Looking at the market recovery right now, I see a lot of opportunities to buy cheap UK shares that were too expensive just a few months ago. I love studying market corrections and analysing sectors that show high activity even during bear runs. And right now, the energy sector, mining stocks and anything electric vehicle (EV)-related looks very popular.

Although I refrain from investing based on fads, current market trends seem to be rooted in important recent developments. Renewable energy has become supremely important after Europe’s latest power crisis. 

I’ve identified three shares that could supplement the growth of this booming industry right now. These UK shares look primed for growth and could boost my portfolio over the coming years.

All charged up

Greencoat UK Wind (LSE:UKW) and Volex (LSE:VLX) are two shares I’m watching closely right now.

Electricity bills across the country are surging. Just yesterday, the Confederation of British Industry warned policymakers about the impact of this on local businesses. And I think this points to the larger crisis as we’re caught between an expensive transition to green energy while fending off sky-high crude oil prices. 

Greencoat UK Wind’s business model involves investing in wind farms and then selling the generated power back to the grid. This relatively low-risk strategy with 90%+ margins means the company is largely cash positive. In the first half of 2022, it has already generated 2,175GWh of energy with a net cash generation of £328.8m.

This share has risen 22% in the last 12 months. And despite this jump, it’s trading at a price-to-earnings ratio of just 4.6 times. I think this is a very attractive valuation for a firm with strong financials and excellent future prospects. 

The next company on my list is Volex, a manufacturer of fibre-optic, copper and battery wires. The company also operates a range of brands in the electronics space that collectively have a global presence. Its main markets are North America (44% of revenue), Asia (23%) and Europe (33%). 

Volex recently developed an EV division that manufactures components for the booming industry. These include charging cables, charging stations and storage systems. 

In FY22, the company saw revenue growth of 38.6% to US$614.6m. The company expects to generate revenue of $1.2bn by the end of FY27. Thanks to strong recent reports, this share has risen 12.8% in the last six months and is finally showing signs of a bounce-back after falling steadily for months.

Concerns and verdict

While both companies look in relatively strong financial positions, they also come with considerable debt. Given the nature of both businesses, a high percentage of profits are invested back into acquiring assets.

Slowing economies remain a concern for Volex, given its international presence. Its buying power could fall if a recession happens, affecting sales and currency values. Greencoat is currently seeing a premium paid for the energy it sends to the grid. If this stabilises, year-on-year profits could fall, spooking investors.

However, I’m bullish on the European energy sector. I think current changes will prove fruitful in years to come. While traditional oil shares have dominated the energy market, I think a shake-up is under way, which is why I’m considering an investment in these two stocks right now. 

The post 2 UK shares from booming industries I’d buy now appeared first on The Motley Fool UK.

More reading

• Here’s how £20,000 could be used to aim for an instant £2,000 passive income!
• Thinking of stuffing a SIPP with high-yield shares? 3 things to consider
• Here’s a top dividend share to consider buying for your ISA right now
• With a 10.3% yield, could this be the FTSE 250’s best income stock?

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.

FTSE 100 shares in the energy sector have witnessed a huge surge in profits over 12 months. Like many investors, I am looking at shares in the industry that could supercharge my portfolio. While there are several good stocks on offer, I have identified two showing explosive growth potential over the next decade.

But first, why are renewable energy shares witnessing historic levels of interest right now? I think the COP 26 summit last year triggered the perfect storm for a transition to cleaner energy. While governments increased focus on green alternatives, crude oil prices rose after Russia’s invasion of Ukraine. This added fuel to the green energy lobby and countries are now scrambling to secure sustainable alternatives to meet the power demand.

With money pouring into Europe’s thriving energy sector, I think this is the perfect time to invest.

FTSE 100 shares I’d buy to capitalise

The first company on my list is SSE (LSE:SSE). The FTSE 100 giant has the largest renewable electricity portfolio in the UK and Ireland. It specialises in onshore and offshore wind as well as hydropower. The company sells and distributes its energy to UK’s power grid.

In the financial year (FY) 2021, SSE generated £6.83bn in revenue and a total income of £2.28bn. These figures jumped significantly in FY 2022 when the company generated a revenue of £8.61bn and recorded an income of £3bn. The 33% jump in income comes primarily from its renewables wing.

