3 Renewable Energy Stocks to Dump Before the Damage Is Done
Two years ago, the prospects for renewable energy stocks seemed bright. Money was flowing into all sorts of new and disruptive technology companies. And government assistance was on the way to the sector, with the Biden Administration set to deliver large incentives to wind and solar companies via the Inflation Reduction Act.
Heading into 2024, however, the sky has darkened. The stimulus money has largely been spent, and the current gridlock in Congress seems likely to block further renewable energy investments for the time being. Meanwhile, soaring interest rates have made it increasingly difficult to fund green energy projects.
We’ve seen several notable renewable energy stocks plunge over the past quarter amid these tightening constraints. And the bad news isn’t over yet. It’s time to dump these three renewable energy stocks before things get even worse.
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NextEra Energy Partners (NEP)
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NextEra Energy Partners (NYSE:NEP) is a specialty utility company that owns a portfolio of wind, solar and battery storage projects. It operates in conjunction with NextEra Energy (NYSE:NEE), a large and well-respected power utility firm.
In past times, the relationship between NextEra Energy and the NextEra Energy Partners entity went well. Demand was high for investments in wind and solar. People were excited to put money to work in a high-yielding renewable energy stock that seemingly offered great upside from the green energy revolution.
However, higher interest rates have caused the math to stop penciling out. NextEra Energy Partners had been forecasting it would give investors annual 10% dividend increases. That was a tough task, given that the wind and solar projects it tended to invest in had returns in the single digits. Thus, it had to heap on large amounts of debt to make the math work.
Now that interest rates have soared, NextEra can’t continue running on the growth treadmill like before. Management recently slashed its growth outlook, and the share price plunged.
And I believe things are set to get a whole lot worse. NextEra Energy Partners didn’t generate enough cash flow from operations to cover its dividend last year, let alone fund further growth investments. And with capital being painfully expensive now, it is unclear how NextEra can obtain the cash flow growth necessary to cover its outsized dividend obligations.
Long story short, I believe NextEra Energy Partners will ultimately slash its dividend and the stock will tumble. In these sorts of related party situations, it’s generally safer to own the parent company. Investors here should strongly consider holding the more secure NEE stock rather than gambling on the distressed NEP stock.
Hannon Armstrong Sustainable Infrastructure Capital (HASI)
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Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) is a specialty company that provides financing for renewable energy projects such as windmills and home solar units.
The company made its money by borrowing at low interest rates and then achieving slightly higher returns on its investments. In general, it would borrow around 5% and invest in renewable energy projects generating about 7.5% returns on average as shown in this presentation.
That business model has now broken down thanks to soaring rates. It would likely cost Hannon Armstrong significantly more to borrow money in the credit market than it earns on its portfolio today. In a world where ordinary low-risk 30-year fixed mortgages are encroaching on 8%, Hannon’s collection of illiquid energy assets seems highly unattractive by comparison.
Hannon Armstrong has tried to fill the funding gap by issuing stock. It offered $300 million in new shares earlier this year at just $23 each. That’s a painful blow for investors who had watched shares trade as high as $70 in 2021.
Even issuing equity won’t fix the problem. That’s because the company’s dividend yield is now over 7%. That means Hannon Armstrong is having to pay out roughly as much in dividends as its projects earn. That math is generally not viable for companies prioritizing maintaining a healthy balance sheet. Ultimately, unless interest rates rapidly reverse course, Hannon Armstrong is likely to slash its dividend and shares will plummet on the news.
Enovix (ENVX)
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Enovix (NASDAQ:ENVX) is a company that makes lithium-ion batteries. That may sound unremarkable. However, the firm has built up a loyal shareholder base thanks to management’s claims that it will transform the industry and usher in a new era of electric-powered vehicles and consumer products.
As the CEO put it in a shareholder letter: “At Enovix, our goal is to create a powerful rechargeable battery that can meet and exceed the energy storage needs of the industries and technologies of the future, from IoT devices and consumer electronics to EVs.” He claimed Enovix has developed a new battery technology that will turn the more than century-old industry on its head and usher in a giant leap forward for batteries and related products such as EVs that use them.
Needless to say, bold claims attract a lot of scrutiny. Short sellers have heavily criticized Enovix, claiming that the technology is unproven and quite unlikely to be the basis of a viable business. Short interest is through the roof in ENVX stock.
And there is little sign of commercial demand for the batteries; revenues last quarter were a mere $42,000. In a raging bull market, this sort of speculative investment might make more sense, but in currently choppy market conditions such as the present time, unproven cash-burning start-ups like Enovix are bound to struggle.
On the date of publication, Ian Bezek did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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