Green energy stocks haven't always performed as well as expected. Even with years of growing adoption of solar, wind, hydroelectric and other clean sources of power generation, investing in the underlying renewable energy companies has often been a roller-coaster ride.
While green energy stocks can be volatile and challenging to invest in, one cannot fault the excitement around them – especially with investments in this theme ramping up.
Consider that in the first quarter, assets in investment funds with at least a partial environmental mandate reached $2 trillion globally, tripling in three years, according to The Wall Street Journal. And since 2019, nearly $500 billion has flowed into stock funds with environmental, social and governance (ESG) criteria, compared with $103 billion for all other stock funds.
There is a profound and seemingly long-lasting shift to sustainability, with the U.S., China and Europe all on a green path. And U.S. cities and counties more than tripled the size of their renewable energy deals from 2015 to 2020, according to the American Cities Climate Challenge.
Moreover, the reign of the internal combustion engine (ICE) might be coming to an end to give way to the battery electric vehicle. The International Energy Agency says that as of mid-2020, 17 countries have set 100% zero-emission vehicle targets or the phase-out of ICE vehicles by 2050.
And according to a KPMG report, the top 10 global automakers are investing $200 billion into electric vehicles (EVs) – more than what the U.S. spent over 13 years on the Apollo space program to land a man on the moon, adjusted for inflation.
With that view, here are seven of the best green energy stocks to buy. Some of these companies are directly involved in producing green energy, while others are leveraging the use of cleaner energy sources. But every stock possesses unique competitive advantages with room to grow. They also all exhibit a decent baseline of financial health, with a current ratio at or above 1.0, meaning their liquid assets meet or exceed short-term liabilities.
Data is as of Aug. 25.
- Market value: $3.7 billion
- 2020 revenue: $1.2 billion
- Current ratio: 1.0
Clearway Energy (CWEN) makes it easier for consumers and businesses to go green. The company is a developer and operator of renewable energy projects, with solar and wind assets in 25 states. CWEN also provides energy storage services.
Global Infrastructure Partners, one of the world's largest infrastructure investors managing $71 billion in assets, owns a controlling interest in the company through Clearway Energy Group.
One distinguishing initiative by Clearway is the "community solar farm," which offers subscriptions to households, small businesses and commercial customers in exchange for energy credits that lower their utility bills.
The idea behind these farms is to take the hassle away from folks having to install solar panels themselves. Instead, the community shares a solar farm built by Clearway Energy. To date, the company has nearly 100 community solar farms currently operating or under development including in Colorado, Illinois, Massachusetts, Minnesota and New York.
For larger clients, Clearway Energy builds what it calls "distributed solar," or solar systems it installs on roofs, carports and on the ground for hospitals, cities, universities, corporations and others. Clients include Arizona State University, Whole Foods Market and MGM Resorts International (MGM).
Clearway Energy stands out among green energy stocks because of its high 4.2% dividend yield. That's more than three times better than the 1.3% yield on the S&P 500 (.SPX).
Collectively, the pros view CWEN among the more attractive green energy stocks, with a consensus analyst rating of Buy.
- Market value: $14.7 billion
- 2020 revenue: $1.5 billion
- Current ratio: 3.7
Without solar inverters, homes and businesses cannot harness the power of solar energy for power. These inverters convert direct-current (DC) solar power into alternating current (AC) used by appliances and other electronics. SolarEdge Technologies (SEDG) is one of the world's largest makers of solar inverters.
The Israeli company saw a compound annual growth rate (CAGR) of 31.4% from 2016 to 2020; earnings per share (EPS) rose by 54% overall in the same period. What's more, SEDG's total assets are nearly double its total liabilities: $2.6 billion compared with $1.4 billion as of June 30.
The consensus analyst rating on the stock is a Buy. That includes bullish sentiment from BofA Securities analyst Aric Li, who upgraded SEDG to Buy earlier this year amid what he believed was an "overdone" pullback.
More recently, Li and other BofA analysts saw even more good news in storage trends: "Soligent (a distributor) expressed share gains by ENPH and GNRC in particular against TSLA and LG Chem as incumbent solutions – expecting ENPH and SEDG to be particularly strong with installers."
Even analysts who don't see SEDG among the top green energy stocks admit the company's prospects are getting brighter.
