“One of the biggest trends of the 2020s decade is likely to be an unfortunate one: climate change,” I wrote in an introduction to a January 2020 article in which I picked three top climate change stocks to consider: Water supply giant American waterworks (NYSE: AWK), Wholesaler in swimming pool supplies Pool Corp. (NASDAQ: POOL), and backup power specialist Generac Holdings (NYSE: GNRC).
I feel this statement even more strongly almost two years later, as the effects of climate change have become even more evident recently. In June and July, the Pacific Northwest was scorched by a heat wave that broke numerous all-time records. Late last month, Hurricane Ida not only left more than 1 million homes and businesses without power in Louisiana alone, but its remains caused catastrophic, record-breaking floods in the densely populated northeast.
As a combined portfolio, my three climate change stock picks have the market for the past 20 months with an average return of 158% or more than four times that S&P 50037.2% return. (Stock chart follows below.) All three stocks are still worth buying if you're a long-term investor.
Image source: Getty Images.
3 of the best stocks on climate change: overview
| society | Market capitalization | Dividend yield | The projected annualized EPS growth for Wall Street over the next 5 years | 1 year share redemption | 10 year stock return |
|---|---|---|---|---|---|
|
American waterworks |
$ 32.3 billion | 1.4% |
8.6% |
28.1% | 645% |
|
Pool Corp. |
$ 18.6 billion | 0.7% |
17% |
53.5% | 1,800% |
| Generac Holdings | $ 27.5 billion | N / A |
8th% |
137% | 3,450% |
|
S&P 500 |
N / A | 1.31% | N / A | 34.1% | 346% |
Data sources: Yahoo! Finance and YCharts. Data as of September 17, 2021. EPS = earnings per share.
American waterworks
What is one thing that every person naturally has to do to cool off as temperatures rise? Of course, drink more water than usual. As climate change continues to drive the average global temperature higher, the need for fresh water will also continue to increase. And we are just one of many living things that need more water. Farmers will also grow crops, especially in the drought-prone southwestern United States.
Climate change also affects the supply side of the supply-demand equation. As temperatures rise, access to fresh water tends to become more expensive due to factors such as evaporation. This supply-demand picture is not positive for consumers, as water prices are likely to continue to rise faster than inflation. But it's an ideal situation for investors in listed regulated water companies that have legal monopolies in their territories to sell a product without a substitute.
American Water Works remains the best choice in water supply for most investors in my opinion. It is the largest and most geographically diverse publicly traded water and wastewater company in the United States. This puts it in the best position to benefit from the consolidation trend in the industry.
American Water provides regulated and market-based drinking water, wastewater services, and other related services to approximately 15 million people in 46 states. Its regulated business will span 15 states once it completes the sale of its New York state operation. In the first half of 2021, regulated business accounted for nearly 91% of the total net revenue of the two businesses.
Image source: Getty Images.
Pool Corp.
The above picture is a particularly refreshing scene for me, as my region of the country, like some others, has so-called “July temperatures in September”. That means an extended bathing season for people in my area who have pools. As climate change continues to cause average global temperatures to rise and the length of time many people can enjoy their pools, the cost-benefit equation of installing a pool should seem more appealing to more consumers.
Climate change isn't the only factor that should drive demand for pools. People were spending more money on their homes – indoors and outdoors – before the pandemic began, which accelerated this home nesting trend. If interest rates remain very low, this trend should continue.
As the world's largest wholesaler of swimming pool supplies, Pool Corp. ideally positioned to benefit from the increasing demand for pools. The company has also cleverly expanded into related outdoor living products such as landscaping and irrigation products.
Wall Street took a step back in forecasting Pool Corp.'s earnings growth. bad job done. This type of situation can often benefit a savvy investor as the market often values a stock based largely on estimates from the street. For the past four quarters, Pool Corp. Not only exceeded the consensus earnings estimate in every quarter, but also exceeded it by an average of 63%.
Data from YCharts.
Generac
Climate change has increased the frequency and severity of many adverse weather events, including hurricanes, tornadoes, torrential rains, and wildfires. These weather events often lead to power outages, which until recently were usually unintentional. In recent years, California utilities have implemented several preventive blackouts in windy and dry conditions. These steps are aimed at reducing the likelihood that your equipment will spark forest fires.
As people in their homes or businesses fail more often or for longer periods of time, more consumers and business owners should be encouraged to buy emergency power generators. This is even more true in this era when people are increasingly working from home, where lights and a computer are usually essential to get their jobs done.
In the second quarter, Generac's home standby generator shipments almost doubled from the same period last year and the company is ideally positioned to continue to benefit from the strong demand for emergency generators as it is the largest player in that market. It is also a major player in commercial and industrial standby generators. In addition, the company has expanded into the clean energy market in recent years. It makes battery storage systems that can store energy from solar panels or the power grid, and related products.
Wall Street analysts have consistently underestimated Generac's earnings growth potential. So there is good reason to believe that the company's earnings growth will exceed the 8% average annual growth that analysts expect over the next five years. For the past four quarters, the company has broken the consensus estimate on every quarter, with two of the beats being sizeable.
Bottom line
I close with a sentence from my article from almost two years ago: “American Water, Pool Corp. which seems extremely unlikely). “
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.