The global renewable energy market broke records in 2020, and over the next few years, analysts expect tens of billions of dollars of new capital to flow into the market. As such, I have recently been looking for renewable energy stocks to buy for my portfolio.
Here are five companies I would buy that all look set to benefit from the flood of cash.
Renewable energy stocks
The first two companies I would buy are BHP and XP Power. These two enterprises are not traditional renewable energy stocks, but they do fulfil a critical part of the green energy supply chain.
BHP is the world’s largest mining group, and copper is one of its key commodities. As the world moves away from hydrocarbons, the demand for copper should grow as the electricity grid expands. Earlier this year, the CEO of commodity trading powerhouse Glencore speculated that the price of copper would need to increase by 50% to meet this higher demand.
Rising electricity consumption will also boost demand for XP’s power control devices. Management is expanding its presence in renewable energy markets to capitalise on this trend.
As well as BHP and XP, I would also buy Glencore as a speculative investment in my portfolio of renewable energy stocks. This company is probably not going to appeal to many investors because it has a large coal mining operation.
However, it is a major copper producer and trader. It also has exposure to rare earth metal production. Rare earth metals such as lithium are required for battery production.
The one challenge all of these firms will have to deal with is competition. Increased competition in the mining sector will push up copper supply and could send prices lower. Meanwhile, XP will have to compete for market share in the electricity transmission market.
One of the significant challenges the world faces as part of its transition towards being more green is storing energy. Wind energy is a booming market, but wind generation is unpredictable. Storing energy to cover periods of low wind is a challenge the industry is spending heavily on overcoming.
I would buy two renewable energy stocks to play this theme: the Gresham House Energy Storage Fund and the Gore Street Energy Storage Fund.
Both of these companies have relatively similar strategies, although Gore Street is more established than its peer.
Both have substantial pipelines of energy storage assets under development or in the process of being acquired. These pipelines should help them grow over the next few years. The two firms are returning profits from their energy storage businesses to investors through dividends. Gresham offers a yield of 6.1% at the time of writing, and Gore Street yields 6.2%.
While they have significant growth plans, both companies could face challenges if competitors start to edge into the market. This could push down returns on investment, potentially making capital spending less appealing and reducing probability. In the worst-case scenario, falling profits may force both firms to reduce their dividends.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. 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.