Renewable energy stocks are rebounding in early 2019, coming off a weak 2018 and shaking off a brief hit after California’s Pacific Gas & Electric (PCG) bankruptcy.
PG&E is a big buyer of renewable energy and many of the power purchase agreements with renewable energy producers were signed when green energy prices were much higher.
Patrick Kaser, managing director at Brandywine Global, says while there’s not much dispute that renewable energy use will grow, it’s still a young field, so valuing companies can be tricky.
Here are seven investments to consider.
Angelo Zino, equity analyst at CFRA Research, says SPWR is his top pick among solar companies. Zino says SPWR is well-positioned this year and beyond, given the company’s shift to smaller commercial and residential projects, rather than the utility-scale it's done in the past. SPWR makes the most highly efficient solar panels available, and these work very well on smaller scale projects. On the commercial side, 80% of SPWR’s planned industrial volume is in backlog, which he says provides good visibility from 2019 to 2020. He sees SPWR returning to profitability in 2020. SPWR currently trades at slightly above $7 per share.
Pattern Energy Group
PEGI is a dividend growth-oriented company, known as a yieldco, that owns renewable energy projects and signs long-standing, power-producing agreements with utilities to produce wind and solar power. Yieldcos are the renewable energy equivalent of master limited partnerships in fossil fuel production. Garvin Jabusch, chief investment officer for Green Alpha Advisors says the continuing drop in renewable energy prices benefits PEGI, which is producing energy at prices much lower than some of the power agreements it signed years ago. Although PEGI has some exposure to PG&E, it’s a small position, he says. Even if the contracts are renegotiated in bankruptcy court, that will only reduce PEGI’s profit margin slightly. PEGI pays nearly an 8% dividend.
Another yieldco, TERP owns solar generating capacity globally, including in the U.S. and in Spain, and the company is looking to get into Asia. Jabusch says the company is conservatively managed and has a great cash pile, so it can be strategic about where it seeks to add generating capacity. The company has raised dividends annually in the past several years and has a current divided of about 6%. “Terraform is the gold standard for yieldcos,” he says. In addition to strong income, Jabusch says TERP has the potential for share appreciation because of renewable energy’s growing use for electricity generation.
Vestas Wind Systems
Vestas Wind Systems is a Danish company that U.S. investors can access through their American depositary receipts. Jabusch calls the company a world leader in owning the intellectual property on how to make very efficient wind turbines. That makes it cheaper for utilities to generate electricity. They have global distribution, which helps with diversifying revenues geographically, Jabusch says, and are adding production capacities to increase output. Turbines need a lot of maintenance, and Vestas owns the majority of the contracts to fix turbines, which is a lucrative side business, he says.
Goldman Sachs expects U.S. utility-scale solar power installations to grow at a 40% compounded annual growth rate through 2020, which is far above other renewable energy market users. That should benefit FSLR, the bank says, noting the solar power panel maker has a strong project pipeline and backlog, and FSLR has the capacity to ramp up production to meet a forecast for higher solar power demand. Goldman forecasts solar power demand to rise 10% to 15% between 2019 and 2022. They have a "buy" rating on FSLR, with a $64 12-month price target. FSLR currently trades at about $55.
CSIQ manufactures solar modules and also sells large-scale power solar systems. It has a significant business in China, with 26% of its 2017 sales to that country. As the country’s economy stabilizes, CSIQ could benefit, says Goldman Sachs, and the bank adds China’s improved environmental policy supports the solar company. Additionally, the bank says CSIQ’s large-project business is seeing improved momentum and could benefit from a growing U.S. utility-scale installations trend. U.S. utility-scale solar installations could rise 31% in 2019 over a year ago. Goldman has a "buy" rating on CSIQ, with a $26 12-month target. It currently trades at about $19.
NEE is a leading wind producer, and Morgan Stanley analysts are bullish on the company. The bank’s analysts say even with an expected reduction in the wind production tax credit in 2021, they don’t see any falloff in wind power demand. Morgan Stanley says wind economics will stay very favorable versus competing technologies even after the tax credit expiring in 2023, noting as wind blades get longer, power production increases exponentially while costs increase much slower. The bank says NEE’s Florida utility is best in class in terms of growth, customer value and regulatory environment.