Investors should focus on financially strong, clean energy companies, those that produce solar, hydro, wind and geothermal energy and that have essentially ‘decarbonized’.
Coal and other fossil fuels are not coming back. They are dirty, polluting and being replaced by what are referred to as ‘renewables’—sources of energy that are clean and not being depleted. (When we say renewables we are talking wind, solar, hydro, biomass, geothermal and ocean waves and currents.) Renewables are not some green-energy fad, but rather the fastest growing type of energy that can light up the planet and even keep certain cars running.
One reason for the fuss about renewables is that they can be seen as good investments. While it’s tempting for investors to buy any company connected to renewables, those same investors should look for companies that wisely allocate capital to renewable energy projects that generate attractive returns on investment. Renewable energy companies that generate free cash flow and have strong balance sheets have a competitive advantage over financially weaker rivals, since they have greater access to the capital needed to finance growth. And renewables is a capital-intensive industry.
In the end, or especially before they shout ‘Buy’, investors should focus on financially strong, clean energy companies, those that produce solar or wind energy and that have essentially ‘decarbonized’. As the global economy switches power sources from greenhouse-gas-emitting fossil fuels to cleaner and renewable alternatives, investors should realize that there is money to be made.
The MoneyLetter surveyed equity analysts and industry observers and found that five companies consistently reoccur as favourite ‘Buys’. We deliver snapshots below.
NextEra Energy, Inc. (NYSE—NEE)
NextEra is a utility company that owns Florida Power & Light and Gulf Power, along with wind and solar assets. It operates in 2 business segments—rate-regulated electric utilities that distribute power to consumers and businesses, as well as a competitive energy segment that generates electricity and transports natural gas under long-term, fixed-fee agreements. Its regulated utility Florida Power and Light reduced its power generation costs by more than 50 per cent over the past decade by switching from higher-priced coal and oil to cheaper natural gas. The next opportunity for the company is to increase adoption of renewable energies, especially solar, and allow it to reduce its cost base further. Says a company executive: “This will keep customer bills affordable, lower emissions and present an attractive investment opportunity for shareholders.”
First Solar, Inc. (NASDAQ—FSLR)
First Solar is the largest US-based solar company and a leader in developing thin-film solar panels. These larger modules produce electricity at a lower cost per watt than traditional silicon-based panels. They also perform better in hot and humid conditions and shed snow and debris quicker. The stock is up 38 per cent YTD and is also at a two-year high. One factor that makes First Solar stand out is its strong balance sheet. The company routinely carries a large net cash position, which provides it with interest income. Most of its competitors have lots of debt on their balance sheets. The company’s financial strength not only reduces its costs, but also provides it with the ability to continue expanding its manufacturing capacity.
Brookfield Renewable Partners L.P. (TSX—BEP.UN; NYSE—BEP)
Brookfield Renewable is one of the world’s largest publicly traded renewable energy companies with 19,400 megawatts of capacity and 5,288 generating facilities in North America, South America, Europe and Asia. The company is one of the largest owners of renewable assets globally, 75 per cent of which is hydro. It generates a 4.5 per cent dividend yield with a 5 per cent or higher dividend growth. The company currently has a consensus ‘Hold’ rating among 10 analysts while four rate the stock a ‘Buy’.
Brookfield sells the bulk of the power it produces under long-term, fixed-rate power purchase agreements. These agreements provide Brookfield with a stable cash flow, which it uses to pay an attractive dividend and invest in an expanding portfolio. The company also boasts a strong balance sheet with one of the highest-grade bond ratings in the renewable energy sector and lots of liquidity. Brookfield believes it has the capacity to invest $4 billion in expanding its renewable energy portfolio through 2024, with a focus on new solar developments. Analysts believe these investments should power enough robust cash flow to support 5 to 9 per cent annual dividend increases.
Tesla, Inc. (NASDAQ-TSLA)
Tesla reaches into residential power installations via its SolarCity, a company Tesla essentially rescued a few years ago. Moreover, Tesla is looking to make its own lithium-ion battery cells—a task made easier by last year’s $200 million purchase of Maxwell. The deal could help Tesla solve one of the most important riddles in the electric vehicle industry—expanding battery capacity while not losing power after a charge.
Through its PowerAll product, Tesla helps solar customers solve another quagmire—accessing power when the renewable energy fails, as it recently did in California, prompting a spate of blackouts. PowerAll allows residential customers to store solar power and use it when the sun isn’t out or when the traditional electric grid fails.
Of course Tesla will still be powered by its electric cars, which in the first six months of this year controlled 81 per cent of the North American electric vehicle market.
Sunrun Inc. (NASDAQ—RUN)
Sunrun stock is up a whopping 267 per cent this year, making it one of the best-performing clean energy stocks. One reason is Brightbox, Sunrun’s home battery solution. Brightbox places Sunrun at the forefront of the residential market. Analysts are unanimous in their belief that Sunrun should benefit with Joe Biden in the White House.
This is an edited version of an article that was originally published for subscribers in the October 2020/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •11/29/20 •