Thanks to this strong showing, the FTSE 100 share has gone up 15.4% in the last six months. And despite this jump, it is still trading at a price-to-earnings ratio of 7.7 times. SSE shares also come with a healthy 4.6% yield making it really cheap right now

The other company on my watchlist is Centrica (LSE:CNA), a power transmission and delivery company with 11.7 gigawatts (GW) of renewable power under management.

Centrica operates British Gas, which powers millions of homes in the country. Centrica has been adding services like installing EV chargers to help consumers hit net-zero emissions as well. The company also owns a 20% stake in UK’s nuclear energy bank which is considered one of the cleanest sources of energy today.

The FTSE 100 share saw its dividend reinstated last month after the company saw revenue jump a whopping 2,851.22% in 2021 to £1.21bn. Although this is in comparison to a terrible 2020, the bounce back is significant. The energy giant also presented a stronger balance sheet, repaying the £93m debt from 2021.

Concerns and verdict

While both companies look financially strong right now, it is worth noting that energy prices play a major role here. When energy prices stabilise, profits could trend back towards pre-pandemic levels. This will slow down the investor interest in these two FTSE 100 shares.

Right now, both companies have a strong cash flow. But as we move closer to UK’s net zero ambitions, R&D budgets and asset purchases will increase, which could affect future results.

However, given the size, reach, and finances of these two companies, I think they are the best FTSE 100 energy shares for my portfolio right now. Depending on share price performance, I may be tempted to make a £1,000 investment in both in the coming months.

The post Green energy boom: 2 explosive FTSE 100 shares I’d buy to capitalise appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

Suraj Radhakrishnan has no position in any of the shares 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.

The renewable energy lobby has witnessed a massive surge over the last two years. World leaders are finally acknowledging the need to phase out fossil fuels. Latest projections show that over £850bn will be funnelled into the sector this decade via grants and investments, a huge boost for renewable energy firms.

The sector is red hot right now, with many top renewable energy shares across the world gaining momentum even as indexes fall. And I think I have zeroed in on an FTSE 100 name that looks like a winner for my long-term growth portfolio.

Riding the wave

SSE (LSE:SSE) shares have been outperforming the FTSE 100 index for some time now. Since the pandemic crash in March 2020, the Footsie has gone up 36.8% while the SSE share price is up 62%. This is largely due to the EU and the UK focussing on stronger collaborative renewable energy programs. And this revolution is led by wind and hydroelectricity, given the high potential for both in the region. And SSE is a market leader in both. 

The region has lofty ambitions when it comes to fighting climate change. The UK government recently detailed its Energy Security Strategy and the focus is on “homegrown power generation,” which includes a mix with 95% low-carbon power by 2030. This is great news for renewable energy production and distribution companies like SSE.

Is this FTSE 100 share the best growth option for me?

SSE Renewables focuses on onshore and offshore wind and hydroelectric power. SSE already owns nearly 2GW (gigawatt) of operational onshore wind capacity with over 1GW under development. The company also holds hydroelectricity resources capable of generating 1,459MW and an offshore wind portfolio estimated at 579MW across UK waters.

SSE wants to treble its renewable energy by 2030 to 50TWh a year. This includes a fully-funded £12.5bn investment by 2026, that will help ramp up clean power generation. The board also plans to power the increasing demand for EVs (electric vehicles) by supplying 20GW to charging ports across the country. 

In financial year (FY) 2022, the FTSE 100 company recorded total revenue of £8.6bn, up 26% from FY 2021. The board expects increased free-cash generation until 2026 and plans on growing its dividend by 5% per annum to FY 2026. 

These figures point to a business with a large market share operating in a healthy sector. And I consider them strong indicators of future growth. But there are some risks to consider as well. Regulations and currency fluctuations can impact SSE’s operations across UK, Scotland, and Ireland.  Also, analysts expect crude oil price fluctuations to settle in 2023. This could slow down the renewables push, impacting future profits. 

Governmental grants and regulations play a major role in energy prices. And the UK, which is witnessing financial and political turmoil, could tighten current renewable energy budgets if this inflationary period extends beyond 2022. This could increase taxes, stall development projects, and impact SSE’s performance. 

But this FTSE 100 stock looks like a robust renewable energy option for my portfolio right now. Given its strong presence in the UK, plans underway, and predicted jumps in revenue, I could be tempted to make a £10,000 investment if the current share price performance continues. 

