Why doesn’t Warren Buffett have renewable energy stocks?

Warren Buffett is widely regarded as the greatest investor ever. And rightly so. His company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), has outperformed the market since its inception. However, Berkshire has achieved the S&P 500 over the past 10 years – largely due to Buffett not owning many of the growth stocks that produced the market.

Of the 48 Berkshire Hathaway companies, none are renewable energy sources. Let’s break down the reasons why Buffett has led clean from renewable materials, and why now is probably the best time to change his course.

Explains Berkshire Hathaway Energy

It is important to first understand Berkshire Hathaway Energy (BHE) and how it fits into Berkshire Hathaway. Berkshire Hathaway owns 91.1% of BHE. Buffett is considering BHE as part of its “big four” with insurance companies, 100% ownership of the largest U.S. rail by volume of goods (BNSF), and 5.4% ownership of Apple (NASDAQ: AAPL).

BHE is a major U.S. energy operator, meaning it is in a similar industry to utilities and other energy infrastructure companies. BHE is very large, with over $ 100 billion in assets and generating $ 3.4 billion in net income by 2020. Most of its holdings are electricity and natural gas management facilities, transmission and circulation industries that deal mainly with fossil fuels. BHE Renewables is the main exception.

At the end of 2020, BHE Renewables has interests in 4.7 gigawatts (GW) of renewable energy projects and has invested more than $ 6 billion in 32 third-party wind energy projects. In 2020, BHE Renewables generated $ 936 million in revenue and $ 521 million in net revenue. For comparison, Brookfield Renewables Corporation – which has a value of $ 7.7 billion and a renewable property similar to BHE – which has 18.8 GW of renewable capacity and has generated $ 3.09 billion in revenue in 2020. Therefore, Buffett likes energy. But BHE does not own much renewable energy assets for its size.

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Berkshire Hathaway package

Now that we have a better handle on how BHE fits into Berkshire Hathaway as a whole, the rest of our discussion will focus on Berkshire ‘s portfolio of public commercial companies (not the sub – their companies).

Berkshire’s portfolio has changed dramatically over the past five years, notably with Apple’s purchase in 2016. Since then, Apple has become Berkshire’s largest holder. Valued at more than $ 108 billion, Apple stock comprises a staggering 38% of Berkshire’s portfolio of commercial companies. Buffett has also contributed Avalanche and StoneCo, two hyper-growing stocks that go against their traditional investing value curve. Because Buffett has so much Apple, its package is twice the technical density of the S&P 500. Buffett is also financially overweight and consumer staples and under the pressure of every other division. Of course, the Buffett package looks nothing like the S&P 500. The following charts compare the two.

Buffett has had a dense portfolio for decades – so it’s no surprise that Berkshire’s distribution differs compared to the market. However, what is surprising is that it has not added any renewable stock as it is open to growth businesses.

Why Buffett has avoided renewable energy stocks

Profit and valuation is the most likely reason Buffett has avoided renewables. Despite the growth path, the industry tends to be cyclical and even unprofitable. It seems like a distant memory now but 2016 was a recession in the solar industry. The average stock is in the Invesco Solar ETF lost 45% of its value in just one year. Short on to 2020, and the average stock in the Invesco Solar ETF it went up more than 230% and the average stock went in the First Global Wind Energy ETF Trust received 59%.

The report has shifted in 2021 as renewables significantly outperform the market. While there are legitimate reasons why renewables are currently selling off, discounted prices could give Buffett a more attractive entry point into a new segment. Renewable energy is still cyclical, but costs have come down and established players have shown they can better manage profits through market cycles.

Renewable energy stocks are worth considering

Renewable energy stocks would fit perfectly in a Berkshire package. Despite what has been sold, long-term tails for renewable energy are brighter than ever.

There are many different ways to invest in the sector. As a utility operator, BHE is already investing in a large part of the renewable supply chain. However, a well run facility as Power NextEra (NYSE: NEE) stands out as a good buy. NextEra Energy Resources, the company’s renewables division, had over $ 5 billion in 2020 revenue and a renewable capacity of more than 27 GW at the end of 2020. NextEra’s business has a complete history for continental employment and growth and is the largest resource in the US by market potential.

Buffett could also invest in an original equipment manufacturer (OEM) such as General Electricity no Siemens. These companies design designations and manage renewable energy projects. GE, in particular, has been focusing on full-time renewable growth.

Finally, Buffett could go for a more realistic renewable energy stock. Market leaders like it Power of Enphase that has been running too far too fast in 2020 has come down in price and that might be quite appropriate. If Buffett felt too bold, smaller companies would be a wind blade maker TPI Composites worth a look.

Takeaways

BHE is a key part of Berkshire Hathaway, but its renewable assets are small due to the size of Buffett’s holdings. Other than facility operators, Buffett has little knowledge of other aspects of renewable energy. If Buffett is open to investing in Snowflake and StoneCo, he could stand to benefit from adding some growing renewable energy stock as well.