydrogen energy, even nuclear fusion. There are faster and more efficient electric vehicles (EVs) coming to market from some of the world’s biggest automakers. The IRA, and, more generally, the transition to a low- and no-carbon economy will have a “rising tide lifts all boats”-style effect. We’ve just named the very best stocks, with the highest upside potential, but there’s no reason investors can’t own all of them in a broad index. Some investors prefer it that way. That’s why we’re recommending the iShares Global Clean Energy ETF, too.
How to play it: ICLN is trading at an almost unbelievably low $19, but it’s all but certain to enter a strong long-term growth trend, helped along by the Inflation Reduction Act. Buy ICLN at market and average in at lower prices for the broadest possible exposure to clean energy.
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