ICLN - CNRG: A Clean Energy ETF With A Below Market Multiple

2023-03-21 08:49:11 ET

Summary

• The SPDR Kensho Clean Power ETF may surprise investors who typically equate clean energy companies with highly valued stocks.
• That's because the CNRG ETF trades with a forward P/E of only 15.9x.
• The relatively low multiple is primarily a result of investing in the value oriented stocks in the electric components and electric utility sub-sectors.
• That strategy has generated an average annual return of 29% for shareholders since the fund's inception in October of 2018.
• Current top holdings include First Solar, Generac, Algonquin, Arcosa, Canadian Solar, and Tesla. The expense fee is 0.45%.

The SPDR Kensho Clean Power ETF ( CNRG ) is managed by State Street Global Advisors and has a very strong long-term performance track record (29% annually since inception in 2018). That being the case, I was quite surprised to discover that the CNRG ETF actually trades at a forward P/E discount as compared to the S&P500 (15.9x versus 17.3x ). In my experience, that is quite unusual for a clean-energy fund. The combination of strong returns and a more value-oriented portfolio got my curiosity up, so today I'll take a closer look at the CNRG ETF to see if I can discover its "secret sauce".

Investment Thesis

As you all know, the Biden administration has pivoted strongly away from the previous administration's strategy to "make coal great again" and, instead, toward a 21st Century future of clean-green renewable energy and EVs. This clean-energy pivot is more than simply empty hot-air rhetoric because it is legislated in both the Bipartisan Infrastructure Act of 2021 and the historic Clean Energy Act (also known as "IRA") that was passed into law in August of last year.

The Infrastructure Act includes, for example:

• $75 billion in investments in clean-energy power generation, training, research, carbon-capture, battery-supply chains, and clean-hydrogen and much more.
• $7.5 billion to build-out a nationwide network of 500,000 EV charging stations.
• $18.6 billion for clean-energy EVs, busses, and ferries.

The Clean-Energy Act builds on some of the clean-energy programs in the Infrastructure Act and includes, for example, billions of dollars for:

Clean Vehicle Credit for consumers purchasing new qualifying clean vehicles, including battery electric, plug-in hybrid, or fuel cell electric vehicles. To qualify for the maximum $7,500 credit, the vehicle must meet certain standards for North American assembly; the battery's components must meet certain standards for manufacturing or assembly; and the battery's critical minerals must meet certain requirements for sourcing or processing in the United States or from trusted trade partners.

As you can see, the full $7,500 tax credit is only available if the majority of the EV (and critically, the battery pack) is manufactured and/or assembled in the U.S. That has led to a boom in long-term EV supply-chain development in America which is excellent not just from a national economic security perspective, but also for the good-paying manufacturing jobs that go with those clean-tech, EV, and batter supply chains.

With such a large amount of government funding available for clean-energy related projects, it makes sense for investors to allocate a portion of their portfolio to the theme. There are a lot of options available, but today I am going to take a closer look at the CNRG ETF to see how it has positioned investors for success going forward.

Top-10 Holdings

The top-10 holdings in the SPDR S&P Kensho Clean Energy ETF are shown below and were taken from State Street Global Advisors' CNRG webpage , where you can find more detailed information on the fund:

The top-10 holdings equate to what I consider to be a well-diversified 30.5% of the entire 43 company portfolio. The CNRG ETF tracks the Kensho Clean-Tech Index, and you can find more information on this index here . This index "is designed to measure the performance of companies focused on building technologies or products that enable generation of energy in a clean manner." The index uses a modified equal-weight approach and is re-balanced twice a year (in May and November).

The #1 holding is First Solar ( FSLR ) with a 3.6% weight. FSLR stock has bucked the market trend and the 2022 bear-market (to say the least ...) and is up a whopping 158% over the past year. Despite that rather fantastic run, the forward P/E is still only 28x. And while Q4 revenue was only $1 billion (+10% yoy), forward guidance was strong

• Forecasted net sales for 2023 are $3.4-$3.6 billion versus consensus of $3.38B.
• Forecasted EPS for FY23 is $7.00-$8.00 vs. consensus of $5.56.
• The company expects Inflation Reduction Act Section 45X tax credits of $660-$710 million.

That being the case, First Solar is a perfect example of a clear beneficiary of the Biden Administration's Clean-Energy legislation.