"We maintain our Hold rating and increase our price target to $280 (previously $260) ... as we believe the stock is likely to move higher on positive quarter sentiment, supported by increased 3Q21 guidance," writes Canaccord Genuity analyst Jed Dorsheimer, who raised his price target to $280 per share from $260 in an early August note.
Atlantica Sustainable Infrastructure
- Market value: $4.3 billion
- 2020 revenue: $1.0 billion
- Current ratio: 1.4
From a wind farm in Uruguay to a solar electric generation facility in California, Atlantica Sustainable Infrastructure (AY) puts its capital to work in the sustainable energy industry.
The U.K.-based company owns or has a stake in solar, wind, hydroelectric and other sustainable energy facilities and assets in North and South America, as well as certain markets in the EMEA (Europe, Middle East, Asia) region. Atlantica operates long-running assets – the weighted-average contracted life left is 16 years – with regulated revenues underpinned by contracts, which result in stable cash flows. All of the assets also have project financing in place, the company says.
About 72% of Atlantica's holdings are in renewables, 14% are in efficient natural gas, 11% is in transmission and 3% is in water. Per CAFD (cash available for distribution) estimates for the 2021-2025 period, around 41% of AY's assets are located in North America.
Back in March, Raymond James analyst David Quezada raised his rating on the stock to Outperform (the equivalent of a Buy). He also has a 12-month target price of $47.
More recently, UBS (UBS) initiated coverage of AY shares with a Neutral rating and a $40 price target, but that Hold-equivalent assessment largely stems from valuation concerns.
"AY is a globally diversified owner of contracted renewable energy assets providing investors with emerging market clean energy exposure and 7-8% annual DPS growth potential," UBS's analyst team says. "We believe the stock is already pricing in future DPS growth at the high-end of management guidance. Increasing visibility/execution on asset acquisitions developed under the AAGES JV could drive an incrementally more positive view."
Overall, the consensus analyst rating for Atlantica Sustainable Infrastructure is Buy, putting it among the Street's more attractive green energy stocks.
- Market value: $63.9 billion
- 2020 revenue: $2.5 billion
- Current ratio: 2.5
Nio (NIO) has been called the Tesla (TSLA) of China. It makes sleek and innovative vehicles boasting features such as floating car displays, two-spoke steering wheels, invisible smart air vents, massage seats, sensors, radar, soft-opening doors and autonomous driving.
A solid-state battery for its cars is coming in 2023 that will offer a 620-plus mile range, exceeding Tesla's top range. The company recently announced it was expanding into Norway, its first foray outside China and into Europe.
Nio recently beat June-quarter earnings estimates. Mizuho (Buy) says the firm delivered "overall strong execution with strong SepQ guide for deliveries, despite supply shortage overhangs."
Earlier in August, BofA Securities raised its price target on NIO stock to $62 per share from $60 based on stronger electric-vehicle demand. It also reiterated its Buy rating, citing "solid volume sales; focus on autonomous driving, powertrain, and charging solution to enhance user experience; faster sales channel expansion; and continuous new model launches, which should help in share gain."
Deutsche Bank analyst Edison Yu (Buy) believes Germany and Denmark could be the next destinations for Nio. Investors "underappreciate the longer-term potential of the region," he says.
German and other European automakers traditionally dominate the continent's premium auto market. But EV's arrival opens an opportunity to grab share. Moreover, Nio is "localizing its entire ecosystem" instead of exporting its cars to Europe.
While it will not be easy for an unknown brand to gain ground in Europe, smaller and weaker automakers that find it hard to go electric could be vulnerable to Nio, Yu contends. Also, he says, the company's cars with its suite of features "could eventually resonate well with consumers."
Analysts overall regard Nio as one of the best green energy stocks, with a fairly high-conviction consensus Buy rating at present.
Hannon Armstrong Sustainable Infrastructure Capital
- Market value: $4.6 billion
- 2020 revenue: $187 million
- Current ratio: 23.4
Hannon Armstrong Sustainable Infrastructure Capital (HASI) believes there are above-average returns to be reaped from investing in climate-friendly solutions.
It manages more than $7 billion in assets and exclusively invests in companies involved in energy efficiency, renewable energy and other sustainable infrastructure markets. Hannon believes in its mission so much that it requires companies seeking its capital to be neutral or negative in incremental carbon emissions or show other environmental benefits.
Baird analyst Ben Kallo says that "HASI continues to be a 'core' pick for investors looking to gain exposure to sustainable infrastructure and renewable energy growth."
