Top money managers expect these green-energy companies to benefit most from Biden’s infrastructure plan

The proposal offers $621 billion to modernize transportation infrastructure — including changes that favor electric vehicles (EVs), according to the Wall Street Journal. It proposes $213 billion to help make buildings more energy-efficient. Biden also sets an ambitious goal of making the power grid carbon neutral by 2035.

Read: These infrastructure stocks could soar, helped by Biden’s spending plan

To find some of the best investing angles, I checked with two money managers who have great records. Before we get to stocks, first some high-level impressions of the Biden proposals.

Overview of Biden’s proposals

EVs and energy-efficient buildings are “really important mega trends in sustainable energy that we are paying close attention to,” says Andy Braun, who manages the Pax Large Cap Fund PAXLX, +1.37%. His fund outperforms its Morningstar large blend category by five percentage points, annualized, over the past three years.

Another key angle for investors is that the Biden spending initiatives would reinforce similar plans in the two major economic centers outside the U.S. — Europe and China. This amplifies the impact, notes Jonathan Waghorn of the Guinness Atkinson Alternative Energy Fund GAAEX, +1.59%. His fund beats its Morningstar foreign small- and mid-cap value fund category by an impressive 21.8 percentage points, annualized, over the past three years, according to Morningstar. The fund is being converted into an exchange treaded fund (ETF) called SmartETFs Sustainable Energy II SULR, +1.56%.

Putting governments aside, a third force is at work for investors. The greater use of renewable power and reducing the carbon footprint of buildings makes economic sense for companies, says Waghorn. This is important, because investing based on government spending plans alone can be risky.

Now here’s a look at green companies these two money managers say would get a boost if the Biden infrastructure plan gets passed.

Electrification of transportation

The obvious plays here are companies like Tesla TSLA, -0.93% in vehicles and lithium-ion batteries, and ChargePoint Holdings CHPT, +11.76% and Blink Charging BLNK, +0.36% in charging stations. But both Braun and Waghorn instead look beyond these to single out companies that make the building blocks and components supporting this trend.

For example, consider ON Semiconductor ON, +3.08%, a top holding of the Guinness Atkinson Alternative Energy and Waghorn’s SmartETFs Sustainable Energy II. This company would benefit from the Biden plan because its power-management chips convert, control and monitor electricity in EVs, from the charging process to driving. It also makes sensors used in cars.

Next, consider Infineon Technologies IFNNY, +1.75%, which specializes in power semiconductors that regulate electricity in cars. This is a top holding of the SmartETFs Sustainable Energy ETF, and another ETF Waghorn helps manage in this space called SmartETFs Smart Transportation & Technology MOTO, +1.84%. He also likes Samsung SDI, a Korean pure-play on lithium-ion batteries that’s building partnerships with European car manufacturers.

Braun, at the Pax Large Cap Fund, highlights fund holding Aptiv APTV, +2.06%, which offers software, components and electrical power distribution systems used in EVs. He also singles out TE Connectivity TEL, +1.30%, which makes connectors and sensors used in EVs.

Cutting the carbon footprint

“Buildings are a big culprit in greenhouse-gas emissions, a theme we have felt strongly about for years,” says Braun. Biden’s plan to spend hundreds of billions to help make commercial buildings and homes become more energy efficient would boost business at Trane Technologies TT, -0.07%, which offers energy-efficient climate-control systems.

Waghorn highlights Ameresco AMRC, +2.43%. The company helps customers improve the energy efficiency of buildings through the use of LED lighting, solar photovoltaic power sources, and modifications to heating, ventilation and cooling systems. His funds also own Hubbell HUBB, +1.87% in energy-efficient lighting.

‘Aggressive target’

Biden wants to completely eliminate carbon emissions from the power grid by 2035. “That is an enormously aggressive target,” says Waghorn. Whether the U.S. actually gets there or not, green energy companies will benefit as the government rolls subsidies and incentives to try to make it happen.

Holdings from Waghorn’s SmartETFs Sustainable Energy II that he thinks will benefit include NextEra Energy NEE, +0.21%, a power utility that uses renewable energy from wind and sun; and Ormat Technologies ORA, +0.50%, a utility that draws on geothermal and solar power.

Downsides of the proposals

While Biden’s infrastructure and green-spending initiatives would help companies in the sector, it might not really help stocks overall, for two reasons.

First, someone has to pay for it. A big chunk of the spending in the bill would be footed by companies, and this will hit earnings.

Ed Yardeni, of Yardeni Research, estimates that without any tax increases, S&P 500 SPX, +1.18% earnings per share (EPS) would increase to $215 by the end of next year. Tax hikes may eat into that substantially.

“We estimate that Biden’s tax hike would reduce S&P 500 earnings per share by $15 to $200,” says Yardeni.

Bank of America economists estimate Biden’s corporate tax proposals would hit S&P 500 earnings by 7%, around the same amount as Yardeni’s estimate.

Next, the additional Biden stimulus may already be priced in by the stock market. Bank of America tracks an interesting metric, the ratio of S&P 500 market cap to M2 money supply. The average since the financial crisis has been 1.4. It is now at 1.7. This suggest the market was already anticipating $2 trillion in stimulus, say economists at Bank of America.

Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested TSLA and ON in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.