The post Renewable energy boom: 1 top FTSE 100 share I’d buy appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

Suraj Radhakrishnan has no position in any of the shares 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.

With the rise in directives from governments to cut carbon footprints, FTSE 250 incumbent Drax Group (LSE:DRX) is one of a number of renewable energy stocks on my radar. Let’s take a closer look at it to help me decide if I would add the shares to my holdings.

Renewable power generation

As a quick reminder, Drax Group is a UK-based business involved in renewable power generation and selling this electricity to businesses. It has four assets in the UK and also has a global bio energy supply business with facilities across the US and Canada with customers in Europe and Asia.

So what’s been happening with the Drax share price? Well, as I write, the shares are trading for 664p. At this time last year, the shares were trading for 442p, which is a 50% increase over a 12-month period.

Risks involved

Firstly, the capital outlay and investment needed to ensure successful operations and energy production is significant. Drax has pumped billions into its technology and infrastructure already. With any investment there is a risk it may not pay off. Furthermore, although renewable energy is rising in popularity, there is no surefire method or practise that is accepted. Drax could be investing in the wrong things.

Another issue I have is Drax’s current strategy and biomass pellet business. Drax has invested billions into the, biomass pellet arm of the business, which it sells throughout the world. There is a risk that these pellets could be reclassified. If this were to happen, there could be a negative effect on its green credentials, as well as its balance sheet.

A FTSE 250 stock I’d buy

There is lots to like about Drax, in my opinion. Firstly, the state of the current energy market, has shone a new light on firms like Drax that provide renewable alternatives. I believe energy is a defensive sector. After all, everyone needs power to be able to run homes and businesses. Drax has defensive aspects. I would go further and say Drax has the potential to become a renewable energy leader in the coming years.

Next, Drax shares look good value for money at current levels on a price-to-earnings ratio of just seven. The shares also pay a dividend, which would boost my passive income stream. Drax shares currently yield close to 3%. This is just above the FTSE 250 average dividend yield. It is worth noting that dividends can be cancelled at any time.

So what about recent performance? Well, Drax has a good record of consistently recording revenue and profit growth in recent years. I do understand that past performance is not a guarantee of the future, however. Aside from 2020, which was affected by the pandemic, Drax has grown revenue and profit year on year since 2018. The rising popularity of renewable energy alternatives could mean this upward trajectory of performance growth could continue.

I would add Drax shares to my holdings and keep a hold of them for the long term, which is a core part of my investment strategy. I believe the rewards outweigh the risks currently.

The post Should I buy this FTSE 250 renewable energy stock? appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

Jabran Khan 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.

Berkshire Hathaway is a conglomerate that generates money from a variety of sources. Berkshire Hathaway Energy (BHE), the company’s electric utility arm, is one of them. At first glance, it’s easy to dismiss Berkshire Hathaway as a renewable energy investment option. BHE only accounts for around 9% of Berkshire Hathaway’s income, while renewable energy accounts for a little under half of the company’s overall energy output. However, I believe that BHE’s location inside Berkshire Hathaway provides it with a significant competitive edge over other electric utilities. I also believe it reduces some of the big risks that come with investing in the renewable energy transition

A significant advantage

Warren Buffett identified a fundamental advantage that BHE has over other power companies in his 2020 letter to shareholders. The majority of electric utility businesses pay out around 60% of their profits as dividends to income-seeking shareholders. This makes it much harder for them to invest in renewable energy infrastructure. Instead, they must finance their investments through debt or the issuance of stock, diluting the value of current owners’ shares.

BHE, on the other hand, does not pay a dividend. This may make it less appealing to those of us who appreciate passive income. But it means it may use the money it makes to invest in renewable energy projects without taking on debt or issuing stock to do so.

BHE has already been able to make significant renewable energy investments. It has spent more than $35bn on a variety of renewable energy initiatives while cutting back on fossil fuels. Coal-fired energy generation accounted for 74% of BHE’s total energy generation in 2006. By the end of 2020, the percentage had dropped to 33%. BHE was also able to spend $18bn on the transmission infrastructure needed for the renewable energy transition. All because of its access to capital.

Green energy investing risks

Over-optimism is the biggest danger I see with investing in green energy firms. While I believe that the transition to renewable energy is unavoidable, businesses must remain disciplined in their investments in this area. Making investments that don’t pay off can be costly, and it might even lead to bankruptcy. In 2016, SunEdison provided an excellent illustration of this.

