Green energy stocks haven't always lived up to the hype. Despite years of continued adoption of solar, wind, hydroelectric and other power-generation sources, investing in the underlying companies has been a turbulent ride.
Fortunately, renewable energy stocks suddenly have friends in high places.
President-elect Joe Biden plans to invest $2 trillion in clean-energy initiatives over the next four years, with a loftier goal of making America a net-zero-emissions country by 2050. Obviously, just how much progress he can make remains largely up to the composition of Congress, but most analysts nonetheless expect a much more accommodative Washington for green energy over the next few years.
When you think of clean energy, you typically think of solar and wind, which have the biggest market share by far; they also have the distinction of being two of the fastest-growing employment sectors in the past decade, according to a 2020 Deloitte report. But there are other types of green energy – biomass, geothermal and hydropower among them. Not to mention, there are companies that help the green-energy fight without actually producing energy; think miners of lithium, which go into batteries that can be charged by renewable sources.
Adoption should only continue, too, as solar photovoltaics and onshore wind now are the cheapest ways to add new electricity-generating plants in most countries, according to the International Energy Agency (IEA). It projects that total installed wind and solar PV capacity is on track to overtake natural gas in 2023 and coal in 2024.
"I see solar becoming the new king of the world's electricity markets," IEA Executive Director Fatih Birol said in a statement.
Read on as we look at seven green energy stocks with more upside to come in 2021. Whether they're directly responsible for producing renewable energy, or play a role in important supporting technologies, each appears to have high potential as the new year rolls around.
Data is as of Dec. 10. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Forward P/E ratios use earnings estimates for the next fiscal year and are provided by Morningstar.
Market value: $143.6 billion
Dividend yield: 1.9%
Forward price-to-earnings (P/E): 29.3
NextEra Energy (NEE) is the world's largest utility company. While it serves roughly 5.5 million customers in Florida across two different subsidiaries, the company also bills itself as the world's largest generator of wind and solar renewable power.
Indeed, Morningstar analyst Andrew Bischof likes NextEra for the combination of its highly regulated Florida utility business and fast-growing renewables arm, saying it offers "the best of both worlds: a secure dividend and industry-leading renewable energy growth potential."
Bischof says NextEra's Florida Power & Light (FP&L), like other regulated utilities, enjoys "service-territory monopolies and efficient scale advantages." And as for its renewable energy business, he pointed to a key competitive advantage: It has already secured some of the most desirable wind and solar generation sites in the country, with purchase power agreements spanning at least 20 years with "escalator" clauses to protect returns.
Meanwhile, the renewable energy stock's dividend has grown by more than 10% annually since 2011, and Bischof predicts 11% annualized payout growth for NEE through 2024.
Here's another reason to like the stock: NextEra announced plans for FP&L to invest $65 million in a pilot project that will produce "green" hydrogen from solar power by 2023, as the company closes its last coal-fired power plant.
CFO Rebecca Kujawa said in the company's second-quarter earnings call that producing "green" hydrogen presents a "potential significant opportunity for us."
Many on Wall Street have NEE among their top green energy stocks to buy for 2021. Currently, 13 analysts call it a Buy or Strong Buy, versus six Holds and one lone Sell.
Market value: $15.1 billion
Dividend yield: 1.1%
Forward P/E: 34.5
Albemarle (ALB) is one of the world's top producers of lithium, which is used in batteries for electric vehicles and mobile devices, among other applications. It produces lithium from its own assets in Chile and Nevada, as well as two joint ventures in Australia. The Chilean operation is among the world's lowest-cost sources of lithium, according to Morningstar analyst Seth Goldstein.
Look for demand to keep rising as electric vehicles catch people's fancy. Sales of electric vehicles hit a record in 2019, according to a June 2020 report by the International Energy Agency (IEA). Consider that in 2010, there were only 17,000 electric cars on the roads globally. By 2019, that number had grown to 7.2 million, half of which are in China.
"Today's consumer profile in the electric car market is evolving from early adopters and technophile purchasers to mass adoption," the IEA wrote.
Goldstein sees greater adoption of electric vehicles and buildout of large batteries for energy storage to "drive lithium demand growth of 6 times over the next decade."
Albemarle plans to nearly double its lithium production by the end of 2021. Moreover, "We expect the company to continue investing in increasing its lithium capacity after 2021," the analyst says, likely through acquisitions or brownfield capacity expansions.