Generac ( GNRC ) is the #2 holding with a 3.5% weight. Unlike FSLR, Generac stock is down 64% over the past year and is a "least favorite" name in the space according to Citigroup. That's because, according to Seeking Alpha, revenue and earnings are expected to decelerate this year after a few years of relatively strong growth:

This choice for the second largest holding puzzles me a bit as it is not clear that Generac stands to be a beneficiary of government clean-energy funding, not to mention that its primary product is making backup generators that typically run on natural gas. While natural gas is certainly cleaner than coal, it is nonetheless a rather surprising pick for an ETF that is focused on renewables in my opinion.

Algonquin Power & Utilities ( AQN ) is the #4 holding with a 3.0% weight. AQN operates through two segments: the Regulated Services Group and the Renewable Energy Group. AQN trades with a forward P/E of only 13.6x and currently yields 5.45%. Algonquin's Q4 earnings were a top- and bottom-line beat (revenue grew 26.4% yoy), yet the stock is down 48% over the past 12-months after cutting its dividend in January along with weak forward guidance.

With a 2.9% weight, General Electric ( GE ) is the #5 holding. GE stock is up nearly 23% over the past year and BofA recently raised estimates on the company due to positive trends in its aerospace and energy businesses. As a result, BoFA raised its price target from $96 to $105 a share. GE currently trades at $90 with a forward P/E of 46x.

Canadian Solar ( CSIQ ) is the #8 holding with a 2.9% weight. Canadian Solar designs, develops, manufactures, and sells solar ingots, wafers, cells, modules, and other solar power and battery storage products for the global clean-energy market. Revenue is expected to grow to $9.71 billion this year (+30% yoy), yet the stock trades with a forward P/E of only 10.6x.

Tesla ( TSLA ) rounds out the top-10 with a 2.9% weight. TSLA stock has rebounded sharply from what many consider to be a self-inflicted wound (i.e. CEO Elon Musk's acquisition of Twitter). The stock has rebounded strongly from a low near $100 in early January to the current $182, but is still down 38% over the past year. That drop is despite what has been arguably strong operational and financial performance. TSLA is expected to earn $4/share this year, and trades with a forward P/E of 45x. Tesla, with its battery giga-factories in the U.S., should be a primary beneficiary of domestic EV tax credits.

For the portfolio as a whole, the valuation metrics look very attractive to me:

I say that because the forward P/E is half that of the 3-5 year estimated EPS growth rate while the Price-to-Book ratio of 2.1x is almost half that of the S&P500's 3.96x .

The fund is most exposed to the following sub-sectors:

The large allocation of capital to the electrical components and electric utility industries is wise considering these companies will be primary beneficiaries of the incentives to build out the grid and transmission infrastructure. In addition, these companies have traditionally traded at a significant discount to the broad S&P500 (and continue to do so).

I also like the 21.05% exposure to the semiconductor and semi-equip sub-sectors because companies in those sub-sectors generally got mauled last year yet the prospects for the sector going forward - which include the CHIPS & Science Act tailwind - have never been better in my opinion.

Performance

As mentioned in the bullets, the CNRG ETF has demonstrated a very strong long-term performance track-record:

The following chart shows a 5-year total-returns comparison of the CNRG ETF with some of its competitors: the First Trust Nasdaq Clean Edge Green Energy Index ETF ( QCLN ), the iShares Global Clean Energy ETF ( ICLN ), the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index ETF ( GRID ), and the Invesco Wilderhill Clean Energy ETF ( PBW ):

As can be seen in the graphic, the CNRG ETF is the leader of the pack by a significant margin.

Risks

The companies held in the CNRG ETF are - despite the government funding programs - are certainly not immune to global macro-economic headwinds: the broken food & energy supply chains as a result of Russia's invasion of Ukraine (and the resulting inflation), higher interest rates, and the slow-down in global economic growth.

The recent collapse of the Silicon Valley Bank, which was a large lender to companies building out solar arrays , could cause a temporary or even mid-term slow-down in new greenfield renewable projects.

Summary & Conclusion

The CNRG ETF is ideally positioned to benefit from the boom in clean-energy projects, the build-out of the electric grid and EV charging network, and the transition to EVs - and, of course, the government incentives to accelerate all of these trends. The ETF has a very strong performance track record, and I suspect that will continue going forward. CNRG is a BUY.

I'll end with a 3-year total returns comparison of the CNRG ETF against the broad market averages as represented by the Vanguard S&P 500 ETF ( VOO ) and the Nasdaq-100 Trust ( QQQ ):

For further details see: