In this episode of Industry Focus: Energy, Nick Sciple is joined by Motley Fool contributor Jason Hall to talk about renewable energy investments. Jason shares his tips on what to watch out for when you are investing in this sector. He has prepared a list of five stocks you can use to get some exposure to the sector and have some predictable returns over time.
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This video was recorded on October 1, 2020.
Nick Sciple: Welcome to Industry Focus. I’m Nick Sciple. On today’s episode, we’ve got a good old-fashioned pick show with Jason Hall, joining us to share his renewable stocks basket. Jason, welcome back on the podcast.
Jason Hall: Awesome to have you on. I just want to say, at this minute, I’m sitting on the edge of my chair, because I can’t listen to my beloved Atlanta Braves play their second game two of the Wild Card Series. So, I’m on pins-and-needles right now.
Sciple: If you’re a sports fan right now, there’s not enough time in the day, literally, you’ve got baseball playoffs; you’ve got NFLs up-and-running; NBAs in the finals; college football is back, which I know I could spend hours and hours talking about this week on the topic of football, but our topic this week, as we said, is renewable energy.
Before we dive into this basket, Jason, I just want to ask you, as you put together this list of stocks, what criteria do you look for in renewable energy investment, and what stands out to you in that sector as things to go for in an investment?
Hall: So, you know, a couple of things. I think No. 1 we all know is there’s no getting around the fact that renewables are going to grow and they’re going to continue to take global share of electricity production. Whether you’re powering transportation or it’s powering buildings and industrial operations, that’s going to continue to happen, right? But it’s really easy to get caught up in that excitement and invest in companies that are far more cyclical, because as much as there’s growth, there’s parts of the industry that are still exposed to the extreme demand cycles that can shift from year-to-year, to try to find companies that have competitive advantages that protect themselves against those cycles. So, companies that can generate consistent steady cash flows are really good. Find companies that have some technological advantage that gives them a competitive advantage that’s durable.
So, those are some of the things that I really, really focus on. And not getting too caught up in commodity sides of the business, find the companies that can benefit from that commodity side. So, that’s something that we’re going to talk a lot about with two of the first talks that we talk about when we get into the basket.
Sciple: Yeah, absolutely. When you look at energy, in general, the big thing you worry about, whether it’s renewable or anywhere else, is staying away from that commodity cycle, that cyclicality. How can we get steady cash flows over time? Because sometimes you know, [laughs] these stocks can be really, really difficult to hold, even if it’s a great company with this crazy volatility. And renewables is such a developing space, it’s really hard to predict the future. So, when you can find some of that stability, that really makes for an attractive investment in this space.
So, without further ado, we’ll dive into this first stock on the list we talked about a bunch on the podcast in the past, that’s Brookfield Renewable (NYSE:BEPC), that’s BEPC is the corporate sector. If you’re interested in owning partnership shares, which are still out there, that’s ticker BEP. Jason, what can you tell us about Brookfield Renewable?
Hall: So, whenever we talk about renewables, this is consistently the first company that I talk about. I think this is my largest single investment now. I think it’s finally grown between growing and between dividend reinvestments and between new cash that I’ve added to buy shares, this is my largest single investment. And the reason why is because Brookfield Renewable, it’s part of that Brookfield family of companies, this is their arm that owns hydroelectric dams, wind and solar energy generating facilities, and then they sell the power on these long-term contracts that generate consistent steady cash flows.
And the reason why this one always tends to flow to the top, is they’re just so very, very good at capital allocation, and that’s so important in this business, because you’re selling a commodity, right, you’re selling power. And, yes, there are benefits to the renewables aspect, especially outside of the U.S., you get into other parts of the world and there are more regulations and things that can help make renewables more competitive. But they figure out how to just make money, right? Levelized cost of power and make money in all three of the major sources of renewable energy. They’re just really, really good at buying assets at great values and generating meaningful returns and then passing those returns onto investors.
So, that’s why it’s always at the top for me. I mean, they have a goal — for example, here’s one of their primary goals when it comes to returning value to investors: to grow the distribution dividend, to grow it every year at around 8% or 9%; that’s their goal, to grow that payout every year about that amount. And they beat that just about every year, [laughs] consistently outperform that goal. So, that tells you their focus is on making sure that they own the right assets, they can predictably generate cash flows that they can return back to investors on a consistent basis.
