The world faces two monumental tasks. It needs to continue meeting steadily growing energy demand, which is expected to expand by another 25% by 2040, according to the International Energy Agency, while minimizing the impact on the environment. It's a crucial dual mission that will require $2 trillion per year of investment in new energy supply, with those dollars needing to skew toward cleaner sources.
That investment in clean energy could generate enormous profits for investors who choose the right stocks. To get there, we'll need to first take a deep dive into the sector to unearth the most compelling opportunities. From there, we'll need to sharpen our knowledge of what to look for in the companies targeting these opportunities so we can narrow our list to the top options.
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What is clean energy?
The term "clean energy" is broader than most investors probably realize. While many believe that the term is a synonym for renewable energy, it encompasses even more sources of energy. Whereas renewables include energy derived from wind, solar, hydro, and geothermal sources, clean energy also includes nuclear, clean coal, fuel cells, energy from waste, biofuels such as ethanol and wood pellets, and natural gas. Because of that, clean energy encapsulates all of the alternatives to oil and coal, not just the renewable ones.
That's because clean energy implies that the source emits lower levels of pollution, therefore making it better for the environment than "dirty" fossil fuels like oil and coal, which produce significant amounts of greenhouse gasses and other pollutants. This distinction is why a lower-carbon fuel like natural gas, for example -- which emits 50% fewer emissions when burned than coal -- is on the list even though it's nowhere near as clean as renewable energy sources like wind and solar.
The outlook for clean energy
The world is on pace to add 1.7 billion new people to the planet by 2040. As a result of those new additions, along with rising income levels from those of us already here, energy demand is on pace to expand by 25% by 2040. To meet this need, the world must continue investing in new energy supplies.
However, if governments and companies continue focusing their investments on fossil fuels, it would likely cause carbon emissions to rise to an even more dangerous level. That's why more money needs to go toward lower-carbon options like renewables, nuclear, and natural gas. Many forecasters anticipate this to be the case, with the International Energy Agency, for example, modeling that 80% of this future investment will be on low-carbon energy sources.
Because of that, the energy produced by cleaner sources is expected to expand at a fast pace in the coming years. Renewables like wind and solar, for example, are on track to grow 18% by 2035 according to a forecast by well-respected energy industry consultancy Wood Mackenzie, which is a much faster growth rate than that projected for oil (14% over that timeframe) or coal (7%). However, what might surprise investors is that natural gas demand will expand by an even faster 46% by 2035, according to Wood Mackenzie. Meanwhile, the energy produced by nuclear and all other sources is on pace to grow at much slower speeds of 10% and 6%, respectively. Given this forecast, investors should focus their clean energy investments on renewables and natural gas since those opportunities have the most growth potential.
Despite the crucial need for clean energy investment, several headwinds could affect the sector in the near term. For starters, the Trump administration imposed tariffs on imported solar panels, fees enacted to protect the solar industry in the United States. That added to the cost of installing solar and is starting to hurt demand. During the third quarter of 2018, for example, solar installations dropped 15% year over year thanks to the impact of the tariffs. Those added fees could further dampen the solar sector's prospects in 2019. That's certainly the view of the U.S. Energy Information Administration (EIA), which anticipates that U.S. solar generation growth will decelerate in 2019, only increasing 13% after rising 27% during 2018.
Meanwhile, the Trump administration also imposed tariffs on imported steel, which will make wind turbines more expensive. Those fees could add 10% to the cost of building new wind farms. On top of that headwind, federal tax credits for wind power are nearing expiration, which could affect the pace of development beyond 2020.
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How to invest in clean energy stocks
Despite the significant promise and growth potential of clean energy, the stock prices of many companies operating in the sector haven't enriched investors. The Invesco Global Clean Energy ETF, for example -- which is an exchange-traded fund that holds more than 100 clean energy investments -- lost about 20% of its value in 2018, putting it down double-digits over the last five years. Meanwhile, several clean energy stocks have declined even further, with some declaring bankruptcy due to company-specific issues, usually related to a lack of profits and a debt-laden balance sheet.