However, I believe that BHE’s position inside Berkshire Hathaway mitigates this risk. This is due to two factors. The first is the capacity to invest in renewable energy with its funds rather than borrowing. The second is BHE’s position inside the larger conglomerate, which gives it access to $150bn in capital. Warren Buffett oversees the company’s investments as part of Berkshire Hathaway. When it comes to discovering good value assets, I can’t think of anybody better.

As a result, I believe that owning Berkshire Hathaway stock is a great way to participate in the renewable energy revolution.

The post Not sure about where to invest in green energy? I’m trusting Warren Buffett appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

James Reynolds owns Berkshire Hathaway (B shares). 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.

ITM Power (LSE: ITM) shares are a popular investment at the moment. Last week, ITM was one of the most traded stocks on Hargreaves Lansdown’s platform.

Should I buy ITM shares for my own portfolio? Let’s take a look at the investment case.

ITM Power shares: the bull case

I can see why UK investors are bullish on ITM Power right now. For starters, the company – which specialises in hydrogen energy solutions – operates in a high-growth industry.

According to Energy Monitor, demand for green hydrogen and its derivatives is expected to grow “ten-fold” between now and 2050. This industry growth should provide powerful tailwinds for ITM Power.

Secondly, revenues are projected to explode in the years ahead. For the year ended 30 April 2021, ITM posted revenue of £4.3m. For the year ending 30 April 2022 however, analysts expect revenue to come in at £22.8m. That would represent a 430% increase – a very impressive level of growth.

Third, ITM has already signed deals with a number of major players in the energy industry, including Shell, Snam, Linde, and Anglo American. These deals suggest that the company has some top-notch technology.

Finally, the company is getting some positive coverage from brokers. In November, Jefferies initiated coverage of the stock with a price target of 800p. That’s roughly 125% above the current share price. Jefferies also named ITM as a top pick for 2022.

Risks to the share price

However, I have a few concerns in relation to the renewable energy stock. One is the fact that the company is not expected to be profitable for a number of years. This adds a considerable level of risk to the investment case. We’ve seen recently that unprofitable companies tend to be hit hard when there’s a market sell-off.

Another risk is the company could miss analysts’ forecasts. As I mentioned earlier, analysts expect revenue of £22.8m for this financial year. Yet revenue in the first half of the year was only £4.1m. So the group needs to have a huge H2.

It’s worth noting that when I covered ITM last March, analysts were expecting revenue of £6.2m for that financial year. The fact that the top line came in at £4.1m – over 30% below forecasts – is a bit concerning, in my view.

Then there’s the valuation. ITM Power doesn’t have a price-to-earnings ratio because it doesn’t have any earnings. But it does have a price-to-sales ratio and that’s a whopping 96 at the current share price of 356p. That seems very high, to my mind. At that valuation, there’s no margin of safety at all. If future growth is disappointing, I’d expect the stock to fall significantly.

Should I buy ITM Power shares?

Weighing everything up, I don’t see ITM Power as a buy for my portfolio at the current share price. To my mind, the valuation is too high.

All things considered, I think there are much better stocks to buy today.

The post Is ITM Power a ‘buy’ at the current share price? appeared first on The Motley Fool UK.

More reading

• Why is everyone selling ITM Power shares?
• £5,000 invested in red-hot UK growth stock ITM Power 5 days ago is now worth…

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

ITM Power (LSE: ITM)

ITM power is a UK-based manufacturer that produces hydrogen electrolysis machines. Hydrogen is a clean burning gas which some have touted as a better replacement for gasoline. ITM Power’s electrolysis machines are unique in that they are modular, transportable, and designed to work in conjunction with wind or solar farms to produce ‘green’ hydrogen. This contrasts sharply with BP and Shell’s ‘Blue’ hydrogen which is made by reforming methane, a process which releases carbon dioxide into the atmosphere.

ITM has been growing its business in recent months. It raised £250m this year to help fund the construction of two new factories, and had seen a 46% rise in its projected revenues over the next year followed by 31% over the next three years. However, it has seen a lot of share price volatility and diluted those shares to raise that £250m. As someone who believes in the future of hydrogen, I will be adding it to my portfolio. But it is a risky choice.

