The Inflation Reduction Act 2022: Top 10 Winners

Published on August 13, 2022 at 2:43 pm by Hamna Asim in Hedge Funds, News

In this article, we discuss the top 10 winners of the Inflation Reduction Act 2022. If you want to see the top stocks in this category, check out The Inflation Reduction Act 2022: Top 5 Winners.

The Inflation Reduction Act of 2022 was authorized by the U.S Senate on August 7, with the deciding vote being cast by Vice President Kamala Harris. The $740 billion stimulus package is expected to affect corporate taxes, where a corporate alternative minimum tax (AMT) of 15% will be liable, in addition to taxed share buybacks. The aim of the bill is to reduce overall inflation in the United States and move towards a greener environment.

The Inflation Reduction Act and Green Energy

The Inflation Reduction Act will allot billions towards green energy initiatives. That includes a 30% tax credit for building or repairing renewable energy plants, tax credits on green energy generation, and production-related credits for manufacturers of solar and wind power equipment and accessories. According to Peter Krull, the director of investments at the North California-based Earth Equity Advisors, while 2020 was great for the alternative energy sector, 2021 and 2022 have been tough for the industry. Krull believes the Act will benefit green energy firms and propel them back into positive territory.

The Inflation Reduction Act and EV Manufacturers

The Inflation Reduction Act will allocate a $7,500 consumer income tax credit for the purchase of a new electric vehicle, as well as a $4,000 tax credit for the purchase of a used EV, in its bid for a cleaner environment. However, there are price and income caps in place. For new electric vehicles, the retail price for cars can’t exceed $55,000 in order for it to qualify for the tax credit. For SUVs, trucks, and vans, that price cap will be $80,000. The consumers eligible for these tax credits will also need to fall within a specified adjusted gross income range of $150,000, $300,000, and $225,000 in the case of single individuals, married couples, and individuals who file as the head of households, respectively.

For electric vehicle manufacturers, the final assembly of the vehicles needs to take place in North America, and key materials for batteries must be manufactured or assembled in North America. The bill is intended to make the American EV industry more competitive and reduce its reliance on China.

The Inflation Reduction Act and Healthcare Provisions

The Inflation Reduction Act will work to lower health insurance costs for about 13 million Americans, capping medicine costs for seniors at $2,000 annually. Diabetes patients with Medicare will only have to pay $35 monthly for insulin. The government will start negotiating the price of ten drugs by 2026, which will expand up to 20 drugs by 2029. Seniors who are prescribed expensive medicines for cancer, multiple sclerosis, or other similar illnesses are the ones most likely to benefit from the bill. While big pharma is likely to be a loser in the wake of the Inflation Reduction Act, health insurers stand to gain tremendously.

Some of the top winners of The Inflation Reduction Act of 2022 include Tesla, Inc. (NASDAQ:TSLA), UnitedHealth Group Incorporated (NYSE:UNH), and Enphase Energy, Inc. (NASDAQ:ENPH).

The Inflation Reduction Act 2022: Top 10 Winners

Photo by MIKE STOLL on Unsplash

Our Methodology

We selected companies from the renewable energy, health insurance, and EV sectors that stand to potentially benefit from the Inflation Reduction Act of 2022. We ensured that the chosen stocks have strong business fundamentals, robust future outlooks, optimistic analyst ratings, and positive hedge fund sentiment as of Q1 2022.

The Inflation Reduction Act 2022: Top Winners

10. Sunnova Energy International Inc. (NYSE:NOVA)

Number of Hedge Fund Holders: 26

Sunnova Energy International Inc. (NYSE:NOVA) is a Texas-based company that offers residential solar energy services in the United States. Sunnova Energy International Inc. (NYSE:NOVA) more than doubled its revenue year-over-year in Q2 2022, and added 17,300 new customers. In line with the climate and energy initiatives in the Inflation Reduction Act, Sunnova Energy International Inc. (NYSE:NOVA) is positioned to be one of the beneficiaries of the legislation. The company’s revenue in Q2 grew 121% year-over-year to $147 million, outperforming estimates by $60.11 million. Sunnova Energy International Inc. (NYSE:NOVA) also reaffirmed its 2022 guidance of new customer additions ranging between 85,000 and 89,000 and adjusted EBITDA of between $117 million and $137 million.