Because the sector can be a challenging one for investors, they need to focus their attention on companies that not only have strong growth prospects, but also sound financial profiles. As such, investors should seek out companies that are already profitable and generate healthy cash flows, because that makes it less likely that they'll lack the funds needed to expand their operations. In addition, investors should look for companies that have strong balance sheets, which ideally means they have investment-grade credit ratings, signifying that they have the resources to meet their financial obligations during a market downturn, as well as a significant amount of cash and available credit to finance their expansion plans.
Speaking of growth, investors should also take a close look at a company's prospects, paying closest attention to visible near-term growth via either expansion projects under way or secured sales contracts, since those factors increase the probability that the company can grow its earnings -- and therefore shareholder value -- in the coming year.
Top clean energy stocks for 2019
With those factors in mind, here are five top clean energy stocks to consider for 2019:
Clean Energy Stocks
Clean Energy Focus
Brookfield Renewable Partners
Hydroelectric power with some wind, solar, and storage
Wind and solar
Wind, solar, natural gas, nuclear, and storage
Liquified natural gas
Solar panel manufacturer
Data source: Company Investor Relations' website.
Here's a closer look at why these five clean energy companies appear well positioned to generate strong returns for investors in 2019 and beyond.
The hydropower king: Brookfield Renewable Partners
Brookfield Renewable Partners controls one of the largest portfolios of renewable power generating facilities in the world, operating in 15 countries, though the bulk of its assets are in Colombia, Brazil, the U.S., and Canada. The company owns a diversified mix of hydroelectric, wind, solar, and energy storage facilities, though it's a global leader in generating hydroelectric power, which comprised about 76% of its portfolio at the end of 2018.
What makes Brookfield's focus on hydropower so intriguing for investors is that these facilities generate steady renewable electricity for decades and require minimal recurring investment for maintenance, which gives them a leg up on other renewables like wind and solar, which need higher levels of regular upkeep and tend only to last a couple of decades. Because of that, hydropower plants typically generate lots of cash flow for their owners. Brookfield further solidifies its cash flow profile by signing long-term contracts to sell the power it produces at fixed prices, which insulates it from fluctuations in electricity rates.
Aside from hydropower plants, Brookfield also operates some wind farms as well as a few energy storage facilities, which use water or batteries to store electricity until it's needed. In addition to that, the company holds a controlling stake in TerraForm Power. These renewable power investments also tend to generate stable cash flow for the company, backed by long-term contracts.
Brookfield returns about 70% of the cash flow produced by its expansive portfolio of renewable investments to investors via a dividend, which yielded an attractive 7.8% at the end of 2018. The hydropower giant reinvests its retained cash into additional renewable energy assets and had several projects under construction heading into 2019, including new hydroelectric facilities in Brazil and a pumped storage project in North America.
Brookfield Renewable Partners believes it should have plenty of opportunities to continue expanding its renewable energy portfolio in the future. In the company's estimation, the renewable energy market represents a $10 trillion opportunity, which should allow it to invest about $700 million per year to build or buy high-quality renewable assets. The company can finance that level of investment with retained cash flow and its strong, investment-grade balance sheet, which had more than $2.3 billion of cash and available credit available at the end of 2018. Those investments, when combined with the embedded growth of its existing portfolio, should expand its cash flow per share at a 6% to 11% annual pace. That should give the company enough power to increase its dividend by 5% to 9% per year. That healthy growth rate, when added to Brookfield Renewable's high-yielding dividend, could give it the power to generate total annual returns in the mid-teens, making it a great stock for income-seeking investors.
Image source: Getty Images.
A high-yielding wind and solar company: TerraForm Power
TerraForm Power operates wind and solar assets, primarily in North America and Western Europe. As of the end of 2018, the wind generated about 63% of its power while the sun contributed the other 37%. Like Brookfield Renewable, TerraForm Power sells its electricity under long-term contracts, which locks in power prices to produce predictable cash flow.