Plug Power (NASDAQ: PLUG)

At the other end of the hydrogen spectrum sits Plug Power. Plug produces the fuel cells needed to convert hydrogen into electricity. Hydrogen fuel cells themselves are not that complex although they can be expensive, and demand has historically been very low. Plug has been on the renewable energy scene for a very long time, first going public all the way back in 1999. The real question is though, is now the time for Plug to really shine?

Well…maybe?

It has seen incredible growth in revenues recently, averaging 30% over the last five years and 76% in just 2021 alone. It has also undertaken massive partnerships in France and South Korea to help expand their hydrogen fuel needs, and opened a new gigafactory in New York just this month. But Plug, like ITM, is yet to be profitable. The cost of revenue far exceeds the revenue actually attained and (according to the Wall Street Journal) the company is at least $700m in debt. Its growth over recent years is astounding and if renwable hydrogen really takes off then Plug has a chance. But that much debt with such low revenue and no profits makes this too risky for me.

Greencoat UK wind (LSE: UKW)

Greencoat is a much simpler choice for me than Plug or ITM. The investment firm owns or partially owns 40 wind farms across Britain and is expanding its holdings to offshore sites. Its net profit margin over the last five years has been 77% and while the amount of debt has increased, it has shrunk as a percentage of the company’s market cap.

Greencoat UK could be in for a tough year as energy firms struggle to stay afloat. But its reliance on an inconsistent resource means market resilience is baked into the business model. On top of that, electricity produced by renewable sources is already cheaper than that of coal or gas power plants. I believe that the soaring costs of fossil fuels will continue to increase the appeal of firms like Greencoat, and I’ll be adding it to my portfolio shortly.

The post Renewable energy stocks: which ones are worth a buy? appeared first on The Motley Fool UK.

More reading

• Why is everyone selling ITM Power shares?
• £5,000 invested in red-hot UK growth stock ITM Power 5 days ago is now worth…
• Here’s how £20,000 could be used to aim for an instant £2,000 passive income!
• Thinking of stuffing a SIPP with high-yield shares? 3 things to consider
• Here’s a top dividend share to consider buying for your ISA right now

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.

Just in case you’ve been avoiding all news flow recently, there’s probably no hotter investing space right now than renewable energy. Fortunately, there’s already a plethora of options available to investors looking to tap into the megatrend, including exchange-traded funds (ETFs). Here are two I already own and which I’d feel comfortable adding more of in the years ahead. 

2 ETFs to buy

As it sounds, iShares Global Clean Energy ETF (LSE: INRG) invests in companies that have a finger or two in the clean energy production pie. Alternatively, some holdings may supply the equipment or technology that enables this energy to be generated. 

All told, this ETF has 76 holdings. That’s not exactly concentrated but nor does it present as being overly diversified. This is an important consideration for me. After all, the greater the number of stocks held, the less impact each individual stock can have on returns. As such, I think INRG strikes a nice balance between risk and reward.

Another positive to this fund is the geographical spread. Companies held come from both developed and emerging markets (although 43% are based in the US). UK-listed SSE features in the portfolio, as do firms like and solar power company Enphase Energy.

A second passive fund I’m holding as part of my renewable energy strategy is WisdomTree Battery Solutions ETF (LSE: CHRG). As it sounds, this fund is more focused on energy storage. According to WisdomTree, battery technology has the potential to “significantly transform industries, services, labour and consumption“. Unsurprisingly, the electric vehicle revolution will form a major part of this.

Again, the geographical spread of this ETF is reassuring. By contrast to INRG however, almost 30% of holdings are based in China. Another 20% and 12% are based in the US and Japan respectively.

Some positives

As you might expect, there are advantages and disadvantages to playing the renewable energy theme via passive ETFs. For me, one clear benefit of using trackers is their relatively low cost. The less I give back in management fees, the better my eventual returns will be thanks to compounding.

The iShares and WisdomTree funds have total expense ratios of 0.65% and 0.40% respectively. Neither strikes me as unreasonable considering these are thematic funds. Moreover, the CHRG share price is up 50% over the last 12 months. 

It’s not just about the cost. I don’t claim to have specialist knowledge of the renewable energy space. This lack of investing ‘edge’ suggests buying a diversified fund that tracks indices created by experts in the field would be the more rational move.

Then again…

On the flip side, both funds could still prove volatile. Growth companies in hot areas usually trade on high valuations. And, regardless of renewable energy’s solid prospects, that could prove problematic in the event of a global economic wobble.

