WOLF - QCLN: Follow The Money ($1 Trillion+) Into EVs And Green Energy

Summary

• Bloomberg recently reported that global investment in clean energy for 2022 reached a milestone by exceeding $1 trillion for the first time - up more than $250 billion year-over-year.
• It was also the first year in which energy transition investments drew even with fossil fuels.
• That being the case, investors may want to consider a directed investment into clean energy and EV by means of a diversified ETF like the First Trust Green Energy Fund.
• The QCLN ETF is up 22% YTD, has an expense ratio of 0.58%, and its top holding include Albemarle, Tesla, Enphase Energy, Lucid, and Wolfspeed.

Global investment in the clean energy transition is booming - led by renewable green energy (primarily wind and solar) and EVs. Last year, Bloomberg reports that global investment in the clean-green energy transition reached a milestone: exceeding $1 trillion and pulling even with investments in fossil fuels for the first time ever. While there are obviously many ways to invest in this trend, today I will consider the diversified First Trust NASDAQ Clean Edge Green Energy Index ETF ( QCLN ) to see if it might be a good candidate for your well-diversified portfolio.

Investment Thesis

Led by investments in solar, wind, and EVs, global investment in the clean-energy transition exceeded $1 trillion last year for the first time ever:

Investments in renewable solar and wind power led the way (with more than 350 GW of incremental power generation capacity added), but EV related investments are growing much faster:

As can be seen in the graphic above, investments in electrified transport is booming and will likely exceed renewable energy investments this year.

With that as background, let's take a look at the QCLN ETF to see how it has positioned investors for success going forward.

Top-10 Holdings

The top-10 holdings in the QCLN ETF are shown below and were taken directly from the First Trust QCLN webpage , where investors can find more detailed information on the fund and its holdings. The top-10 holdings equate to what I consider to be a moderately diversified ~56% of the entire 61 company portfolio:

The #1 holding with an 8.6% allocation is specialty chemicals company Albemarle Corp. ( ALB ). ALB is a leading producer of lithium - a critical material used in the production of EV batteries. ALB is experiencing strong demand and is expected to grow revenue to $11.8 billion this year, up 60%+ yoy:

ALB shares are up 37% over the past year and currently trade with a forward P/E of only 13x.

Tesla ( TSLA ) is the #3 holding with a 7.8% weight. As most of you know, Tesla stock is up a meteoric 60%+ so far this year after a massive beat-down last year. Q4 results were released last Wednesday and reported revenue of $24.32 billion (+37.2% yoy), free-cash-flow of $1.42 billion, and record deliveries of 405,278 EVs. However, due to cost-cuts to move inventory against strong and growing competition, gross margin was 25.9% - down from $27.9% in the prior quarter. Tesla currently trades with a forward P/E = 45x.

The #4 holding is Enphase ( ENPH ) with a 5.6% weight. Enphase specializes in microinverters and associated networking and software for the solar industry. ENPH stock is up 75% over the past year after posting strong Q3 results in October and raising Q4 guidance. Q4 results are due out on February 7th and I expect another strong report as ENPH is expected to grow revenue by ~50% this year.

EV maker Lucid ( LCID ) is the #5 holding with a 5.4% weight. Lucid jumped 43% Friday on a short-covering rally due to rumors that the Saudi Public Investment Fund is may purchase the remaining shares of Lucid it doesn't already own (the fund controls a 62% stake in the company). Seeking Alpha currently reports a 25% short position in the company, but it is not clear if that number has been updated after Friday's trading. Meantime, Lucid is still losing money and has a $23.5 billion market cap. However, the company is making solid progress: Q4 production was 3,493 vehicles with 1,932 vehicles deliveries during the quarter. For the full year, LCID produced 7,180 vehicles - exceeding its prior guidance range of 6-7,000 EVs. Lucid delivered 4,369 vehicles in calendar-year 2022 and Q4 earnings are due out on February 22nd.

The #9 holding with a 3.3% weight is semiconductor company Wolfspeed ( WOLF ). WOLF specializes in low-power highly-efficient silicon-carbide based semiconductors for the EV-market. Revenue is expected to grow to $1.36 billion in FY24 from an expected $922 million in FY23. In Q2 FY23 , WOLF reported revenue of $216.1 million (+24.8% yoy) with GAAP gross margin of 31.0% and quarterly design-ins of $1.5 billion. However, on a GAAP basis the company lost $90.9 million, or $0.73 per diluted share.

Overall, the QCLN portfolio is most highly exposed to the renewable energy, EV, and semiconductor sub-sectors:

Performance

As of year-end 2022, and despite a bear-market thrashing last year, QCLN has an admirable 18.2% average annual return over the past decade:

Indeed, over that time QCLN has not only delivered superior returns as compared to the Vanguard S&P 500 ETF ( VOO ), but has also significantly beat the Nasdaq-100 as represented by the ( QQQ ) ETF:

The following graphic compares the 3-year total returns of QCLN to some of its competitor funds such as the iShares Self-driving EV and Tech ETF ( IDRV ), the ALPS Clean Energy ETF ( ACES ), the iShares S&P Global Clean Energy Index ETF ( ICLN ), and the Invesco WilderHill Clean Energy Portfolio ETF ( PBW ):

As can be seen, the QCLN ETF has far-and-away delivered superior total returns as compared to these competitors.

Risks

As most investors know, the clean-green energy and EV space is quite volatile and - as can be seen by the top-10 holdings in the QCLN ETF - is represented by some companies that, while growing revenue at a fast-paced clip, are yet to be profitable. That said, after a 30%+ decline in the fund last year, it currently trades with a P/E of only 24.3x, down considerably from the 32x valuation the ETF had when Seeking Alpha published my first BUY-rated article on QCLN back in August of 2020 (see Green Energy QCLN: EVs, Solar, & Wind, Oh My ):

Note that shares have more than doubled the returns of the S&P500 since that article was published.

That said, investors should consider that QCLN shares were up 4.3% on Friday on the heels of a strong rally in EV stocks - primarily Tesla and Lucid. That being the case, I suspect there will be some profit-taking early next week and advise investors to be patient in order to achieve a more promising entry point (or to add to an existing position).

Summary & Conclusion

Governments around the globe - especially in China, the U.S., and the EU - have instituted strong incentives for companies to invest in clean energy (solar, wind, battery backup), EVs, and EV batteries. Last year, clean-green energy investments exceeded $1 trillion for the first time and were roughly equal to fossil-fuels related investments. This trend is likely to continue - and accelerate - going forward. That being the case, investors should consider a direct and diversified investment in the clean energy sector - and the QCLN ETF is one of the best ways to do so. QCLN is a BUY.

For further details see: