Why Clean Energy Stocks Could Get A Reconciliation Bill Boost, But 'Expect Outsized Volatility'

The reconciliation bill being debated in Washington, D.C. could be a major catalyst for the stock market, particularly among clean energy stocks. On Tuesday, Bank of America analyst Julien Dumoulin-Smith broke down the clean energy stocks he is recommending ahead of what could be a historic piece of legislation for the Biden administration.

Reconciliation Debate: President Joe Biden has proposed the $3.5-trillion Build Back Better Act, which includes corporate tax hikes and spending on climate initiatives, social welfare programs, health care and child care benefits and higher education incentives.

Democratic Senators Joe Manchin and Kyrsten Sinema have joined Senate Republicans in questioning the $3.5-trillion price tag, potentially preventing the Democrats from securing the 50 Senate votes needed to pass the bill in its current form.

Manchin has previously suggested he would support a reconciliation bill with up to $1.5 trillion in spending.

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For now, Dumoulin-Smith said investors are waiting for clarity on exactly which programs will make the cut if the reconciliation bill is trimmed down from $3.5 trillion to around $1.5 trillion.

Dumoulin-Smith said there are three provisions in the bill that are most important for alternative energy investors:

• Stand-alone energy storage tax credits.
• Extensions and potential increases of the Production Tax Credit (PTC) and the Investment Tax Credit (ITC).
• Ongoing credits to support nuclear power.

Volatility Ahead: While the reconciliation debate carries on in Washington, Dumoulin-Smith said investors can anticipate a very volatile earnings season for his Buy-rated alternative energy stocks, including First Solar, Inc. FSLR, Enphase Energy Inc ENPH, Sunnova Energy International Inc NOVA and NextEra Energy Inc NEE.

“3Q pressures will include both sustained freight/logistics & outright delays (due to both Covid/trade issues) as well as elevated supply chain costs (exacerbated by Chinese shutdown of late only further and rally in global commodities),” the analyst said. 

Alternative energy investors should “expect outsized volatility” at the very least throughout earnings season, he said. 

Benzinga’s Take: Most investors agree the alternative energy space is one of the largest secular growth trends in the global economy today. Yet the world has a long way to go before alternative energy is scalable and economical enough to account for the majority of global energy demand, and the iShares Global Clean Energy ETF ICLN is down 23.7% year-to-date.