Sciple: Yeah, I think one thing that jumps out whenever I look at Brookfield Renewable, I know a lot of folks think about renewable energy and they want to jump straight to wind and solar, those are really exciting. Actually I get really excited about their hydroelectric assets, because those are — you know, you don’t [laughs] have to deal with the sun coming up and the wind being out. I mean, obviously it depends on water flows and things like that, but also you don’t have the intermittency problem nearly as much, because you’ve got built-in storage, right? When you put a dam in there, that’s basically a battery. And so it’s got some of these …
Hall: It’s baseload, right, exactly.
Sciple: Right. And so, it doesn’t have dependability problems. You’ve got this ability to take those cash flows that are really predictable and steady over time, and then reinvest those into this growing renewable wind area, which is a business that has a strong track record of allocating capital, as you said. I mean, there’s a lot of companies in this space that are in this yieldco demographic, is that really, that the capital allocation acumen really what makes Brookfield stand apart for you?
Hall: It really is. And I think here’s what I go back to, if you go back to Brookfield Renewable five years ago, you know, more than 80% of their cash flows came from hydroelectric. And then maybe three years or so ago, they made a substantial investment in TerraForm Power to acquire that, which was wind and solar, they were entirely wind and solar. They acquired a majority stake of TerraForm Power, which they recently rolled into their business. To me, that was a huge signal that when Brookfield jumped into wind and solar, it meant that there was money to be made, because, again, of that capital allocation thing.
Now, if you look at their business, I think it was through the end of, I don’t know, if it’s the end of last year or the most recent quarter, but hydroelectric is about two-thirds of its business now, down from 80%, because it’s grown its wind and solar business, which makeup that other third now, primarily through that TerraForm Power acquisition that it’s now rolled in. So, again, they are just the best when it comes to capital allocation.
They don’t buy an asset to grow, they lose deals all the time, and they talk about the deals they lose on their earnings calls, because the message they want to send is that we won’t buy anything, we will buy the right assets at the right price.
Sciple: Absolutely. So, you’ve got this capital allocation story, with the strong past track record of performance, I have in my notes, over the past five years on a total return basis, that includes your dividends being reinvested in the company. The stock is up 250%. And then you look at, as we’ve mentioned a lot of times in the past, the long reinvestment opportunity into renewables as the energy transition carries out, Brookfield Renewable with their expertise puts them in a good spot to take advantage of that.
Moving on to the next company on your list, a little bit smaller, but a similar company to Brookfield Renewable is Atlantica Sustainable Infrastructure (NASDAQ:AY), ticker AY, because it’s formally known as Atlantica Yield. Jason, what can you tell us about Atlantica Sustainable Infrastructure?
Hall: Yeah. So, I started following Atlantica two or three years ago. Our good colleague Matt DiLallo actually brought it across my radar, when he started paying a little bit more attention to it. And it’s a much smaller business. You know, it’s about a $3 billion business compared to closer to about $7 billion for Brookfield Renewable. And I think it’s an interesting business to look at. No. 1, because it is smaller, and I think it can be a little bit more nimble. But it has some things that I like about it to compare to Brookfield. No. 1., and it took me a little bit of time before I bought, I followed the business for about a year before I invested, but what I like is that it has a pretty solid sponsor. Algonquin Power is its largest investor, it’s the controlling investor and it’s a Canadian utility that acquired its stake from Abengoa, which is a Spanish utility. Abengoa had had some troubles.
And I guess the best way to put it, Atlantica was not really getting the [laughs] attention that it needed, and now I think it has a much more financially strong backing company in its sponsor with Algonquin. Algonquin has done an incredible job of allocating capital itself, since it was founded a few decades ago. And it just puts it in a really great position to use Atlantica as a way to develop and monetize renewable energy assets. So, it’s just a kind of an interesting growth story. Maybe you could say it’s like almost, it could be a younger version of Brookfield Renewable, right? So, I think that’s one of the things that I think that it’s interesting.
Now, I think there are some other things that I like about it, that its business is a little bit different too. So, it doesn’t own any hydroelectric; and that’s just more a product of how it was founded mainly in Europe, focusing on solar and wind. But it also owns some natural gas, I think they call it efficient natural gas, it’s mostly newer highly efficient natural gas power production. It owns a small amount of power transmission and it also owns a small amount of water desalinization. So, it has a little bit more optionality in terms of the core competency of the things that the company has found out that they’re pretty good at developing. So, it has different ways that it can look to grow its business.