The company also is the second-largest producer of bromine in the world, which is used in flame retardants for electronics, Goldstein says. Prices of the element are going up due to increased demand for servers and auto electronics, offset by lower demand from TVs, computers, and oilfields.
Albemarle – also a supplier of catalysts for the petroleum refining and chemical industries – suffered a big hit to sales and profits in 2020, but both are expected to rebound in 2021.
Market value: $1.5 billion
Dividend yield: N/A
Forward P/E: 27.7
TPI Composites (TPIC), one of a handful of wind energy stocks available to investors, is a leading manufacturer of composite wind blades. It supplies these blades to wind turbine manufacturers and commands nearly a fifth of all onshore wind blades sold on a megawatt basis globally.
In 2019, the company notched a record $1.4 billion in annual net sales, selling 9,500 wind blades. And despite the economic upheaval of COVID-19, the pros expect the company to finish 2020 with 15% revenue growth to $1.65 billion.
Of the 11 analysts that cover TPIC stock, 10 say it's Buy-worthy. That includes Roth Capital analyst Philip Shen, who says TPI will benefit from continued outsourcing of wind blades by wind turbine manufacturers, as well as the potential windfall from the transportation sector.
"We believe multiple opportunities could be on the horizon for both cab and structural components," he writes. "Look for more positive news from this segment over the next six to nine months."
"Turbine blades are a key input within the wind industry's value chain, and TPI is a top player in the blade outsourcing trend," writes Raymond James analyst Pavel Molchanov, who rates TPIC stock at Strong Buy, putting it among its top green energy stocks. "TPI has achieved the rare feat of double-digit organic top line growth every year for the past decade."
The analyst also pointed to more upside coming from a deal with electric bus maker Proterra, which has been a TPI customer since 2017. Proterra, which buys composite bus bodies from TPI, just unveiled a transit bus that can travel 329 miles on one charge – the farthest any 40-foot bus can travel.
"Opportunities in the electric vehicle market remain, in our view, underappreciated," Molchanov says.
Daqo New Energy
Market value: $3.0 billion
Dividend yield: N/A
Forward P/E: 12.6
For investors interested in solar stocks, Daqo New Energy (DQ) is one of China's largest producers of high-purity polysilicon used in the manufacturing of solar panels. The Chinese company also produces silicon wafers and modules, as it strives to become vertically integrated.
Governments and industries across the world are prioritizing renewables, especially solar, leading to higher demand for polysilicon. ResearchAndMarkets, in a May 2020 report, estimates the size of the global polysilicon market at $7.4 billion.
"Policy makers, regulatory bodies and industrial sectors are investing enormously in the solar energy sector," the report says. "This is generating remarkable demand for solar panels across the globe" and in turn, for polysilicon.
Daqo's revenues for the first nine months of 2020 have improved by 85% year-over-year, and analysts are expecting a 91% improvement across all of 2020. Meanwhile, its gross margins have outpaced its average peer in the industry every year over the past five years, according to Refinitiv data.
Roth Capital analyst Philip Shen writes that Daqo's fundamentals appear "robust nearly across the board with strong demand, an elevated pricing outlook, and an improving cost structure." Moreover, Daqo's plans to list on the Shanghai Stock Exchange's STAR market is a "meaningful positive catalyst for the stock."
But Chinese stocks are fraught with risk. Shen actually has a Neutral rating on the stock due to risks related to the use of forced labor in Xinjiang province, where Daqo manufactures. The analyst does not believe Daqo uses forced labor, but the stock could be affected by such scrutiny. In September, the House passed the Uyghur Forced Labor Prevention Act that would block goods from Xinjiang unless companies prove they do not use forced labor.
Daqo says it "does not tolerate" any use of forced labor in its own facilities or throughout the supply chain, and regularly monitors compliance with its policies. It also says impact from potential actions by the U.S. government would be limited since its wafer customers serve the global market.
Broadly speaking, Wall Street seems unconcerned. Shen has the only Hold-equivalent rating among the eight analysts covering the stock; the rest call DQ a Buy. Still, among the green energy stocks on this list, Daqo should be handled with the most care.
Market value: $11.4 billion
Dividend yield: N/A
Forward P/E ratio: 69.4
Sunrun (RUN) was already the nation's largest residential solar company before it agreed to buy its rival, Vivint Solar, in a deal worth $1.5 billion. The acquisition, which closed in October, creates a rooftop solar giant that provides 75% of new residential solar leases each quarter, according to Bloomberg.
