The renewable energy segment is one of the few high-growth arenas in the energy sector, but it's been a terrible place for investors over the past decade. As competition and innovation have rapidly driven down the prices they can charge for their wares, companies have been left with little to no profits, and many have struggled just to survive. But that doesn't mean there aren't opportunities for those investors who have the patience to wait for winners to emerge.
We asked three of our contributors to name the top renewable energy stock they'd buy now, and Livent (NYSE: LTHM), Brookfield Renewable Partners (NYSE: BEP), and SunPower (NASDAQ: SPWR) were their picks. These companies don't have much in common, but they all present great growth opportunities for investors.
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Be greedy when others are fearful
Rich Smith (Livent): It's been more than two months since lithium supplier Livent reported fiscal first-quarter 2019 earnings that were in line with expectations, but gave weak guidance for the rest of the year due to issues with both its suppliers and customers. Management's forecast of "lower volumes and lower average realized price" sparked a sell-off that cut the stock price in half.
Making matters worse, this steep decline has drawn lawsuits like rotten fruit attracts drosophila melanogaster. These days, the newsfeed for Livent is dominated by press releases inviting injured shareholders to join class-action lawsuits that allege the company's pre-IPO registration statement misled investors.
But here's the good news: With so many people feeling fearful about Livent's prospects, there may be an opportunity to "get greedy" with the stock before the company's Q2 earnings come out next month.
Although it's true near-term prospects for Livent look dim (analysts forecast a 35% decline in profits this year), those lowered expectations have depressed Livent's share price to just 9 times trailing earnings -- a steep discount to rival SQM's P/E ratio of 20, and even cheaper than Albemarle's P/E of 11.4. (And for the time being at least, Livent remains free-cash-flow positive. Albemarle isn't).
If you believe, as I do, that lithium is a sine qua non for storing energy generated from renewable sources like wind and solar, it makes sense to believe that Livent -- one of the top three players in lithium -- will outlive its present difficulties, and become much more profitable as time goes by.
An outperformer with great growth prospects
John Bromels (Brookfield Renewable Partners) In an important, emerging sector, it can be tough to figure out which companies are going to make money. For investors interested in renewable energy, this can be especially difficult. Some renewable technologies that showed early signs of promise, like hydrogen fuel cells, have underperformed. Other niches, like solar panel manufacturing, have been battered by political headwinds, economics, and competition. That's why I'm recommending a company that's already making money for its investors from green energy.
Brookfield Renewable Partners is a master limited partnership (MLP) set up by Canadian asset manager Brookfield Asset Management to hold its diverse group of renewable power assets. With a $6.5 billion market cap, the MLP has a lot of assets under its control, including 880 generating facilities across the globe with 17,400 megawatts of capacity. These include hydroelectric plants, and wind and solar farms, as well as energy storage facilities.
About 75% of Brookfield's assets are in good-old, reliable hydroelectric power, which helps the company generate steady cash flow and pay a hefty distribution that currently yields 5.6%. While the company has been paying out around 90% of its cash flow via its distribution -- which is higher than I'd like -- management projects that cash-flow growth will help it get that number closer to its 70% target.
Brookfield is also committed to earnings growth: It not only anticipates green-lighting new projects that will bring in an additional 3% to 5% of annual earnings growth, but also projects that it can improve earnings from its existing facilities to the tune of an additional 3% to 6% growth per year. That likely adds up to high-single-digit percentage growth, which for what's essentially a utility company is a solid rate. And thanks to Brookfield's superior cash flow and excellent credit rating, the company can easily fund these plans.
MLP ownership isn't for everyone, but if you're looking to add a renewable energy company to your portfolio, Brookfield Renewable Partners is about as solid a bet as you'll find in this sector.
A bet on high-end solar
Travis Hoium (SunPower): The solar industry has been going through a phase of dramatic cost reductions over the past two decades, and that has driven most installers to use primarily commodity panels. SunPower, with its high-efficiency solar panels, has been punished by that transition, and has struggled with low margins and constant disruptions to its manufacturing technology.
However, over the last year or two, certain conditions have changed.
The pace of cost reductions has slowed, and developers are renewing their focus on the efficiency of their installations. Up-front costs remain important, but with the greater weight that is now being given to squeezing the most energy possible from a location, SunPower's position looks to be strengthening.
SunPower's finances haven't been anything to write home about, but that may change in the near future. The company introduced its A-Series solar panel earlier this year -- the industry's first 400-watt panel. It has larger cells than previous models, and management says its costs will be competitive with commodity manufacturers.
Not only are high-efficiency solar panels improving in cost effectiveness, SunPower is adding energy storage to more projects. One-third of its commercial solar power systems now include energy storage, and the company says it will introduce a residential solar solution later this year.
These new products combined with improving market conditions in the residential solar industry may make SunPower one of the biggest winners in energy in 2019.
A lot of ways to get into renewable energy
These stocks present a variety of ways for investors to capitalize on the growth of the renewable energy sector. Whether you're a low risk investor who wants a dividend (Brookfield Renewable Partners), someone looking for growth (SunPower), or a commodity investor (Livent), there's something for everyone here.
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John Bromels has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.