The company aims to pay out between 80% to 85% of its cash flow to shareholders via its dividend, which yielded 7.2% at the end of 2018. TerraForm Power plans to reinvest its remaining cash in projects that will increase its cash flow, such as expanding its sites or repowering its wind farms by replacing aging turbines with new, more powerful ones.
Those growth-focused investments, when combined with TerraForm's internal initiatives to reduce costs and increase earnings, position the company to grow its cash flow per share by more than 35% from 2017's level through 2022. That steadily rising cash flow stream will give the company the funds to increase its high-yielding dividend at a 5% to 8% annual rate over that time frame.
In addition to the visible growth the company has seen from those internal initiatives, TerraForm Power also plans to continue making acquisitions. The company completed one large-scale transaction in 2018, buying Spanish wind and solar power company Saeta Yield for $1.2 billion. TerraForm sees the Spanish market as an ideal target for future acquisitions since it can combine new assets with its recently acquired platform in the region. Meanwhile, the company also plans to target investments in Mexico, which it sees as a ripe market for renewables, as well as to continue expanding in the U.S. and Canada. The company finished 2018 with more than $900 million in cash and available credit, which provides it with the financing needed to capture attractive investment opportunities that might emerge.
TerraForm Power believes it has the right formula to create value for investors in the coming years. In the company's view, the combination of its 7% yielding dividend along with 5% to 8% growth should generate a total return of between 12% to 15% annually. That makes it an ideal stock for income-focused investors.
The largest and cleanest utility: NextEra Energy
NextEra Energy is the world's largest utility company, which means it not only generates power, it distributes that power directly to customers. NextEra Energy operates two main business units: Florida Power & Light (FPL), which is one of the largest electric utilities in the U.S., and NextEra Energy Resources, the world leader in producing power from the wind and sun. In addition, the company operates a publicly traded subsidiary, NextEra Energy Partners (NYSE: NEP), which acquires, owns, and operates clean energy assets on behalf of NextEra Energy.
FPL distributes electricity and natural gas to roughly 5 million customers in Florida. The company operates several power plants to supply these customers, including natural gas, nuclear, and solar generating facilities. The utility is investing billions of dollars through 2020 to improve the reliability of its operations as well as expand its clean energy generation capacity.
Meanwhile, NextEra Energy Resources is a world leader in generating and transporting clean energy. The entity owns a gigantic portfolio of power plants, with wind producing 69% of its electricity, followed by nuclear at 14%, solar at 11%, oil at 4%, and natural gas at 2%. The company primarily sells this power to other utilities and end users under long-term contracts, which enables it to generate predictable cash flow. In addition to those generation plants, it also has a meaningful natural gas pipeline business, including several operating pipelines -- seven of which NextEra Energy Partners owns -- as well as one large-scale pipeline under construction and another in development.
Even though it's already the world's largest clean energy company, NextEra Energy plans on investing a staggering $40 billion through 2040 to expand its operations. In addition to the investments at FPL, NextEra Energy Resources has a gigantic backlog of projects under way, including building wind farms in the U.S. and Canada, developing additional solar assets in the U.S., repowering several of its wind farms, investing in energy storage projects (where it's the U.S. leader) and constructing more gas pipelines.
NextEra Energy estimates that these investments will grow its earnings per share at a 12% to 14% annual rate through at least 2020, which should support similar yearly increases in its 2.6%-yielding dividend as of the end of 2018. That high growth rate makes NextEra Energy an ideal stock for growth-focused investors, though its rapidly expanding dividend makes it a compelling option for income-seekers as well.
The emerging LNG giant: Cheniere Energy
Natural gas is a crucial fuel in meeting energy demand while maintaining a cleaner profile. However, while gas is abundant and cheap, it's not as easily transported to global markets as oil and coal are. That opens the door for companies like Cheniere Energy to build and operate liquified natural gas export facilities that cool natural gas to negative 260 degrees Fahrenheit, at which point it becomes a liquid and can then travel by specialized ship on the open seas to global markets.
