Trump vs. green energy: Where should small-cap investors look?

In the first hours of his presidency, Donald Trump launched a massive offensive against green energy. Among the affected industries are electric vehicles (EVs) and solar power. This has left small-cap investors in these sectors searching for answers as to which companies can survive the Trump barrage and even thrive and which cannot.

The first days of Trump's second term in office have upended the last four years of U.S. energy policy. Former President Joe Biden prioritized green technology in his economic agenda, whereas Trump promotes traditional energy sources.

He has declared a national energy emergency, withdrawn the U.S. from the landmark Paris Climate Accords (again), and suspended leases for wind power projects, as reported by CNBC. “We are not going to do the wind thing. Big ugly windmills, they ruin your neighborhood,” Trump said. He has made similar comments about solar energy while pledging to boost oil and gas production. “Drill, baby, drill” remains one of his most well-known slogans.

Meanwhile, an executive order halting all disbursements of funding under the Inflation Reduction Act (IRA) has received less attention, notes Freedom Finance Global analyst Dmitry Pozdnyakov. Signed into law by Biden in 2022, the IRA allocates up to $400 billion in federal funding to boost production and demand for clean energy in the U.S. For example, it provides tax credits for energy projects utilizing renewable sources and for manufacturers of solar panel components, storage systems, and wind turbines. Recipients can both reduce their tax burden and sell their tax credits to other companies.

Pozdnyakov expects the IRA funding disbursement suspension to have the least impact on project developers and operators. He highlights two companies:

— Shoals Technologies Group, a supplier of equipment for energy projects;

— SolarBank Corp., a developer of renewable and clean energy projects in the U.S. and Canada.

With an average operating cycle of one year, these companies are not immediately affected by shifts in the business landscape, Pozdnyakov points out.

For the third quarter of 2024, Shoals reported a 24% year-over-year revenue decline to $102.2 million, which it attributed to project delays. Still, the company revised upward the lower end of its full-year 2024 revenue guidance: Now, it guides for a top line of $390-400 million (versus its August-issued guidance of $370-400 million). Full-year financial results are expected to be released on February 25.

Shoals has 14 “buy” ratings and seven “holds” with an average target price of $7.06 per share, suggesting upside of more than 74%. According to MarketWatch, no analysts have revised their recommendation since Trump’s election.

SolarBank, headquartered in Canada and listed in the U.S., recently announced a $49.5 million contract with a subsidiary of South Korea’s Qcells to sell and construct four solar power projects, with plans for an operations and maintenance contract following the completion of construction. The official website lists eight projects in the U.S.

The two analysts who cover SolarBank both rate it a “buy,” with an average target price of $5.12 per share versus the current market price of $5.79 per share.

Pozdnyakov expects the IRA funding disbursement suspension to hit residential solar installers the hardest.

One of them is Sunnova Energy. “The company’s cash reserves might only last a few more quarters without new funding, raising which is difficult given slowing sales growth,” says Pozdnyakov.

In the third quarter of 2024, Sunnova's revenue grew 19% year over year to $235.3 million, while its net loss attributable to stockholders nearly doubled to $122.6 million. The company reported a $1.8 billion increase in debt servicing costs over the first nine months of the year (up 28% year over year). As of September 30, 2024, total liabilities stood at $10.2 billion.

On February 7, Jefferies downgraded Sunnova from “buy” to “hold” and slashed its target price by 77% to $2.00 per share. Amid declining demand for solar panels, the investment bank believes the company will shift its focus from growth to debt management.

Sunnova is covered by 22 analysts, with an average target price of $7.70 per share, implying 305% upside.

Still, some companies in the sector are set to be less affected by policy whipsawing. Pozdnyakov suggests Sunrun Inc.

Sunrun is the leader in the U.S. residential solar panel market and has the opportunity to strengthen its position as peers struggle, notes Pozdnyakov. For instance, SunPower, the second-largest player in the market, went bankrupt last year.

