Why renewable energy stocks jumped on Tuesday

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What happened

The stock market had a good day on Tuesday with the S&P500 climbing 1.4% at 12:40 p.m. ET and the Nasdaq Compound up 2.3%. The two main news items of the day are the producer price index which rose only 0.2% in October, below an estimate of 0.4%, as inflation in the market wholesale is getting colder. The other big factor in the market rally is the apparent willingness of the United States and China to discuss how to work together. That might not last, but for now, the market appreciates the recent talks between the leaders of the two nations.

Three renewable energy stocks who move today are Plug hole (PLUG 2.49%)which jumped 5.5%; Bloom Energy (BE 3.29%), up 5.3%; and flashing charging (BLNK 1.40%), with a pop of 5.5%. Stocks are still at 3.4%, 3.5% and 2.9%, respectively, as I write this.

So what

Today, investors are attracted by falling interest rates, which makes renewable energy projects cheaper to build. In the United States, the yield on 10-year government bonds fell by 3 basis points today at 3.82% and is now down 20 basis points over the past month.

Renewable energy investors are concerned about interest rates because these projects often have high upfront costs during construction and then generate value over decades. Thus, the discount rate used by investors to value future cash flows can significantly change the value of a project today. Lower rates mean higher values ​​today, which is good for these businesses.

China is a key part of the supply chain, which could also have an impact. Companies get components from there, even if they assemble them in the United States, and China is a major market for almost every renewable energy industry.

It will take years for interest rates and trading changes to show up in a company’s income statement, but that’s what the market is looking at today.

Now what

The market has not been kind to most renewable energy companies over the past year, but these developments could be a sign that sentiment is changing. Interest rates will likely rise over the next few months, but investors buying long-term bonds are not asking for as high a rate as the short-term rate, which is bullish for those borrowing money to build projects.

What I’m going to see from these companies is their ability to improve their margins and generate positive cash flow. Building projects is tough with higher rates, but the environment to fundraise for a cash-burning business is even tougher. Plug Power, Bloom Energy, and Blink Charging are all burning cash right now, so the first to break even in cash flow might be the best long-term investment.

Travis Hoium has positions in Bloom Energy Corp and has the following options: long January 2023 $15 puts on Blink Charging Co. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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