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The Worst Mistake Pattern Energy Investors Can Make Right Now

Matthew DiLallo, The Motley Fool

After a few challenging years, shares of renewable energy company Pattern Energy (NASDAQ: PEGI) have bounced back big-time in 2019. The company's stock is up 42% so far this year, including a spike of more than 12% in the past month on news that it has received takeover interest.

That rebound likely has shareholders wondering whether they should do something. Some might be thinking about cashing out, while others are probably contemplating adding to their position. However, making a move in response to a potential buyout is the worst thing Pattern Energy investors could do right now. Here's why.

Two people in hard hats and a laptop looking at a row of wind turbines.

Image source: Getty Images.

The risk of selling too early

With shares of Pattern Energy surging this year, some investors are likely tempted to cash out and lock in those gains. Doing so, however, would give up all the company's upside potential, which could be substantial. For starters, the company could accept a buyout bid at a premium to its current price. That offer could be for a cash deal, an all-stock merger, or some combination of the two. Fellow high-yielding renewable energy company TerraForm Power (NASDAQ: TERP), for example, has reportedly floated a merger proposal. A combination of these two renewable energy companies could create a lot of shareholder value as they benefit from increased scale, which should drive down costs.

Even if a merger offer never materializes, there are many reasons to be bullish on Pattern Energy's future. The company is currently in the middle of a two-year strategy that should grow its cash flow per share at a 10% annual rate. This plan would improve its dividend payout ratio from a concerning 99% last year to a more comfortable 80% by the end of 2020. That would enhance the long-term sustainability of Pattern's 6.4%-yielding dividend, which it should eventually be able to start growing again.

It should have plenty of opportunities to expand its portfolio and cash flow over the long term. That's because the energy industry needs to invest trillions of dollars in transitioning from fossil fuels to renewables. Add those growth prospects to Pattern's high-yield dividend, and it could generate market-beating total returns in the coming years as a stand-alone entity. Investors who sell now would miss out on all this potential upside.

Wind turbines in a field, with the sun setting in the background.

Image source: Getty Images.

The potential pitfalls of buying more

Another move that Pattern Energy investors might be tempted to make is to buy more shares in hopes of boosting their near-term return. That move could also have major consequences.

For one thing, an acceptable buyout offer might not materialize. While the company reportedly has received interest from several suitors, that doesn't mean they're willing to pay a premium price. TerraForm Power's parent, Brookfield Asset Management, for example, is a well-regarded value investor, so it likely wouldn't pay a huge premium for an acquisition. Given that shares of Pattern are already up sharply this year, it may not even get an offer. If it doesn't strike a deal, then shares could give back some of their recent gains.

There's also some risk that the company might not achieve its growth goals if it remains independent. That's because it needs to make a few more acquisitions to give it the power to deliver on its two-year plan. While it has a large pipeline of identified targets thanks to its investment in a renewable energy development company, it doesn't have all the funding lined up. Another concern is the apparent weakening in global market conditions, due to recession worries, which could hamper Pattern's funding initiatives.

There's nothing wrong with doing nothing

When a stock spikes on reports that it has received takeover interest, investors often feel the need to react. However, taking action in this situation could result in making the wrong decision.

That's why I think the best thing current investors can do is absolutely nothing. Let the dust settle, and decide once there's more information. While that might cost some near-term gains, investors will avoid making a hasty decision that they might regret later.

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Matthew DiLallo owns shares of Brookfield Asset Management and TerraForm Power. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com