Cheniere Energy is currently building two large-scale LNG export facilities along the U.S. Gulf Coast, one in Sabine Pass, LA, and the other in Corpus Christi, TX. The company completed construction on the first phase of Sabine Pass in 2016, which made it the first company to export LNG from the lower 48 states (Alaska has shipped LNG from time to time over the years). The company now has four phases complete at that facility, another expected to start up in early 2019, and a sixth one in development.
In addition to that, Cheniere Energy started commissioning the first two phases of its LNG export facility in Corpus Christi in late 2018, which should become fully operational in early 2019. Cheniere also began construction on the third phase of its Corpus Christi facility in 2018 and should finish it up by the second half of 2021. The company has enough land at that facility to build several additional phases in the future.
Cheniere Energy is on track to become the fifth largest LNG producer in the world by 2020. This output should be highly profitable since the company has secured long-term contracts for about 85% of its anticipated production, which locks in that revenue stream. Because of that, Cheniere is on pace to deliver significant earnings growth over the next couple of years.
Meanwhile, with significant new LNG supplies needed to meet future demand, the company should be able to continue expanding both its existing sites as well as potentially adding new locations. It could also make other LNG-related investments, such as building new natural gas pipelines and import facilities. Cheniere Energy can finance this growth with its solid balance sheet, which had more than $1 billion in cash at the end of 2018, and its rapidly expanding stream of cash flow.
What makes Cheniere Energy such a compelling clean energy investment is that it offers significant near-term growth given the phases that should become operational in 2019 as well as substantial long-term upside as it makes additional LNG-related investments. This visible growth and ample future potential make it an ideal option for growth-focused investors.
The cash-rich solar panel maker: First Solar
First Solar designs and manufactures solar panels. However, what sets it apart from rivals is that instead of building traditional solar modules out of polysilicon, First Solar uses a proprietary thin-film technology that enables it to make its panels faster and cheaper than competitors. While its modules aren't as efficient in generating electricity from the sun as other panels, they offer a better overall value, especially for commercial and industrial uses.
The company entered 2019 in a bit of a transitional phase as it moves toward full-scale production of its Series 6 panel, which is its newest and most efficient module. First Solar aims to phase out its current Series 4 module as it scales up the output of Series 6 by the end of 2020.
Even though 2019 is a transitional year, First Solar still sees ample growth up ahead. The company unveiled its forecast for 2019 toward the end of 2018, estimating that it should bring in $3.25 billion to $3.45 billion in net sales (up from $2.3 billion to $2.4 billion in 2018) as it ships 5.4 to 5.6 gigawatts (GW) of modules (up from 2.7 to 2.6 GW in 2018). That puts it on track to earn between $2.25 to $2.75 per share, an increase from $1.40 to $1.60 per share in 2018. Backing that view is the large backlog of orders the company booked in the past year, with the solar panel maker ending 2018 with more than 11 GW of modules on order, providing it with solid revenue visibility well past 2019 and muting its exposure to the Trump Administration's solar tariffs. Meanwhile, First Solar projects that it should end 2019 with $1.6 billion to $1.8 billion in cash, giving it the strongest balance sheet in the sector.
First Solar's investments in its Series 6 module should enable it to continue growing revenue and earnings at a fast pace beyond 2019. Meanwhile, its top-tier balance sheet gives it the financial strength to continue making investments to expand its operations. That combination of growth potential and balance-sheet strength makes First Solar a lower-risk way for growth-focused investors to invest in solar.
These top clean energy stocks could make investors lots of green in 2019
These clean energy stocks share three important characteristics: Each one is highly profitable, has a strong balance sheet, and boasts visible near-term growth prospects. Those factors increase the probability that these companies can generate strong returns for investors in the coming year, which is what makes them ideal clean energy investments for 2019.
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