Research · Bachelor's thesis
A Formula for Investing in the Renewable Energy Sector
Abstract
The renewable energy sector has seen substantial growth in recent years, presenting not only a critical shift towards sustainable development but also encouraging individuals to invest in accordance with ethical and environmental considerations with the potential for financial returns. Along with these opportunities come the challenges in selecting high-yield stocks, a task which for many can be both intimidating and unrewarding as it requires knowledge, time, and dedication. While there are thousands of investment strategies, few are publicly available in the renewable energy sector, thus leaving a gap in research. The purpose of this paper is to develop a method which simplifies the process of selecting high-yield renewable energy stocks on the global stock market.
Drawing inspiration from Joel Greenblatt's magic formula and implementing panel data regression based on 10 stocks from 2007–2023, return on asset and revenue growth were shown to be statistically significant. A portfolio of 6 stocks was created based on a subset of 35 stocks in the renewable energy sector from 2018-03-27 to 2023-03-27. On an annual basis the portfolio was rebalanced based on highest return on asset and revenue growth. The portfolio outperformed the market index for global clean energy and the top-performing clean energy exchange-traded fund but did not generate any excess return.
Key findings
- Return on assets and revenue growth explain the returns of renewable energy stocks. In a random-effects panel of ten firms from 2007 to 2023, return on assets is significant at the 1% level and revenue growth at the 10% level. The formula ranks firms by return on assets, and uses revenue growth to separate firms with the same return on assets.
- The six highest-ranked of 35 stocks, rebalanced each year, returned 25.47% a year on average from March 2018 to March 2023, against 14.91% for the S&P Global Clean Energy Index and 13.63% for the SPDR S&P Kensho Clean Power ETF after its fee.
- The portfolio beat the index in four of the five years, but its extra return matches extra market risk: its beta is 1.05, and Jensen's alpha is not statistically significant.
Returns, March 2018 to March 2023
| From March | Portfolio | Index | ETF |
|---|---|---|---|
| 2018–19 | 1.84% | 2.89% | −23.62% |
| 2019–20 | 40.85% | 5.89% | 14.02% |
| 2020–21 | 93.52% | 81.86% | 107.13% |
| 2021–22 | −6.14% | −6.68% | −19.45% |
| 2022–23 | −2.72% | −9.39% | −9.93% |
| Average | 25.47% | 14.91% | 13.63% |
About the study
- Sample
- Ten renewable energy firms for the regression; 35 stocks listed in the United States, Canada, France, Germany, Sweden and Norway for the portfolio
- Data
- Annual reports and prices from Refinitiv Eikon, 2007 to 2023
- Method
- Panel regression with random effects, chosen by a Hausman test, and robust standard errors; the Capital Asset Pricing Model for risk adjustment
- Portfolio test
- March 2018 to March 2023, against the S&P Global Clean Energy Index and the SPDR S&P Kensho Clean Power ETF
- Paper
- Bachelor's thesis in economics, Umeå University, May 2024; 37 pages
An academic paper, published for information. Its portfolios are historical backtests, not recommendations to buy or sell any security, and nothing here is investment advice. Past returns are no guarantee of future returns. Balk Investmentbolag and its co-owners may hold shares in companies named in the paper.