Clean Energy: Raymond James Upgrades Sunnova Energy (NOVA) to 'Strong Buy', Downgrades Evoqua Water (AQUA) to 'Outperform' and Energy Recovery (ERII) to 'Market Perform'

July 7, 2021 9:19 AM EDT
Get Alerts NOVA Hot Sheet
Price: $18.49 +0.33%

Rating Summary:
    19 Buy, 3 Hold, 1 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 4 | Down: 13 | New: 10
Join SI Premium – FREE

Get inside Wall Street with StreetInsider Premium. Claim your 1-week free trial here.

Following a rapid surge in valuation of clean energy assets in 2020 (WilderHill Clean Energy index (ECO) up 203%), the index fell 5% in Q2 to add to make an H1 decline at 10%.

Raymond James analyst Pavel Molchanov weighs in to note that the clean energy sector is “currently trading in a more rational manner as compared to the ultra-euphoric highs of late 4Q20 / early 1Q21.”

“Within clean tech, in fact, a similar dynamic is playing out: on the whole, the loftiest story stocks (e.g., in hydrogen and electric vehicles) are underperforming year-to-date; whereas the more mature, value-type names (e.g., in ethanol and water technology) are outperforming. On a more fundamental level, plenty of company-specific headlines created pressure for clean tech stocks that had been (in some cases, still are) at or near peak valuation levels. This reflects a healthy, appropriate return of investor focus on actual business performance rather than sentiment,” the analyst said in a note.

Molchanov also makes three rating changes. First, he upgraded Sunnova Energy (NYSE: NOVA) to ‘Strong Buy’ from ‘Outperform.’ A price target is $50.00 per share.

“NOVA shares have underperformed year-to-date: the stock is down 15%, versus the ECO index's decline of 12%. The shift in investor sentiment is understandable, but that is not the same as rational. First, let's consider the longer-term history: even a 10-year Treasury yield at 2% (as compared to the current level of 1.4%) would be substantially more favorable than the market backdrop for most of the previous decade. As recently as 2019, the 10-year yield averaged 2.1%. Second, and even more to the point, looking at benchmark yields tells only part of the story. What should not be overlooked is the fact that the debt market's perception of solar - including rooftop solar - from a risk standpoint continues to get better. In other words, the risk premium is compressing,” the analyst argues.

On the other hand, Molchanov has moved to downgrade Evoqua Water (NYSE: AQUA) to ”Outperform” from ”Strong Buy” as “ the easy money has been made.”

“Despite the uncertainty, investor enthusiasm has spurred the stock's outperformance year-to-date: up 24%, versus the ECO index's decline of 12%. As a result, the stock's multiples have expanded to all-time highs, and valuation is no longer at a level that would justify our highest rating - simply put, the easy money has been made. To be clear, we remain fans of the story, and our view of company fundamentals has not changed - this is purely a valuation call,” he explains.

Similarly, Energy Recovery (NASDAQ: ERII) is downgraded to “Market Perform” from “Outperform.”

“We no longer see sufficient upside to encourage investors to keep accumulating the stock - the risk/reward looks fairly balanced,” the analyst comments.

Serious News for Serious Traders! Try Premium Free!

You May Also Be Interested In

Related Categories

Analyst Comments, Hot Comments, Hot Upgrades, Upgrades

Related Entities

Raymond James, Pavel Molchanov