And I just think that this is the kind of area where you don’t have to bet on one horse, right, you don’t have to make just one investment. And as much as I think Brookfield is the top dog, and probably will continue to be, I think there’s going to be so many winners. And I think Atlantica is just a great, small, well-run, well-partnered, well-structured yieldco that has enormous opportunity to expand.
Sciple: Yeah. You mentioned the European aspect of the business, and we’ll mention a few companies that have aspects in Europe, and there’s a few reasons for that. The regulatory environment is a little bit more predictable in Europe, they really have things a little bit more sketched out than here in the U.S. A lot of times you’ll hear U.S. investors talk about, well, if XYZ happened in the election in the U.S., and that’ll be a huge catalyst for renewable energy companies. A lot of that stuff has kind of already happened in Europe and you don’t really have that question mark of what’s going to happen politically, there already is that mandate there. And so that is something that’s attractive for a lot of these companies.
The one thing, as you mentioned that desalinization thing, it’s interesting, how big they said that opportunity is, they said they think it can be a $26.8 billion market opportunity by 2025. Where does that plug into their operations relative to the renewable aspect of the business?
Hall: Yeah, it’s a very small part of the business. And actually, it’s interesting, because it’s something that is a little bit of a risk for Brookfield, with climate change Brookfield’s hydroelectric business did struggle a little bit, because rainfall wasn’t as strong in certain areas and its hydroelectric didn’t generate its normal level of output last year. The flipside of that is that [laughs] water security is a major, major concern for the 21st century. You know, the global middle class is going to add about a billion people, the global population is going to grow by about a billion people over the next 10 or 12 years. And a lot of those people are going to live in coastal areas that don’t have access to fresh water, that don’t have access to clean water. So, simply meeting the need for this large, growing urban population is going to require more types of water desalinization.
I live in Southern California, I live about an hour from Santa Barbara. The city of Santa Barbara, a couple of decades ago, built a desalination plant, never turned it on. They just spent substantial, you know, a couple tens of millions of dollars to bring it back on line, because access to water is an issue in North America [laughs] in a lot of places too. You know, it’s right on the coast, we’re essentially Mediterranean desert, there’s no ground water up there. They get, like, 20-inches of rain a year. Access to water is a really big deal and Atlantica is going to be positioned to take advantage of that, because they’re already in a lot of those markets, right, and I think that’s really important.
Sciple: Yeah, it’s an interesting opportunity to keep on your radar as the world changes and develops, and we move into the future.
Hall: This isn’t just a problem in Ethiopia, I mean this is a problem everywhere in the world, a lot of developed places are going to run into water security problems.
Sciple: Yeah. So, that might be a whole podcast, Jason, we need to write that down as maybe something to go into. So, moving on to the European aspect I mentioned, that moves on to our next company on the list, that’s Vestas Wind Systems, they have a ADR, VWDRY is the ticker. What can you tell us about Vestas, Jason?
Hall: Vestas is one of my favorite renewable energy companies. And I’m going to go ahead and let the cat out of the bag, we’re actually, in our basket we’re putting together here, we’re not going to have any solar panel makers, because that’s a really heavily commoditized business and there’s a lot of competitors and it can be really, really tough to make money. Vestas is a huge market share leader in onshore wind turbines. I think they can command around 15% of global market share of onshore turbines. And they’re basically the only pureplay that’s a publicly traded company, and they happen to be one of the best, they’re just fantastic at it. They’re based in Denmark, I think.
Sciple: Yes, I believe so.
Hall: They’re a Danish company. And I’ve owned shares for probably five or six years, maybe longer now. And the thing that I like about Vestas — so just, again, you compared it a little bit to solar panel. Solar panel is so highly competitive and commoditized, there’s just not as much competition in the wind turbine business, because these things are gigantic, the cost of competitive entry is substantial. You can’t just build a factory in China and send wind turbines everywhere around the world and compete, because these blades are 300-feet long, right? [laughs] You can’t fill up a container ship with those and send them to Mexico or North America, like you can with solar panels, right? So, that by itself makes it I think a little more attractive business for returns.
And what I like about Vestas is that they’ve figured out, because they were really cyclical for a number of years too, like, peaks-and-valleys were big, and they had really high fixed costs. And when that utility scale demand that can change from one year to the next would fall off, they would go from a cash cow to just bleeding money, just like, you think about some of these steelmakers, that when steel demand falls all of a sudden, they go from making $1 billion in a quarter to losing $4 billion. So, Vestas kind of went through some of that too. And what they figured out is, they don’t need to manufacture everything, they need to focus on R&D, they need to focus on manufacturing the core things, like, the most-critical important things that they’re really, really good at, and then use more third-party manufacturing and let companies that can, kind of, leverage that manufacturing capacity across other industries, across other companies, kind of soak up some of that stuff.