On August 8, JPMorgan analyst Mark Strouse raised the price target on Sunnova Energy International Inc. (NYSE:NOVA) to $54 from $43 and kept an ‘Overweight’ rating on the shares. The analyst sees the Inflation Reduction Act as the biggest policy change in U.S. history to promote growth in an “already inevitable energy transition to renewables”.

Among the hedge funds tracked by Insider Monkey, 26 funds were bullish on Sunnova Energy International Inc. (NYSE:NOVA) at the end of Q1 2022, compared to 25 funds in the earlier quarter. Ken Griffin’s Citadel Investment Group is the largest shareholder of the company, with 1.35 million shares worth $31.2 million.

In addition to Tesla, Inc. (NASDAQ:TSLA), UnitedHealth Group Incorporated (NYSE:UNH), and Enphase Energy, Inc. (NASDAQ:ENPH), Sunnova Energy International Inc. (NYSE:NOVA) is positioned to be one of the beneficiaries of the Inflation Reduction Act.

Here is what Clearbridge Investments Small Cap Strategy had to say about Sunnova Energy International Inc. (NYSE:NOVA) in its Q1 2022 investor letter:

“We initiated a new position in Sunnova (NYSE:NOVA), in the energy sector. Sunnova is a residential solar and energy storage company that enables adoption through a network of installers with options for financing, service and broader home energy management. Rising interest rates and solar energy supply constraints weighed on the stock’s performance in the fourth quarter of 2021 but created a compelling valuation opportunity to buy this business when the market was embedding low growth expectations. We believe Sunnova will deliver value accretive growth for a much longer time, with its downside limited by the long-term, fixed-rate, high- quality contracts it has with customers.”

9. Rivian Automotive, Inc. (NASDAQ:RIVN)

Number of Hedge Fund Holders: 29

Rivian Automotive, Inc. (NASDAQ:RIVN) is a California-based manufacturer of electric vehicles and accessories. The company also operates the Rivian Commercial Vehicle platform for electric delivery vans in collaboration with Amazon. Rivian Automotive, Inc. (NASDAQ:RIVN) has its primary manufacturing facilities in Illinois, California, Michigan, and Arizona, which is in line with the Act’s stipulations, making it a beneficiary. Rivian Automotive, Inc. (NASDAQ:RIVN) needs to introduce new models under $55,000 to fully gain from the Inflation Reduction Act.

On August 12, Morgan Stanley analyst Adam Jonas told investors that although significant cash burn will continue at Rivian Automotive, Inc. (NASDAQ:RIVN), liquidity can last through most, if not all, of FY23. Rivian Automotive, Inc. (NASDAQ:RIVN) reassured shareholders about its FY production target of 25,000 units as its reservation book climbed to 98,000 from 90,000 previously. Thus, the analyst reaffirmed his ‘Overweight’ rating and $60 price target on the stock.

According to Insider Monkey’s data, 29 hedge funds were bullish on Rivian Automotive, Inc. (NASDAQ:RIVN) at the end of March 2022, compared to 47 funds in the earlier quarter. Philippe Laffont’s Coatue Management is the leading shareholder in the company, with 30.8 million shares worth over $1.5 billion.

Here is what Baron Global Advantage Fund had to say about Rivian Automotive, Inc. (NASDAQ:RIVN) in its Q1 2022 investor letter:

“Rivian Automotive, Inc. designs, manufactures, and sells consumer and commercial electric vehicles. Shares of Rivian continued its volatile trading following the stock’s IPO in late 2021, declining 52% in the first quarter as investors rotated out of fast-growing long-duration stocks and as industry wide supply-chain issues delayed Rivian’s production ramp. In addition, even while other automotive companies raised prices due to inflationary pressures, Rivian launched a price increase campaign that was not well communicated and, as a result, was met with dissatisfaction by existing reservation holders. While this was an unforced error, the company quickly corrected course, reversing its decision to raise prices for existing reservations, while maintaining the increase on new buyers (which has not caused a material impact to demand). We retain conviction in the shares given management’s vision, Rivian’s product positioning, the company’s relationship with Amazon.com, and the company’s strong balance sheet, which will help it overcome the current challenges while taking advantage of the long-term opportunity as the market transitions to electric vehicles.”

