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Near-Term Bright Prospects for Alternative Energy Stocks

The Zacks Alternative Energy industry can be fundamentally segregated into two sets of companies. While one group is involved in the generation and distribution of alternative energy and electricity from sources like wind, natural gas, biofuel, hydro and geothermal, the other set is engaged in development, design and installation of renewable projects involving these alternative energy sources.

The industry also includes a handful of stocks that offer fuel cell energy solutions, which gained popularity as an affordable clean energy of late.

Per the latest Global Trends in Renewable Energy Investment report, the year 2018 marked the fifth successive period in which global investment in renewable exceeded $250 billion.  According to a BloombergNEF study, investment in clean energy is set to hit $2.6 trillion in the years from 2010 through the end of 2019 with the United States being a major contributor.

Here are the industry’s three major themes:

  • Among alternative energy sources, wind energy continues to make noticeable progress in the United States. Per American Wind Energy Association’s latest report, the country reached the milestone of generating 100 gigawatts of wind energy at the end of third-quarter 2019. This growth was driven by increased installations of wind projects that touched maximum in any given third quarter on record. Installations for the year totalaled 3,667 MW, reflecting a 123% surge from the first three quarters of 2018. Courtesy of energy developers’ intensified focus on large-scale off-shore wind projects, the recent tax credit extension bills introduced by the U.S. Senate and declining installation costs, the U.S. wind space should remain buoyant. With projections that wind power will secure investments worth $1 trillion for the decade ending 2019, the outlook for the alternative energy industry seems favorable.

  • The outlook for the alternative energy industry is also encouraging as utilities and corporations are increasingly shifting to renewables. This shift can be attributed to lower cost of generating electricity from alternative energy sources and storing the same, thanks to rapid technological advancements. Per International Renewable Energy Agency, cost of all commercially available renewable power generation technologies declined in 2018. By 2020, onshore wind is set to join hydropower in consistently offering a less expensive source of new electricity than the least-cost fossil fuel alternative without financial assistance. This indicates that alternative energy sources can be profitable for industry players. Thus, stocks in this industry should remain prudent choices for investors.

  • Per a report by S&P Global Platts, with U.S. states increasingly adopting favorable renewable portfolio standards, existing technologies are not adequate to support their ambitious 100% clean energy goals. In particular, the stakes are high when it comes to transmission costs. Per a report by Wood Mackenzie, the United States currently has about 200,000 miles of high-voltage transmission (HVT) and achieving 100% renewables will require doubling of these transmission lines. The addition of 200,000 miles of new HVT will add $700 billion to the total price of grid decarbonization, excluding the cost of materials. Going by the report, the total cost of shifting the U.S. power grid to 100% renewable energy over the next 10 years is an estimated $4.5 trillion. So, no doubt, investments are promoting clean energy but at a high price.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #103, which places it in the top 41% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500, Outperforms Sector

The Alternative Energy Industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year. The industry has declined 5.2% while the Oils-Energy sector has decreased 13.2%. Meanwhile, the S&P 500 has increased 15.3%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 3.69 compared with the S&P 500’s 11.23 and the sector’s 4.77.

Over the last five years, the industry has traded as high as 5.97X, as low as 1.91X and at the median of 3.93X as the charts show below.

Bottom Line

Currently, electricity is the fastest-growing form of end-use energy with renewables likely to become a key source of electricity generation in the coming years. Rapidly expanding corporate investments from the nation in renewables should allow stocks in this space to continue generating impressive shareholder returns in the near future and help the United States be a constant forerunner in the alternative energy space.

However, fossil-fuel combustion from residential and commercial buildings accounts for roughly 29% of total U.S. greenhouse gas emissions. So, if the country is determined to build a cleaner environment, cutting down carbon emissions from energy use in buildings is necessary. While smart energy buildings are in vogue currently, reducing emissions from existing buildings remains a challenge.

Nevertheless, given its favorable industry rank, investors may bet on a few alternative energy stocks that exhibit a strong earnings outlook. Also, there are some players in this space that shareholders might want to hold on to.
Here we present three alternative energy stocks with a Zacks Rank #2 (Buy) or 3 (Hold) that investors may want to invest in or retain for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bloom Energy Corp. (BE): For this San Jose, CA-based company, the Zacks Consensus Estimate for current-year bottom line indicates a year-over-year improvement of 54%. The stock came up with average positive surprise of 60.12% in the trailing four quarters. The company carries a Zacks Rank of 2.

FuelCell Energy, Inc. (FCEL): For this Danbury, CT-based company, the Zacks Consensus Estimate for current-year bottom line indicates a year-over-year rise of 58%. The stock delivered average beat of 22.24% in the last four quarters and is Zacks #2 Ranked.

Evergy Inc. (EVRG): For this Kansas City, MO-based company, the Zacks Consensus Estimate for current-year earnings indicates 7.9% growth year over year. The stock has a solid long-term earnings growth estimate of 6.6% and a Zacks Rank of 3.

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