The energy sector is going through a multi-decade pivot from fossil fuels to renewables. However, even as investment in wind and solar accelerates, the energy industry still needs to continue spending money on expanding the production of oil and gas and the infrastructure required so it can freely flow to market centers. Because of that, investors can find compelling opportunities on both sides of the spectrum.
That's the case this May as our contributors have uncovered three intriguing options across the energy sector that look like great buys this month: midstream MLP Crestwood Equity Partners (NYSE: CEQP) and solar energy stocks SolarEdge Technologies (NASDAQ: SEDG) and First Solar (NASDAQ: FSLR). Here's why they top our list.
Image source: Getty Images.
The acceleration is starting to take hold
Matt DiLallo (Crestwood Equity Partners): Units of Crestwood Equity Partners have been red hot over the past year, surging more than 20%. Fueling the high-yielding MLP's rise has been a big-time turnaround in its financial results. That was evident in the company's first-quarter report, as cash flow zoomed nearly 28% compared to the year-ago period.
That uptick is only the beginning. Crestwood currently has several expansion projects slated to enter service over the next year. On top of that, the company recently completed a needle-moving acquisition for full control over one of its growth engines. Those factors position the MLP to deliver peer-leading cash flow growth of more than 20% per year through 2020. That high-octane growth rate not only makes Crestwood's current 6.8%-yielding distribution even more sustainable, but positions the company to increase its payout in the coming years.
Meanwhile, units of Crestwood Equity remain relatively inexpensive despite their rebound in the past year. The MLP, for example, has a $2.6 billion market value. However, it's on track to produce $290 million in cash flow, which implies that it sells for less than nine times cash flow. That's well below the low-double-digit multiple most peers fetch.
Crestwood Equity Partners offers energy investors high growth and a high yield for a value price. That trio of factors sets up this MLP to continue producing market-beating total returns over the next couple of years, making it one of the top energy stocks to buy this month.
Looking to expand but not getting distracted
Jason Hall (SolarEdge Technologies): Recently, I named SolarEdge as the solar stock investors should watch in May, with an eye specifically on the company's first-quarter earnings release on May 6. Well, that earnings release came, and the company demonstrated exactly why it deserves a place in investors' portfolios. SolarEdge reported record sales, with $272 million in revenue that beat most investors' expectations, while also delivering another profitable quarter -- $0.64 per share adjusted EPS -- that came in ahead of expectations.
Moreover, the company's biggest business -- supplying important power management components to solar panel makers and installers -- reported not just growth year over year, but also sequential growth. Considering that the first quarter of each year is typically weaker due to normal seasonal demand, this is a handy piece of evidence that both solar demand and demand for SolarEdge's technology is high.
It's growing more profitable, too. The company said that gross margin in its solar segment was 33.8%, up from 32.8% in the fourth quarter of 2018.
Lastly, SolarEdge has multiple irons in the growth fire that look set to deliver in the coming years, including in the electric vehicle power train and charging, and energy storage spaces. These two high-growth, high-demand niches fit nicely with SolarEdge's core solar business while offering other avenues to expand, but as this quarter's result showed, they aren't distracting management away from its bread-and-butter solar business.
That combination makes SolarEdge worth buying today.
Image source: Getty Images.
Shining a light on solar energy
Travis Hoium (First Solar): Solar energy is the most abundant energy source on earth and it's now cost-effective versus any fossil fuel competitor. But that doesn't mean that all solar stocks are good investments. First Solar, a manufacturer of thin-film solar panels and one of the industry's financial leaders, is one company that is.
First Solar is one of the largest solar manufacturers in the world and has historically had industry-leading margins as well. Margins have been compressed as competitors have lowered costs and improved efficiency, but First Solar's new Series 6 solar panels promise to bring higher margins than the low-teens that older models were generating. In addition to making solar panels, First Solar does about 1 gigawatt (GW) of project development per year, which generates captive demand for panels.
The real differentiation First Solar has is a $1.7 billion to $1.9 billion expected net cash balance by the end of 2019. First Solar's balance sheet is awash with cash in an industry where most companies have piled on debt. This gives First Solar flexibility to make more prudent investment decisions and maybe even buy competitors if the time is right.
There are no sure bets in solar energy, but First Solar's balance sheet and long history as one of the few profitable companies in the industry make this an energy stock to buy in an energy industry that's turning more and more to solar.
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Jason Hall owns shares of First Solar and SolarEdge Technologies. Matthew DiLallo owns shares of Crestwood Equity Partners LP and First Solar. Travis Hoium owns shares of First Solar. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.