8. Energy Transfer LP (NYSE:ET)

Number of Hedge Fund Holders: 31

Energy Transfer LP (NYSE:ET) is a Texas-based company that provides energy-related services, such as infrastructure, natural gas storage facilities, and natural gas transportation pipelines. Energy Transfer LP (NYSE:ET) stands to benefit from the Inflation Reduction Act as the legislation aims to eliminate the uncertainty around new infrastructure projects. Gas is considered a cleaner source of energy than coal, and in the shift towards renewables, natural gas will be preferred until there is mainstream adoption of renewable energy. This transition could take years, during which time gas companies like Energy Transfer LP (NYSE:ET) will make money and the government will continue to subsidize new pipelines and energy infrastructure.

On August 3, Energy Transfer LP (NYSE:ET) reported its Q2 results, announcing GAAP earnings per share of $0.39, topping the market consensus by $0.02. The company’s revenue came in at approximately $26 billion, up 71.5% year-over-year, and outperforming Wall Street’s estimates by $5.57 billion. Energy Transfer LP (NYSE:ET) also declared a $0.23 per share quarterly dividend on July 26, a 15% increase from its prior dividend of $0.20. The dividend is distributable on August 19, to shareholders of record as of August 8. ET shares delivered a dividend yield of 7.93% as of August 12. The company aims to return extra value to stakeholders while maintaining its leverage ratio of 4.0x-4.5x debt-to-EBITDA.

On July 20, Barclays analyst Theresa Chen maintained an ‘Overweight’ rating on Energy Transfer LP (NYSE:ET) and lowered the price target on the shares to $13 from $14. The analyst appreciates firms with “solid” Q2 midstream earnings and expects the group to “generally fare better than other energy subsectors amid a trading environment rife with volatility”.

Among the hedge funds tracked by Insider Monkey, Energy Transfer LP (NYSE:ET) was part of 31 public stock portfolios at the end of Q1 2022, compared to 36 funds in the prior quarter. David Abrams’ Abrams Capital Management is the largest stakeholder of the company, with over 22 million shares worth $247.5 million.

Miller Value Partners, an investment firm, talked about Energy Transfer L.P. (NYSE:ET) in its Q2 2021 investor letter. Here is what the fund said:

“Energy Transfer LP (ET) rose over the period along with the price of oil climbing 40.59% over the period. The company received positive news that the Dakota Access Pipeline project would not be shut down while the Environmental Impact Statement by the US Army Corps of Engineers is drawn up. Energy Transfer reported strong 1Q results with revenue of $17B surpassing expectations for $11.8B with adjusted earnings before income, taxes, depreciation and amortization (EBITDA) hitting $5.04B ahead of consensus of $2.77B. The company raised full year adjusted EBITDA guidance to $12.9-13.3B from $10.6-11.0B previously, with the increase largely related to the benefits realized from Winter Storm Uri. The company paid down $3.7B in debt during the quarter, using strong cash flow to reduce leverage. The company also announced the issuance of $900M in 6.5% Series H perpetual preferreds with the company using the proceeds to repay debt and for general purposes.”

7. First Solar, Inc. (NASDAQ:FSLR)

Number of Hedge Fund Holders: 35

First Solar, Inc. (NASDAQ:FSLR) is an Arizona-based company that provides photovoltaic solar energy solutions in the United States, Japan, France, Canada, India, Australia, and other international markets. First Solar, Inc. (NASDAQ:FSLR) is one of the leading American renewable energy firms, and it stands to be one of the biggest winners of the Inflation Reduction Act. The stock rose 9% on August 8 as the climate bill made headlines.

On August 11, KeyBanc analyst Sophie Karp upgraded First Solar, Inc. (NASDAQ:FSLR) to ‘Overweight’ from ‘Sector Weight’ with a $145 price target. The manufacturing tax credit for locally made solar panels makes First Solar, Inc. (NASDAQ:FSLR) the most direct beneficiary of the Inflation Reduction Act in her coverage, the analyst contended. Despite comparative outperformance since the IRA became public, the analyst sees additional upside, particularly due to First Solar, Inc. (NASDAQ:FSLR)’s success towards scaling larger operations and reducing input costs. The analyst estimates that First Solar, Inc. (NASDAQ:FSLR) could be eligible for about $400 million in tax credits, and should achieve at least a 20% gross margin by 2025 on over $3 billion in revenue.

According to Insider Monkey’s data, 35 hedge funds were long First Solar, Inc. (NASDAQ:FSLR) at the end of Q1 2022, compared to 36 funds in the prior quarter. Jim Simons’ Renaissance Technologies is one of the leading shareholders of the company, with 931,000 shares worth $78 million.

