2 top renewable energy stocks to buy

Renewable energy stocks could have a bright future and be boosted in the short term by the COP26 summit, but which ones are the best for me?

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Windmills for electric power production.

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It’s easy to claim that renewable energy stocks are the future. Yet the path will be long and winding. For investors like me prepared to take a long-term view, renewable energy stocks have a lot of potential. There may even be a short-term boost to shares in the sector as the UK-hosted global environment summit, COP26, is in November.

This could create a lot of investor interest in such stocks and therefore push up share prices. To take advantage of this, I could buy a tracker like iShares Global Clean Energy, or a fund. Or there are these two companies, which could be positioned to benefit.

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Top renewable energy stock

The first is FTSE 100 energy giant, SSE (LSE: SSE). For a number of years now, the Scottish-based energy producer and supplier has been building up its wind power assets. It’s aiming to treble its renewable energy output from 2019 levels to 30TWh by 2030. In my opinion, this makes SSE a serious renewable energy stock. It’s not a case of greenwashing.

So far this year SSE’s shares are up modestly, but over a year they are up 25%. Not bad for a FTSE 100 company. For reference, shares in oil major BP are up by a far less impressive 5% over the last 12 months.

So what could be driving the outperformance at SSE?

Partly I think the recent performance of SSE shares has come about because activist investor, Elliott, has been building up a stake.

This investment adds to the perception that SSE may become a takeover target. A buyout would likely not only have to win over investors but be at a premium to the current share price.

As a regulated entity, SSE does have limited pricing power. It also has high debts and there’s pressure on the dividend – although management has been able to maintain a high yield for many years. It also faces challenges with a tough regulatory framework coming into force.

Overall though I think it’s a good FTSE 100 renewable energy stock.

A smaller option

Shares in hydrogen company ITM Power (LSE: ITM) were recently boosted by the release of a UK government plan that sets out a roadmap for a world-leading hydrogen economy. The focus on hydrogen alone was enough to lift ITM’s share price. I expect we’ll see and hear a lot more about hydrogen in the coming months and years, creating more opportunities for the share price to spike.

The opposite is also true though. The industry has a history of false dawns and any setbacks will likely see the ITM share price published heavily. Not least because the price is based mainly on expectations of what ITM could become in the future. Currently, revenues are small at around £3.5m and the group is loss-making.

If the plans for hydrogen start to take shape and ITM’s losses narrow it could become a top renewable energy stock in my opinion – but I’ll probably wait a little longer to see what happens.

In the run-up to COP26, I expect there will be a lot of focus on renewable energy stocks. There could therefore be a short and a long term opportunity to invest in these stocks now before the environment takes centre stage in the news agenda once again. I’d certainly consider investing in both these top renewable energy stocks. 

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Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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