QCLN: Follow The Money ($1 Trillion+) Into EVs And Green Energy (NASDAQ:QCLN)

Global investment in the clean energy transition is booming – led by renewable green energy (primarily wind and solar) and EVs. Last year, Bloomberg reports that global investment in the clean-green energy transition reached a milestone: exceeding $1 trillion and pulling even with investments in fossil fuels for the first time ever. While there are obviously many ways to invest in this trend, today I will consider the diversified First Trust NASDAQ Clean Edge Green Energy Index ETF (NASDAQ:QCLN) to see if it might be a good candidate for your well-diversified portfolio.

Investment Thesis

Led by investments in solar, wind, and EVs, global investment in the clean-energy transition exceeded $1 trillion last year for the first time ever:

Investments in renewable solar and wind power led the way (with more than 350 GW of incremental power generation capacity added), but EV related investments are growing much faster:

As can be seen in the graphic above, investments in electrified transport is booming and will likely exceed renewable energy investments this year.

With that as background, let’s take a look at the QCLN ETF to see how it has positioned investors for success going forward.

Top-10 Holdings

The top-10 holdings in the QCLN ETF are shown below and were taken directly from the First Trust QCLN webpage, where investors can find more detailed information on the fund and its holdings. The top-10 holdings equate to what I consider to be a moderately diversified ~56% of the entire 61 company portfolio:

The #1 holding with an 8.6% allocation is specialty chemicals company Albemarle Corp. (ALB). ALB is a leading producer of lithium – a critical material used in the production of EV batteries. ALB is experiencing strong demand and is expected to grow revenue to $11.8 billion this year, up 60%+ yoy:

ALB shares are up 37% over the past year and currently trade with a forward P/E of only 13x.

Tesla (TSLA) is the #3 holding with a 7.8% weight. As most of you know, Tesla stock is up a meteoric 60%+ so far this year after a massive beat-down last year. Q4 results were released last Wednesday and reported revenue of $24.32 billion (+37.2% yoy), free-cash-flow of $1.42 billion, and record deliveries of 405,278 EVs. However, due to cost-cuts to move inventory against strong and growing competition, gross margin was 25.9% – down from $27.9% in the prior quarter. Tesla currently trades with a forward P/E = 45x.

The #4 holding is Enphase (ENPH) with a 5.6% weight. Enphase specializes in microinverters and associated networking and software for the solar industry. ENPH stock is up 75% over the past year after posting strong Q3 results in October and raising Q4 guidance. Q4 results are due out on February 7th and I expect another strong report as ENPH is expected to grow revenue by ~50% this year.

EV maker Lucid (LCID) is the #5 holding with a 5.4% weight. Lucid jumped 43% Friday on a short-covering rally due to rumors that the Saudi Public Investment Fund is may purchase the remaining shares of Lucid it doesn’t already own (the fund controls a 62% stake in the company). Seeking Alpha currently reports a 25% short position in the company, but it is not clear if that number has been updated after Friday’s trading. Meantime, Lucid is still losing money and has a $23.5 billion market cap. However, the company is making solid progress: Q4 production was 3,493 vehicles with 1,932 vehicles deliveries during the quarter. For the full year, LCID produced 7,180 vehicles – exceeding its prior guidance range of 6-7,000 EVs. Lucid delivered 4,369 vehicles in calendar-year 2022 and Q4 earnings are due out on February 22nd.

The #9 holding with a 3.3% weight is semiconductor company Wolfspeed (WOLF). WOLF specializes in low-power highly-efficient silicon-carbide based semiconductors for the EV-market. Revenue is expected to grow to $1.36 billion in FY24 from an expected $922 million in FY23. In Q2 FY23, WOLF reported revenue of $216.1 million (+24.8% yoy) with GAAP gross margin of 31.0% and quarterly design-ins of $1.5 billion. However, on a GAAP basis the company lost $90.9 million, or $0.73 per diluted share.

Overall, the QCLN portfolio is most highly exposed to the renewable energy, EV, and semiconductor sub-sectors:

Performance

As of year-end 2022, and despite a bear-market thrashing last year, QCLN has an admirable 18.2% average annual return over the past decade:

Indeed, over that time QCLN has not only delivered superior returns as compared to the Vanguard S&P 500 ETF (VOO), but has also significantly beat the Nasdaq-100 as represented by the (QQQ) ETF:

The following graphic compares the 3-year total returns of QCLN to some of its competitor funds such as the iShares Self-driving EV and Tech ETF (IDRV), the ALPS Clean Energy ETF (ACES), the iShares S&P Global Clean Energy Index ETF (ICLN), and the Invesco WilderHill Clean Energy Portfolio ETF (PBW):

As can be seen, the QCLN ETF has far-and-away delivered superior total returns as compared to these competitors.

Risks

As most investors know, the clean-green energy and EV space is quite volatile and – as can be seen by the top-10 holdings in the QCLN ETF – is represented by some companies that, while growing revenue at a fast-paced clip, are yet to be profitable. That said, after a 30%+ decline in the fund last year, it currently trades with a P/E of only 24.3x, down considerably from the 32x valuation the ETF had when Seeking Alpha published my first BUY-rated article on QCLN back in August of 2020 (see Green Energy QCLN: EVs, Solar, & Wind, Oh My):

Note that shares have more than doubled the returns of the S&P500 since that article was published.

That said, investors should consider that QCLN shares were up 4.3% on Friday on the heels of a strong rally in EV stocks – primarily Tesla and Lucid. That being the case, I suspect there will be some profit-taking early next week and advise investors to be patient in order to achieve a more promising entry point (or to add to an existing position).

Summary & Conclusion

Governments around the globe – especially in China, the U.S., and the EU – have instituted strong incentives for companies to invest in clean energy (solar, wind, battery backup), EVs, and EV batteries. Last year, clean-green energy investments exceeded $1 trillion for the first time and were roughly equal to fossil-fuels related investments. This trend is likely to continue – and accelerate – going forward. That being the case, investors should consider a direct and diversified investment in the clean energy sector – and the QCLN ETF is one of the best ways to do so. QCLN is a BUY.