Across each window, XLE shows strong consistency in top holdings: 4 out of 6 companies – Chevron, ConocoPhillips, EOG Resources, Schlumberger, Exxon and Phillips 66 – account for a little over 50% by weight in the ETF. On the other hand, ICLN has anywhere from 9 to 11 companies amounting to 50%, with Enphase, Vestas, Plug Power and SolarEdge frequently (but not always) appearing in the Top 5.

In the ratio analysis, there are quite a few items of interest. With respect to PE Ratios, valuations of Clean Energy stocks had been sky high relative to fossil fuel stocks even in 2019. While both sets of stocks were extensively overvalued in 2021, the comparison between weighed and weighted-average indicates some stocks were massively overvalued. This is apparent even in March this year, despite ratios slipping below those observed in H1 2019. In comparison, fossil fuel stocks’ average and weighted-average tend to be close together – suggesting relatively more coordinated valuation.

With respect to both PS and PB Ratios, fossil fuel stocks’ weighted-average tends to be nearly twice the average across the windows, which suggests that the top stocks’ prices are relatively overvalued over the rest in terms of sales and book value. When it comes to clean energy, the converse is true, suggesting that the overvaluation problem is more widespread, with the valuation of smaller stocks (by weight) being more speculative.

There was a reckoning of sorts near H1 2021 where the weighted-average PS Ratios of clean energy stocks fell below that of the average – which suggests that corrective actions had taken place before a bounce back at the end of 2021. However, this has returned in March. Absent overvaluations in PE Ratios, PS Ratios tend to be a strong indicator of stock performance in the recent downturn. Thus, there is a strong chance of overvaluation corrections continuing to drag down the stock price of clean energy stocks.

The Overvaluation Problem

Now, most companies in the clean energy space tend to feed the electricity grid. Electricity rates tend to vary by region but the closest proxy to average consumption in the U.S. would be the “Consumer Price Index: US City Electricity Average” which is tabulated with a slight lag. With the data on hand till the end of 2021, it is observed that ICLN’s performance has a widely-varying correlation with the increasing costs of electricity in the US.