Energy market share outlook
Over the past 52 weeks as of March 17, the S&P 500 has returned 10.71%. Over the same period, the iShares S&P Global Clean Energy Index Fund (ICLN) exchange-traded fund is down 5.47% compared to the SPDR Select Sector Fund - Energy Select Sector (XLE) ETF's -47.75%.
No sector has been immune from the recent stock market crash, and the energy sector has received one of the heavies blows. With growth in global oil demand expected to continue its decline to 1.2 million barrels per day in 2020, top oil-producing nations have begun a scramble for market share. OPEC and Russia had a fallout over production cuts on March 6, kicking off a price war that sent oil prices plummeting more than 24% in a single weekend.
The U.S., which became the world's largest oil producer in 2018, has become the third party in the standoff. Oil companies will likely see their revenue and share prices drop dramatically, as has been the case with similar scenarios in the past, and the companies with the weakest market positions and balance sheets are likely to get squeezed out.
Despite the blow to the overall energy sector, clean energy stocks have posted only half of the losses of the S&P 500 over the past year. According to the International Energy Agency's World Energy Outlook published in November 2019, installed power generation capacity growth for coal and oil has slowed down to a crawl, while installed power generation for natural gas and hydroelectric energy have maintained consistent growth of approximately 6.67% and 4.56% per year since 2000, respectively. Solar, wind and other renewable energy growth remained flat through 2005, then began a sharper increase of around 6.12% per year through 2019.
These numbers imply that, excluding ramping up generation in existing facilities, renewable energy will grow faster than fossil fuel energy in the coming years. There are a number of factors behind this, including environmental awareness, emissions regulations and the fact that producing renewable energy continues to become cheaper as operations are scaled up and new technology is developed for the sector.
Renewable energy companies also operate very differently from oil producers. Whereas oil companies produce and then sell on the market, making them more vulnerable to volatility, clean energy is mostly produced as part of a utility or tech company.
Thus, investors may be interested in the following stocks, which are the most popular clean energy stocks among gurus.
Vistra Energy Corp. (NYSE:VST) is a Texas-based electricity company that operates in 20 U.S. states, as well as Washington D.C., Canada and Japan. It is the largest competitive power generator in the U.S. While not a pure play in renewable energy, Vistra's power generation portfolio consists of natural gas, nuclear, coal and solar. It aims to reduce greenhouse gas emissions by 50% by 2030, which it plans to do primarily by shifting away from coal and more toward natural gas and solar. There are 11 Gurus who own shares of Vistra.
On March 17, shares of Vistra Energy traded around $12.89 for a market cap of $6.29 billion and a price-earnings ratio of 7.11. According to the Peter Lynch chart, the stock may be trading below its intrinsic value.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. The Altman Z-Score of 0.82 suggests the company may be in economic distress, though as a utility, it has more opportunities than most companies to avoid bankruptcy. Both revenue and net income have grown consistently over the past several years.
First Solar Inc. (NASDAQ:FSLR) is an Arizona-based semiconductor company that manufactures solar panels and utility-scale photovoltaic power plants. It also provides supporting services for its systems, including maintenance, construction, finance and end-of-life panel recycling. It is the leading global provider of utility-scale solar power systems. There are nine gurus who own shares of First Solar.
On March 27, shares of First Solar traded around $32.55 for a market cap of $3.25 billion and a forward price-earnings ratio of 9.26. The Peter Lynch chart suggests the stock may be overvalued compared to recent earnings results.
GuruFocus gives First Solar a financial strength rating of 7 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 3.64 is higher than 65.09% of competitors. The company has struggled to grow its net income in recent years, but earnings per share without non-recurring items has grown 35.4% per year over the past three years.
NRG Energy Inc. (NYSE:NRG) is a leading nuclear power electricity generator with dual headquarters in New Jersey and Texas. It produces electricity primarily from nuclear, natural gas and coal sources, though it also generates smaller amounts from oil and renewables. There are nine gurus who own shares of NRG Energy.
On March 17, shares of NRG Energy traded around $23.42 for a market cap of $6.05 billion and a price-earnings ratio of 1.41. According to the Peter Lynch chart, the stock may be undervalued.
NRG Energy has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.05 is low, but the interest coverage of 3.17 times and the current ratio of 1.31 indicate that the company can meet its short-term financial obligations. Revenue and net income have increased in recent years, with net income achieving a new high in 2019 (though revenue has yet to catch up to its 2014 high).
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.