"2Q21 was another consistent quarter highlighted by very strong distributable EPS as well as significant transactions closed, and a steady portfolio yield," says Kallo (Outperform). "Management highlighted potential policy tailwinds, but policy and regulatory tailwinds would only accelerate HASI's growth as it does not depend on subsidies."
Kallo adds that current guidance is for distributable earnings compound annual growth of between 7% to 10% between 2021 and 2023, with dividends per share expected to grow 3% to 5% annually in that same time frame.
The company has helped finance more than 450 sustainable infrastructure projects since 2000. Moreover, Hannon invests in projects that tend to be "relatively low risk with recurring and predictable cash flows." It works with "high credit quality obligors" such as federal, state, and local governments, utilities and hospitals, the analyst says.
"Strong execution is already making the three-year guidance look very conservative two quarters into the first year," adds B. Riley analyst Christopher Souther (Buy, $80 price target) who says the stock remains a "Vision Top Pick" for 2021.
Overall, the consensus rating for HASI shares is Buy.
- Market value: $52.6 billion
- 2020 revenue: $127.1 billion
- Current ratio: 1.2
Call it ironic or plain brilliant, but Ford (F) – one of the world's largest automakers whose founder Henry Ford brought the gasoline-powered automobile to the masses – is doubling down on going green.
No doubt it saw the trend towards electric vehicles; this shift was emphasized by its May 26 investor meeting, where it outlined the Ford+ plan.
Ford+ includes a goal for 40% of the automaker's global vehicle volume to be electric by 2030, including the Mustang Mach-E, which is already on the market, and the F-150 Lightning pickup, which will go on sale next year. E-transit commercial vans will debut later in 2021. Ford also raised its total spending on electrification to more than $30 billion by 2025. This includes investments in battery technology, development and production.
The automaker also plans to enhance its digital services through one million connected Ford vehicles that will be on the road by the end of 2021. It is integrating its vehicles with digital technologies from Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL) and Baidu (BIDU). It also unveiled Ford Pro, an initiative that focuses on serving business clients.
Argus Research analyst Bill Selesky recently reiterated his Buy rating on the green energy stock after the company swung to an adjusted net profit of $511 million (13 cents per share) in the second quarter – compared with an adjusted net loss of $1.4 billion (35 cents per share) in the same quarter a year ago.
"The swing to a better-than-expected operating profit in 2Q21 largely reflected strong revenue growth in North America, South America and Europe, which partly offset ongoing semiconductor supply shortages," Selesky says.
The analyst notes that Ford has strengthened its balance sheet and set clear financial targets, and that it is enjoying strong consumer interest in its vehicle lineup, including new EVs.
Even with headwinds from the chip shortage, business should strengthen overall due to expectations for increased consumer spending helped by stimulus payments and the vaccine rollout, low borrowing costs and record savings rates, Selesky points out in a recent note.
"We view Ford shares as attractively valued at current levels based on our expectations for increased consumer spending and accelerating vehicle sales in 2021," he concludes.
- Market value: $2.2 billion
- 2020 revenue: $3.5 billion
- Current ratio: 1.1
With global emphasis on renewable energy on the rise, the future is looking sunny for Canadian Solar (CSIQ). The company is one of the world's largest manufacturers of solar panels, inverters and related equipment. It also manages solar plants globally and provides battery storage solutions.
In the company's fiscal second quarter, Canadian Solar reiterated its guidance for 2021 revenues, which it expects will be in a range of $5.6 billion to $6.0 billion – a 70% year-over-year jump at the midpoint.
But a little caution might be advised in the near-term.
Following the company's most recent earnings report, in which Canadian Solar crushed earnings expectations, CFRA analylst Stewart Glickman (Hold) lifted his 2021 profit estimates by 74 cents per share to $1.34 per share.
"CSIQ seems intent on protecting margins, and Q3 margin guidance is improved as well," he says.
Despite calling efforts to protect margins "laudable," however, Glickman warns that "we hear mixed messages when management also announces that it expects to continue growing market share (which is possible, but unlikely in our view, if setting a floor on pricing is turning away or deferring customers to future periods)." He also lowered 2022 profit estimates by 21 cents per share to $2.64.
Nonetheless, a Buy consensus rating signals that the broader analyst community still considers CSIQ among the energy stocks that investors should have on their radar.
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