In direct conflict with what I’ve stated earlier, the ‘opportunity cost’ of holding these funds over specific shares is potentially very high if I can pick a winner. As the recent performance of Tesla has shown, buying an eventual market leader has the potential to generate life-changing returns. TSLA shares are up almost 2,800% since 2016.

The low/negligible yields from both ETFs also need to be borne in mind if I was looking to generate passive income. If that’s key, dividend-focused funds like these in this area might be more appropriate.

The post Renewable energy: 2 ETFs to buy appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

Paul Summers owns shares of iShares Global Clean Energy ETF and WisdomTree Battery Solutions ETF. 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.

These are five of my top renewable energy stocks for the renewable revolution.

Hydrogen

Lithium-ion batteries might work for cars, but they aren’t energy dense enough to drive buses, diggers, lorries, or boats.

Hydrogen fuel looks like it will be the most viable replacement for petrol and diesel, especially for large, industrial machinery. Hydrogen can also be stored, transported, and then burned to heat homes.

The best part is that solar and wind farms can be used to make hydrogen.

Earlier this year, Prime Minister Boris Johnson announced his hopes that the UK would become the “Qatar of Hydrogen”.

ITM Power

Right now, ITM Power (LSE: ITM) is my top pick in this field. ITM builds modular hydrogen electrolysis machines. Because the machines are modular they can be easily bolted onto existing green energy infrastructure. The company does have a lot of debt right now but has recently raised £250m to fund construction of two new factories. It is poised to meet growing demand.

My main worry with ITM is that it has struggled to turn a profit and still isn’t forecast to do so for at least another three years.

AFC Energy

Another hydrogen company on my radar is AFC Energy (LSE: AFC). This Surry-based company manufactures the fuel cells needed to turn hydrogen fuel into electricity. I’m particularly bullish on AFC because it has a patent on alkaline fuel cells. Alkaline fuel cells use lower purity hydrogen than their non-alkaline counterparts. Cars, trucks, and even buildings using alkaline fuel cells will be able to be run at a far lower cost, giving AFC a competitive edge.

On the financial side, unfortunately, AFC suffers from many of the same setbacks as ITM power: high debt and a track record of low income.

But, just like ITM, revenues are up, and are projected to climb over the next few years. The market has a clear desire for hydrogen. JCB just signed a multibillion-pound deal with Fortescue Future industries to import green hydrogen all the way from Australia.

Hydrogen power still remains untested at a commercial scale. It’s a risky investment compared to some already established technologies. What I’m betting on is that to bring down carbon emissions, firms around the world need access to low carbon fuel that can be produced and used today. I fully expect these companies to have some growing pains, but to ultimately come out on top.

Wind

Within the UK, my top pick for a wind power-related stock is Greencoat UK Wind (LSE: UKW). This investment firm owns or partially owns 40 wind farms around the UK. Greencoat also has some of the best financials I have seen in the sector, operating with a net profit margin of 77.6% and paying a reasonable 5.33% dividend.

However it is a smaller company, and might be squeezed out by larger competitors.

Spanish energy company Iberdrola (LSE: 0HIT) is also on my radar. Iberdrola has a much higher market cap than Greencoat UK (£54bn and £2bn, respectively), but has a much lower net profit margin at 10.45%. Unlike Greencoat, Iberdrola builds its own turbines and funds in-house research and development.

Iberdrola recently announced it was building a massive wind farm off the coast of the UK. The company is also promising to help the Norwegian government construct two new offshore farms, capable of generating a total of 9GW of energy.

Iberdrola leads the charge in floating turbines. Offshore windfarms can only be installed where the water is shallow enough for the turbines to be driven into the seabed. Thousands of new deep-sea sites will become available to energy companies once floating wind farms are perfected.

To do this, Iberdrola has taken on a lot of debt. The UK wind farm will cost upwards of £6bn alone, so I’m uncertain about its short- to mid-term profitability.

If I had to pick one, I would choose Greencoat because of the higher profit margins and lower liabilities. But I think Iberdrola remains a very attractive option.

Solar

When people imagine solar power, they commonly think of photovoltaic generation (solar panels).

While photovoltaic technology has improved in efficiency, the core design has one unfortunate drawback. Solar panels are made from silicone, which has high electrical conductivity but a low melting temperature. Overexposure to direct sunlight causes them to overheat and lose efficiency. 

