The energy industry hasn’t gotten the headlines of technology and consumer stocks recently, but the world continues to consume more energy and prices keep going up. Whether it’s demand for electric vehicles or the electrification of industrial equipment, the industry’s tailwinds are too big to ignore.
Given that backdrop, I think NextEra Energy Partners (NYSE: NEP), Enphase Energy (NASDAQ: ENPH), SolarEdge (NASDAQ: SEDG), and SunPower (NASDAQ: SPWR) are great buys given how much the market has discounted their stocks.
One of the more beaten-up stocks this year is NextEra Energy Partners, the renewable energy asset owner. The company said it would reduce dividend growth in order to shore up the balance sheet. About one-third, or $2.2 billion, of debt will mature before 2026, and rising rates could make refinancing costly. So these are prudent measures, even if they hurt the payout right now.
Management has committed to a $3.52 annualized dividend by the end of this year and expects the dividend to grow 4% to 8% through 2026. With shares trading for $29.07 at Thursday’s close, the yield is a whopping 12.1%, and by the end of 2026, investors could get around 40% of their investment back in dividends alone.
There’s interest rate risk with owning NextEra Energy Partners, but I think that’s a manageable risk by management, and the dividend yield is too good to pass up.
2023 has been terrible for solar energy stocks, but the reasons are understandable. Higher rates have made it more difficult to finance projects, and the short lead time for rooftop solar has affected that sector more than longer lead time sectors like utility-scale solar. On top of that, changes to California’s net metering structure have made it less cost-effective to install solar, requiring batteries to fully compete, and making that financial transition is taking time.
Stocks have been hit hard as a result, and that’s where I see opportunity. Enphase Energy, SolarEdge, and SunPower are the three stocks that I think belong in a basket betting on the recovery of residential solar. Enphase and SolarEdge are component suppliers sitting in the inverter business, which has typically been higher-margin than components like solar panel manufacturers or racking companies.
The problem is, as installers reduce inventory and put pressure on component prices, they are seeing revenue and earnings drop like a rock. We may not see margins reach old peaks, but I think revenue will recover and these will be solidly profitable suppliers when the market recovers in 2024. And now investors are getting these stocks at more reasonable valuations.
SunPower is a solar installer, performing some installations itself and providing a technology and financing platform for some of its partners. It’s felt interest rate pressure in 2023, but there should be tailwinds as utility rates rise and component costs come down.
The difference between SunPower and a company like Sunrun (NASDAQ: RUN) is that SunPower isn’t taking as much financial risk (including interest rate risk) of a solar installation onto its balance sheet in the same way. While Sunrun is 100% lease/PPAs, SunPower said third-quarter 2023 installations were only 56% lease or loan financing, with the rest of customers paying cash. That makes SunPower more of a cost and execution company and less of a bank, which is why it’s my pick over the financing risk at Sunrun.
The renewable energy industry has been through ups and downs before and has always come back bigger and stronger. I think that will happen again for NextEra Energy Partners, Enphase, SolarEdge, and SunPower, which are all much cheaper than they were just a year ago.
10 stocks we like better than NextEra Energy Partners
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and NextEra Energy Partners wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of November 6, 2023
Travis Hoium has positions in NextEra Energy Partners and SunPower. The Motley Fool has positions in and recommends Enphase Energy. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has a disclosure policy.
Blog powered by G6
Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.
For any inquiries, please contact [email protected]