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3 Stocks That Will Benefit From the Inflation Reduction Act

These climate-related companies are well positioned to profit.

Key Takeaways 

  • The Inflation Reduction Act would provide a 10-year solar power credit extension.  
  • Several industries are expected to benefit from the Act, including domestic manufacturing, hydrogen, and energy storage. 

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The Inflation Protection Act includes funding to fight climate change. Here today to dig into some of the details and discuss what industries and stocks may benefit most is Dave Sekera. Dave is Morningstar's Chief U.S. Market Strategist.

So, Dave, let's start by unpacking what exactly is in the Act when it comes to climate change. What are some of the key takeaways?

David Sekera: Well, we're going to see a significant increase in the amount of spending on clean energy specifically coming from this Act. I just recently spoke with our clean energy analyst, and he really noted that he thought there were three main key takeaways that investors should be watching here.

First, he noted that there is a 10-year extension for solar power credits. That really will have an impact in that market specifically. And with solar power, the prior incentives were going to roll off over the next couple of years, so that 10-year extension in his mind is going to end up adding a lot of value to stocks levered to the solar power.

 Second, he noted incentives for new technologies in clean energy. Two of the bigger beneficiaries there that he noted were going to be hydrogen and energy storage. 

Finally, he just noted the incentives for domestic manufacturing. So, prior to this, the U.S. imported a lot of the solar panels and a lot of the equipment used for solar. So, he thinks that we will be seeing a big shift here to domestic manufacturing for solar and for the inverters used in solar power.

3 Stocks That Will Benefit from Inflation Reduction Act 
The companies are considered fairly valued. Data as of August 15.  

  1. SunPower (SPWR)   
  2. First Solar (FSLR)   
  3. Plug Power (PLUG)   

Dziubinski: So, then, Dave, what industries are likely to benefit the most from this legislation?

Sekera: And again, talking to our analysts, the four that he highlighted for us were residential solar, hydrogen, energy storage, and domestic manufacturing.

Dziubinski: So, then, are Morningstar's analysts at this point in time reevaluating increasing their fair value estimates as a result of this legislation? And if yes, what would you expect to see in terms of revaluation of some of these names?

Sekera: He is going through all of that on all of his names. Right now, some of them, we've actually already increased our fair values and others, he is putting that into his model. So, I would say, of course, it's going to depend on the company, it's going to depend on the specifics of what they're involved in. But we are seeing fair value increases of up to 20% and in some cases, even slightly more.

Dziubinski: Wow. Can you give us a few stocks that might benefit the most?

Sekera: Sure. So, I would actually also note too that in the clean energy sector, a lot of our coverage even before this bill we thought was already fully, to in some cases, even already overvalued. So, even though we are looking at, and in some cases, have increased our fair values, I would encourage investors to make sure that you are careful in your stock selection, because the market has certainly been running up on this news. But the three stocks that he highlighted to me that he thought had probably some of the best upside leverage to this was going to be SunPower, First Solar, and Plug Power.

Dziubinski: Well, Dave, thank you for your take on the Act. We appreciate it and of course, appreciate the stock ideas, too.

Sekera: Well, thank you, Susan. 

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch 3 Top Stocks to Buy in Q3 2022 from Dave Sekera for more investing ideas.