Here is what White Brook Capital had to say about First Solar, Inc. (NASDAQ:FSLR) in its Q1 2021 investor letter:

“First Solar (FSLR) and Itron (ITRI), both of which I’ve written about in past In Focus sections, were long-term positions that were sold as their prices exceeded price targets. Both are solid companies that remain on my watchlist, but the opportunity cost of not investing in other potential investments exceeded their potential mid-term returns.”

6. Sunrun Inc. (NASDAQ:RUN)

Number of Hedge Fund Holders: 37

Sunrun Inc. (NASDAQ:RUN) was founded in 2007 and is headquartered in San Francisco, California. The company specializes in residential solar energy systems in the United States. It is one of the most optimally positioned solar panel companies to benefit from the recently announced climate change bill by the Senate. Sunrun Inc. (NASDAQ:RUN) reported a 45% year-over-year (YoY) increase in revenue in Q2 2022, with total customers increasing 21% YoY to more than 724,000. Sunrun Inc. (NASDAQ:RUN) continues to forecast solar energy installed growth of 25% or more for 2022, after 246.5 MW were installed during the second quarter.

On August 8, JPMorgan analyst Mark Strouse raised the price target on Sunrun Inc. (NASDAQ:RUN) to $65 from $52 and kept an ‘Overweight’ rating on the shares. The analyst sees the Inflation Reduction Act as the largest policy in U.S. history to boost growth in a transformational shift to renewable energy. Although alternative energy stocks have gained since the bill first made headlines, there is further upside for most companies in the space, said the analyst.

According to Insider Monkey’s data, 37 hedge funds were bullish on Sunrun Inc. (NASDAQ:RUN) at the end of the first quarter of 2022, up from 31 funds in the earlier quarter. William B. Gray’s Orbis Investment Management is the largest shareholder of the company, with 10.71 million shares worth $325.3 million.

Like Tesla, Inc. (NASDAQ:TSLA), UnitedHealth Group Incorporated (NYSE:UNH), and Enphase Energy, Inc. (NASDAQ:ENPH), smart investors are monitoring Sunrun Inc. (NASDAQ:RUN), as it stands to be one of the top winners in the wake of the Senate bill.

Here is what Horizon Kinetics had to say about Sunrun Inc. (NASDAQ:RUN) in its Q2 2021 investor letter:

“What this table did not cover is valuation. What’s expensive, what’s cheap? A good business that is too expensive is not a good investment. The most expensive business on the table is Sunrun. Sunrun is the nation’s largest residential rooftop solar panel system seller/installer. Sunrun’s valuation might also shed Thumbnail valuation.

To start at the top of the income statement, Sunrun shares trade at 10.3x revenues. The most profitable company in the S&P 500, Microsoft, trades at 13x revenues. Sunrun operates at a loss. Obviously, not only is tremendous growth anticipated, but tremendous profitability, too.

Let’s simply accept that investors have correctly anticipated Sunrun’s future success and make that the starting point for a valuation exercise.

If, 10 years from now, Sunrun is ultimately valued at 25x net income, and if today’s $9.5 billion valuation is appropriate, that would require $380 million of net income ($9,500 million ÷ 25).

Let’s say Sunrun will have the same net profit margin as the average S&P 500 company, which is 10%. That means it would need $3,800 million of sales to generate that level of earnings ($380 mill ÷ 10%).

Since sales are now $920 million, they would have to rise by 4.1x in the next 10 years. That would require annual sales growth of 15.2%.

You see how neatly that all works: investors accept the company’s 10-year, 15% annual sales growth projections, and if a 10% net profit margin and a P/E of 25x earnings are reasonable, then the company will have a $9.5 billion market cap at that time. Except that is the current price. That means a 10-year return of zero.

In order to get a 10% annualized return from the stock, Sunrun would need to be priced at a P/E of 65x its earnings 10 years from now, if at a 10% net margin. Or it would have to have some combination of lower P/E and higher growth and/or higher profit margin.

In the meantime, this is Sunrun’s recent pattern of revenue growth and profitability (the company did recently increase its estimate of installed-capacity growth in 2021 from 20-25% to a new estimate of 25% to 30%).

For the time being, Sunrun loses an extraordinary amount of money, an amount that has been getting larger. Perhaps there are economies of scale that will manifest in the future,so that it will attain profitability. Perhaps from the roughly one-half of Sunrun’s revenues that are from long-term customer service agreements that run up to 25 years. For now, though, the company would seem to require a lot of external financing, and that is one of the greatest business risks.”

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