Hedge funds are now bullish on this green penny stock

We recently made a list 10 Best Green Penny Stocks To Buy Now. In this article, we’ll take a look at how Montauk Renewables (NASDAQ:MNTK) stacks up against other penny stocks in the green energy industry.

Discovering Green Energy

Green energy comes from naturally replenished resources such as the sun, wind and tides and is used for a variety of purposes, including electricity generation, heating and transportation. Unlike traditional forms of energy from finite sources such as fossil fuels, green energy is sustainable and includes several types of energy such as bioenergy, geothermal energy, hydrogen, hydropower, marine energy, solar energy and wind energy.

According to the International Energy Agency (IEA), there has been impressive growth in green energy spending, but it is still heavily concentrated in a few regions, mainly developed economies and China. Investment in green energy is not evenly distributed due to obstacles such as high upfront costs and macroeconomic challenges affecting wider adoption. While the costs of clean technologies have risen in recent years, they remain competitive with fossil fuels.

Despite record global investment in energy transition technologies reaching $1.3 trillion in 2022, this figure falls short of the investment needed to achieve the 11.2 terawatts of green energy that countries have pledged. To address this, increased and larger investments in green energy are needed, particularly in developing countries that have received disproportionately low levels of financing despite their high energy needs. Global investment in renewable capacity must exceed $1.5 trillion per year to meet the targets.

Inflation Reduction Act Boosts Investment in Green Energy

Analysts are bullish on the investment opportunity in green energy, especially in light of the recent fiscal stimulus efforts by the U.S. government, including the Inflation Reduction Act. The $370 billion invested in energy and climate incentives by the Biden administration is expected to significantly boost various sectors in the green energy industry. Experts emphasize the importance of tax breaks and other incentives aimed at developing renewable energy infrastructure and supply chains, especially in the U.S. and with fair trade partners. While traditional, large-cap ETFs are popular, there is growing interest in more diversified, equal-weighted approaches that include smaller, innovative companies in areas such as battery production, solar power and key mineral extraction. This shift to renewable energy is seen as a global trend, offering investment opportunities beyond North America.

J.P. Morgan has been actively investing in green energy projects, providing tax equity financing to support the development and construction of solar and storage projects in the U.S. In May, the bank provided $680 million in tax equity financing to Ørsted, a leading energy developer, to build two major projects: Eleven Mile Solar Center, a 300 MW solar project in Arizona, and Sparta Solar, a 250 MW solar project in Texas.

This investment is one of the largest capital transactions in solar and storage since the passage of the Inflation Reduction Act (IRA), which introduced new tax credit mechanisms, including the ability to transfer tax credits. The bank’s involvement allows it to optimize its federal tax liability while supporting the expansion of green energy infrastructure. In addition, this transaction builds on existing investments in Ørsted’s 1.8 GW of U.S. onshore green energy portfolio, demonstrating the bank’s commitment to the energy transition.

Current levels of investment in green energy are lower than what is needed to transition to a sustainable energy future. A more equitable distribution of investment and a stronger commitment to overcoming barriers such as high upfront costs. With that in mind, let’s take a look at the 10 best green energy penny stocks to buy now.

Our methodology

In this article, we scanned green energy ETFs and online rankings to compile a preliminary list of 50 green energy stocks. From this list, we narrowed our selection to 10 stocks trading below $5 that were the most popular among hedge funds. Hedge fund sentiment was pulled from our database of 912 elite hedge funds through the second quarter of 2024. We also included the market capitalization of these companies as of September 4. The list is sorted in ascending order by hedge fund sentiment through the second quarter.

Why do we care about what hedge funds are doing? The reason is simple: Our research has shown that we can outperform the market by mimicking the best stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (more details here).

A farmer in a protective suit stands in front of a methane processing plant.

Montauk Renewables (NASDAQ:MNTK)

Number of hedge fund owners: 13

Market capitalization as of September 4: $646.25 million

Montauk Renewables (NASDAQ:MNTK) is a leader in the green energy sector, specializing in the conversion and delivery of green energy from waste sources. With more than 30 years of experience, Montauk Renewables (NASDAQ:MNTK) has established itself as a pioneer in the landfill gas-to-energy industry, converting biogas from landfills into renewable natural gas (RNG) and electricity. The company has expanded into the agricultural sector, focusing on anaerobic digestion (AD) technologies that convert dairy and swine farm waste into RNG.

Demand for RNG is expected to grow, and the regulatory environment is expected to become increasingly favorable for RNG producers. The California Low Carbon Fuel Standard (LCFS), along with similar programs in Oregon, Washington, and New Mexico, provides incentives for low-carbon fuel production. Montauk Renewables’ (NASDAQ:MNTK) dairy and hog RNG projects have exceptionally low carbon intensity (CI) scores, with dairy RNG averaging -340 gCO2e/MJ and hog RNG averaging -347 gCO2e/MJ.

The U.S. Environmental Protection Agency (EPA) estimates that there are more than 8,000 farms in the U.S. that could be candidates for biogas recovery systems, offering an energy potential exceeding 170 million MMBtu per year. Montauk Renewables (NASDAQ:MNTK) is well-positioned to capture a significant portion of this market, particularly in RNG production on dairy and hog farms, as only a small fraction of existing farms currently produce RNG.

Montauk Renewables (NASDAQ:MNTK) is set to capture a growing share of the RNG market over the next 5-10 years, driven by low CI projects and a favorable regulatory environment. The company’s focus on high-yield projects further supports its long-term growth prospects, with a potential cash return on capital investment of 2 to 5 years.

Analysts expect the company’s earnings to jump 58% this year and have a consensus Buy rating on the stock, setting an average price target of $6.31 on the stock, implying nearly 35% upside potential from current levels. The stock is held by 13 hedge funds in the second quarter, with a stake of $15.87 million. Hosking Partners is the largest shareholder in the company, with shares worth $4.40 million as of June 30.

Total MNTK takes 6th place on our list of the best green penny stocks to buy. While we recognize MNTK’s potential as an investment, our belief is based on the belief that AI stocks offer a better chance of achieving higher returns, and in a shorter time frame. If you’re looking for an AI stock that has more promise than MNTK but is trading at less than 5 times earnings, check out our report on cheapest AI action.

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Disclosure: None. This article was originally published on Insider Monkey.