The top 'climate stocks,' according to analysts, including BYD and more

Two of the "most attractive" climate themes for investors right now are energy storage and the future of transportation.

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“With global climate stocks up 3% on a relative basis (YTD) on the back of two strong years in 2022 and 2021, the global climate stocks have started 2023 on a strong note, outpacing global equities (FTSE All World) by 8% in 2022 and 15% in 2021,” according to analysts led by Thomas C. Hilboldt.

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There has been a strong price increase in energy storage products this year so far, and it has led all the climate themes that the bank covers with the highest return - 10% - so far this year.

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“Although long-term valuations are still below average, analysts expect earnings to grow by c40% higher than the earnings of global climate stocks over the next 12 months,” according to a report from Deutsche Bank on Feb. 20.

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The bank also noted that the efficiency of the transport system is among the "most favorable."

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“It is our view that companies in the Transport Efficiency theme are attractive in our view because they are priced at relatively inexpensive levels, have a positive 12M forward consensus earnings growth outlook (12% compared to climate stocks) and the sector is increasingly focused on decarbonizing itself," the note stated.

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Upside-oriented stocks

There are a number of stocks in both of these themes that HSBC rates as buy rate, which have among the highest upside potential relative to the bank's price target.

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As for energy storage, CATL, which makes batteries for electric vehicles, made the list with a 55% upside, SQM, which produces lithium, made the list with a 40% upside, and Livent, which makes lithium, made the list with a 38% upside.

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The bank highlighted Warren Buffett’s investment in electric vehicle maker BYD (Hong Kong-listed, over 97% upside probability) and the automaker Stellantis, a company that was created when PSA Group and Fiat Chrysler merged (38% upside probability).

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Battery demand and price outlook

There was a 7% year-over-year increase in the average price of lithium-ion batteries, the type of battery used in electric vehicles, according to HSBC. Battery prices are expected to remain high this year before dropping at the start of 2024, according to the company.

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“Despite rising energy storage costs in 2022, the global market for energy storage continues to grow. Battery demand has rapidly increased due to the fast-growing clean-transport sector, driven by electric vehicles' increasing adoption," said HSBC, adding that demand should double this year compared to last.

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Considering the strong demand for energy storage, the note described the companies in this sector as the "potential frontrunners."

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