Because of this, my top pick for solar is Acciona (LSE: 0H4K), which is a leader in concentrated solar power.

Concentrated solar uses mirrors to focus sunlight on a single point, superheating a plant-based oil or rock salt, which is then used to heat water into steam and drive a turbine. Unlike solar panels, the hotter it gets, the better.

Concentrated solar has two more distinct advantages over panels.

• Computers can adjust the mirrors to maintain energy production at peak efficiency throughout the day.
• Heated elements can then be stored in insulated containers and used throughout the night.

Acciona is a conglomerate, and only one of its subsidiaries actually produces concentrated solar energy. I feel this makes the investment a little safer.

The firm has a market cap of £7.7bn and last year it brought in £5.4bn in revenue. Of this, £3bn was gross profit.

I think the biggest risk to this investment is that there is no guarantee that concentrated solar will gain the mass adoption needed to push the stock up. The 2.44% dividend payment is a reasonable consolation prize.

Conclusion

Renewable energy is the future, there is no doubt about it. The technology is here and some of it can even fit into our existing infrastructure. The best part about the green revolution is that, unlike tech, there’s room for everyone. So, I will continue to learn about the amazing new solutions that are emerging every single day. And in the meantime, I will be adding all of these to my portfolio.

The post Invest in renewable energy today with these 5 green companies appeared first on The Motley Fool UK.

More reading

• Why is everyone selling ITM Power shares?
• £5,000 invested in red-hot UK growth stock ITM Power 5 days ago is now worth…
• Here’s how £20,000 could be used to aim for an instant £2,000 passive income!
• Thinking of stuffing a SIPP with high-yield shares? 3 things to consider
• Here’s a top dividend share to consider buying for your ISA right now

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.

But is INRG actually the best UK clean energy ETF to invest in? I’m not so sure. If I was looking to invest in renewable energy stocks through an ETF today, I think there could be better options for my portfolio.

The best UK renewable energy ETF?

One that looks superior to me is Lyxor New Energy UCITS ETF (LSE: NRJL). This is a smaller, more under-the-radar product with net assets of around €1.4bn.

This ETF is different to iShares Global Clean Energy in that it tracks the World Alternative Energy index. This is an index composed of the world’s 40 largest companies operating in the renewable energy, distributed energy, or energy efficiency sectors, that derive at least 40% of their revenues from alternative energy activities.

By contrast, the iShares Global Clean Energy tracks the S&P Global Clean Energy index, which is an index of around 100 clean energy-related companies in developed and emerging markets.

Better long-term performance

While the fact that these two track different indexes may not seem like a big deal, it has actually made a massive difference to performance, both in the short term and in the long term.

For example, if we look at performance this year, INRG has delivered a share price return of -13%. Meanwhile, NRJL has delivered a return of 5% (to 31 October).

Meanwhile, if we look at the 10-year returns to 31 October, INRG returned around 215% while the Lyxor fund (I’m looking at the EUR version here because it has a longer track record) returned around 295%. That’s a significant difference. 

Now these performance figures don’t tell the full story. That’s because INRG had a period of strong outperformance last year. This is illustrated by the fact that for the three years to 31 October, INRG returned around 220% while the Lyxor ETF returned around 140%.

However, I like the consistency of NRJL’s returns. I’d rather not invest in an ETF that is prone to huge price swings.

Lyxor New Energy risks

Of course, the Lyxor New Energy UCITS ETF isn’t perfect. Because it tracks an index that only has 40 renewable energy stocks, as opposed to around 100 for INRG, stock-specific risk is higher. If a handful of companies in the World Alternative Energy index blow up, this ETF could underperform. It’s worth noting that the top holding at 31 October, Schneider Electric had a 15% weighting in the index. That adds risk.

Another issue to be aware of is that the GBP version of this ETF isn’t available on all platforms. It is available on AJ Bell Youinvest while Hargreaves Lansdown only appears to have the EUR version.

Overall though, I see it as a good ETF for clean energy stocks. If I was looking to invest in renewable energy stocks via an ETF (I’m not, because I prefer to invest in individual stocks), I’d certainly consider NRJL.

The post Is this the best UK renewable energy ETF? appeared first on The Motley Fool UK.

More reading

• Here’s how long-term investors can benefit from a stock market crash
• Why is everyone selling ITM Power shares?
• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?

Edward Sheldon has no position in any of the shares 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.