Roth Capital analyst Philip Shen says Sunrun "is the industry's largest player with differentiated scale advantages and leadership on grid services, and much more." He sees more upside to the stock on "the promise of what we believe (Sunrun) can become: The Power Company of the Future."
RUN shares also would get a lift from a potential extension of the solar investment tax credit of 26% for residential and commercial property installations, which "will be very much in the cards under a Biden administration and GOP Senate," the analyst writes in a recent note.
Shen also notes that Sunrun's management expects to grow faster than the industry's projected 15% year-over-year growth in 2021. However, "we expect (Sunrun) to strike the right balance between margin and growth."
This stock isn't for the faint of heart. Shares have jumped 317% through early December, and it's up more than 900% over the past three years.
But Shen, who has a Buy rating on the green-energy stock, has a Buy rating on shares – in line with the average recommendation of the 11 other analysts who cover Sunrun.
Market value: $61.4 billion
Dividend yield: N/A
Forward P/E ratio: 7.2
General Motors (GM) might not be the first company that comes to mind in a discussion about renewable-energy stocks. But this Detroit incumbent has been pivoting its business model to achieve better sustainability.
GM, one of the world's largest automakers, is investing $27 billion in battery electric vehicles (BEVs) over the next five years. It plans to launch 30 of these vehicles over the same time frame, says Morningstar analyst David Whiston, with two-thirds of those vehicles being sold in North America.
"Management also targets over 1 million annual BEV sales by middecade," he adds.
Currently, it is selling access to its Ultium battery technology to Honda (HMC) and talking to other potential customers.
On Nov. 30, GM restructured a deal with hydrogen-truck maker Nikola (NKLA) in which the automaker agreed to supply its Hydrotec (hydrogen-powered) fuel cell system.
Meanwhile, General Motors has been whipping its traditional vehicle operations into shape. Closing plants and moving hourly workers' retiree healthcare to another fund has lowered its breakeven point, the analyst says. Today, the company does not have to overproduce to meet high labor costs, then dump cars in rental fleets, Whiston adds.
"GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open," he says. "The result is higher profits than under old GM despite lower U.S. share."
Meanwhile, the analyst community has seven Strong Buys and seven Holds on GM shares, versus just four Holds and no Sells of any kind. A median price target of $49.53, meanwhile, assumes 15% upside over the next year. Some are attracted to GM's uber-cheap valuation, which currently sits at just more than seven times earnings estimates.
Market value: $15.5 billion
Dividend yield: N/A
Forward P/E ratio: 17.7
Let’s be clear. Cheniere Energy (LNG), the largest producer of liquified natural gas (LNG) in the U.S., deals in fossil fuels. Regardless, Cheniere makes this list of 2021's best green energy stocks given both LNG's cleanliness compared to other fossil fuels, as well as its preferred status as a backup for renewable-energy sources.
Its potential for growth in the year ahead obviously counts for something, too.
Cheniere exports gas to 32 of the 39 countries that buy the commodity. Morningstar analyst Stephen Ellis believes Cheniere is "well positioned to be the exporter of incremental liquified natural gas supplied to the global market over the next few years, particularly as demand ramps up from China." Chinese demand had cooled due to trade tensions, but Europeans stepped up their buys.
Ellis also thinks Cheniere and its master limited partnership, Cheniere Energy Partners (CQP), have wide moats due to 20-year "take-or-pay" contracts with several customers that "put Cheniere in an incredibly strong competitive position as a pure toll-taker with no commodity price risk."
Bank of America analyst Julien Dumoulin-Smith recently upgraded the stock to Buy, saying that given the prices paid in recent M&A activity in the space, shares deserve a higher valuation. Also, "despite numerous cargo cancellations, management successfully maintained '20 guidance given contractual strength; we perceive force majeure risk as much less of a concern than in prior months given limited announcements, thus affirming the strength of Cheniere's own contract language."
Intent on paying down debt in 2021, Cheniere's free cash flow should turn positive for next year as it focuses on operations and capital allocation, Dumoulin-Smith says.
Naturally, like other natural gas stocks, Cheniere faces risks from issues such as lower commodity demand, delays and cost overruns. Nonetheless, analysts are plenty bullish, predicting roughly 20% upside on average over the next 12 months.
|For more news you can use to help guide your financial life, visit our Insights page.|