And it’s really worked well for Vestas, it’s helped soften the revenues, they’re still kind of bumpy. But their operating cash flows are far more consistent over time. And it’s created just a better opportunity for Vestas to continue to return value to shareholders. And again, you think about renewables, you know, we love to talk about solar, right, that’s the thing with rooftop solar and all that kind of stuff. Two-thirds of the solar market is utility scale, it’s not rooftop solar. And 100%, practically 100%, of the wind industry is utility scale. So, pricing still matters, but there’s a lot more to it than just pricing.
And it’s essentially — I mean, there’s maybe a dozen of these companies out there, but the big ones are Vestas, General Electric, Siemens; and Siemens, it’s a venture that they — and then a Chinese company called Goldwind, along with Vestas, those are the biggest by far in the world. And they don’t get as bloodthirsty on pricing as we’ve seen with so much of the Chinese manufactured solar panel business, because again, they don’t necessarily have to, because of the way the industry is structured. I’m a really big fan of Vestas, and I own far more Vestas than I own of all of the solar panel makers out there that I do own, and I own a few, but I own more Vestas than I do all the solar panel makers combined.
Sciple: Right. It goes back to that theme that we called out off the top of avoiding that commodity cycle and the nature of the supply chain, the nature of the product that goes into the wind industry makes it more difficult for that to fall into that trap, the other thing that’s significant, and you mentioned this a little bit, is just that price increase of wind energy over the past 10 years, the price equivalent or cost of energy equivalent down by two-thirds, which made it significantly more competitive. And then the new opportunity over the past several years has been a significant growth in wind energy, 21% CAGR since the year 2000, that’s Compound Annual Growth Rate, since the year 2000.
And now the big opportunity is that costs have come down so much that there’s this opportunity in onshore wind. So, if you look at projections for growth in wind energy, expect onshore to continue to grow about even with GDP, but offshore to be a really significant grower overtime, and that’s an area where Vestas has some ability to invest as well, and has really been top-of-mind in Europe, you hear in the news just over the past few months. So, how big of an opportunity is that for them, just in addition to what they’ve done historically?
Hall: It’s enormous. And they’ve done some joint venture stuff there that they worked on, but they really haven’t taken a huge step there. But because they are a pure play, because this is kind of where they live, I think it is definitely, it’s an untapped opportunity that Vestas is — I think a decade from now Vestas is going to be a big player there. I really think that’s going to happen.
Sciple: Yeah, I think of these, Vestas is maybe my favorite on the list. Along the lines of Vestas, this next one is TPI Composites (NASDAQ:TPIC), ticker TPIC, a much smaller company, about $1 billion market cap. But they’re playing into those supply chain dynamics we talked about, Jason, that makes wind maybe a little bit more attractive than solar, from the panel perspective.
Hall: Right. It’s really interesting, right? So, you think about these wind turbines, they are stories tall, they’re gigantic. And each of those blades can be, I don’t know, 50-, 75-meters. They are huge, right? That’s just a single blade, that’s one, and there’s three hanging on these things. So, let’s talk about from a logistics perspective where TPI Composites fits in. So, we were just talking about Vestas, the company that makes a living designing and manufacturing wind turbines. And now we’re going to talk about a contract manufacturer for the turbine business. So, if you’re Vestas or you’re Siemens, or you’re any of these major players, and you want to compete globally, you need infrastructure. So, here’s the problem, there are some markets that have small pockets that are great for wind, but you’re not going to build a factory there, because there is just not going to be enough demand to build a factory there, because your fixed operating costs are not going to consistently be covered. So, you’re just going to lose money, just to try to be in that market.
So, enter TPI Composites. So, this company manufactures the blades for Vestas, GE, Siemens. So, Siemens Gamesa, I think, is the name there. It works out to, like, about half of the global market share in onshore wind turbines. So, the companies that make about half of the onshore turbines that are sold worldwide are TPI Composites customers. That doesn’t mean that it, that TPI makes half the blades, that just means that it does work for the companies that command that market share. And essentially, it does business with every company [laughs] that makes onshore wind turbines for the U.S. North America market.