Sunrun offers clean energy on a subscription basis, similar to how streaming services operate — users pay a fixed monthly fee for a specific or unlimited amount of electricity usage. As of September 30, the company had over 30,000 subscribers, with annual recurring revenue from subscriptions standing at $1.5 billion. The average remaining contract life of subscribers was 17.6 years. Sunrun partners with nine of the 10 largest home builders in California and more than half of the top 20 players in the U.S.

Among the 29 analysts covering Sunrun, there are 17 “buy” recommendations, 11 “holds,” and one “sell.” Their average target price of $17.03 per share suggests the stock has room to double.

Trump has also halted a $5 billion EV charging station program and an initiative that would have banned new gasoline-powered car sales in 12 states by 2035. Additionally, his administration has proposed repealing the $7,500 tax credit for new EV purchases.

Some companies have already felt the detrimental impact of Trump’s new initiatives, says Pozdnyakov, pointing to Canoo and Nikola. Canoo, which started delivering EVs to customers last year, announced in mid-January that it was filing for bankruptcy. Nikola, a much-touted hydrogen truck manufacturer whose market capitalization at its 2020 peak briefly exceeded that of Ford Motor Company, is on the verge of bankruptcy, the Wall Street Journal reported on February 6, citing sources familiar with the matter. The company is exploring options that could include a sale or restructuring.

So which EV companies can weather this difficult environment?

— Pozdnyakov highlights Israeli electric truck developer REE Automotive, which has a $173.4 million market capitalization on the Nasdaq.

The company has already started delivering its first vehicles to customers. In its third-quarter 2024 earnings report, REE stated that it had received $137 million in orders in the quarter, up 230% year over year, with some scheduled for production after 2025. The company plans to launch mass production this year and is also considering partnerships with other automakers, Pozdnyakov adds. Its partners include Motherson, one of the world’s largest auto parts manufacturers.

Airbus is another REE partner. As part of its autonomous driving program, the company is testing its vehicle on an active runway at a major commercial airport. REE vehicles are built on a platform with four independent wheel modules connected to each other and the control systems via wires. This design means the size of the vehicle can be adjusted and allows existing EVs to be switched to autonomous driving, Pozdnyakov points out.

HC Wainwright analyst Amit Dayal rates REE a “buy,” with a target price of $15.00 per share. The two analysts who cover the stock both have “buy” recommendations. Their average target price is $14.50 per share, versus the February 13 close of $7.79 per share.

— Another company Pozdnyakov recommends watching is Beam Global, which specializes in EV charging stations.

Its solar-powered products require no wiring or trenching, which makes them easy to deploy and scale.

However, Beam, which has many government clients, already reported a slowdown in demand at the end of last year amid political uncertainty in the U.S. These issues may worsen in the coming quarters, says the Freedom Finance Global analyst. Beam has four “buy” ratings and one “hold” among coverage analysts. Their average target price of $8.00 per share is 3.1 times the current market price.

Overall, it is unlikely that Trump will be able to bring to a halt the country’s transition to clean energy — his administration’s actions will almost certainly be challenged by opponents in court. The WSJ believes it will take some time before their true impact becomes clear.

“The world is undergoing an energy transition that is unstoppable. Last year alone, over $2 trillion was invested in the transition and that compares to $1 trillion in fossil fuels, so the signal is absolutely clear,” CNBC quoted Simon Stiell, the executive secretary of the United Nations Framework Convention on Climate Change, as saying.

Renewable energy accounted for a quarter of all U.S. electricity generation in 2024, according to the Union of Concerned Scientists. Moreover, solar and wind power make up more than 70% of newly installed electricity capacity in the U.S., and the cost of energy from these sources has dropped about 40% over the last decade, Pozdnyakov notes.

“Economic factors, rather than political ones, are the real drivers of the green energy market’s expansion, which will also buoy the growth of publicly traded companies in the sector,” he concludes.