So, where do they fit in? Again, they’re one of those manufacturers that, let’s say, there’s an area where Vestas wants to be able to compete, Siemens is going to be there too, GE is going to be there too, it’s going to be competing against all those players, and they’re all going to win some of the business, nobody is going to win all of it. But do you know what they’re all going to do, they’re all going to work with TPI Composites. So, now TPI can have a factory that’s going to support that market and build blades for everybody, or almost everybody, and it can make money and those turbine manufacturers can be competitive in a market where they don’t have a turbine blade manufacturing presence. So, that’s where it fits in.
Sciple: Yeah. The thing that comes to mind when you make that description, Jason, is a lot of folks are familiar with Taiwan Semiconductor, it’s been in the news a lot this year, that’s kind of the foundry for that semiconductor business. They don’t design chips on their own, but lots of companies use their resources, their infrastructure to build and manufacture their semiconductors. And in this case, TPI Composites is the company that is giving that infrastructure to manufacture for these renewable energy companies, providing the scale to allow this business to work. Now, you lay out that thesis, it makes a lot of sense, what we have seen in the numbers and the operations from the business as far as executing on that plan.
Hall: So, yeah, if you look, you go from 2016 to 2019, it grew revenue almost 90%. So, there you go, there’s a pretty clear indication that it works. The stock has done relatively well, it’s gone up a lot this year. But again, I think the key things you look at is they’ve consistently added more turbine partners, more wind turbine partners over time. I think that’s really, really important. And I think it indicates that there are some clear competitive advantages of its model, which is the idea that competitive advantage of, you know, high barriers to entry, because it’s a supplier to multiple people and multiple competitors in that supply chain that it’s impossible for those companies to get into those markets on their own. I think that’s going to prove that that is going to be a really durable competitive advantage for TPI Composites over time, and it’s going to allow them to continue to grow their revenues at a rate that’s at least as quickly as the industry itself is going to grow, and potentially grow even faster than the industry, as more of its customers use it for more of their blades.
Sciple: Yeah, absolutely. I think that the big thing is that distribution all over the world, they have manufacturing facilities in the U.S.A., China, Mexico, Turkey, Denmark, India, and Germany, that fixed-cost investment already in place, and we already see the big tailwinds for wind energy going forward. Another trend that I think is important for them, and maybe telling, we talked about part of the thesis being that these things are so big, they’re difficult to ship, that you need a localized production for these blades so the logistics make sense.
Well, one trend we’re seeing in wind energy is these blades are getting bigger and bigger and bigger; the bigger these blades are, the more efficient they are. Whenever I saw that stat, the first thing I thought about is, you know, when you look at those old pictures of guys on bicycles where they’ve got the giant wheel on the front, those were racing bicycles back in the day, because it’s more efficient to turn that one big wheel faster. And so that same type of dynamic carrying out for wind turbines. And so, obviously, the bigger these things get, the more that competitive advantage of just the difficulties and the barrier to entry really comes to the fore for TPI Composites.
And if Vestas wins, I believe Vestas is about 44% of their customer mix as of most recent, they’ll win right along with them. So, I really like TPI Composites, that’s kind of the small company that really has a lot of opportunity to grow in this space, and they have another part of their business, which is really, really small now, like, less than 5% of the business, where they’re trying to get involved in the transportation space, making caps for trucks and things like that, maybe that has some potential over time, but right now the story is very much on these wind turbine blades.
Any last thoughts on TPI Composites, Jason, before we move on?
Hall: Yeah, I just want to touch on that real quick; you know, you think about vehicle electrification, and they are focused on composites. They have, like, 300 engineers, so this is a pretty substantial R&D business as well, and they’re working on building composites. So, you think about, like, Workhorse and some of these other electric truck companies. So, you think about moving trucks and work vehicles and that sort of thing, getting the weight down and still having those vehicles strong and sturdy is important. And they are positioned, that’s an industry, automotive, that has always leveraged contract manufacturing and suppliers. So, they’re getting positioned for this next breed of that industry, that’s going to want to leverage that same thing. So, I think don’t sleep on that business, that business could be huge in a decade.
Sciple: Absolutely. And it checks off those boxes, right? So, whether you throw this composite cab on an internal combustion engine vehicle, it gets lighter and more efficient. If you throw it on a battery-electric vehicle, you get more range on your battery. So, it’s a win-win on efficiency for everybody across the board.
All right. So, for our last company in the basket, also the biggest company in the basket, that’s NextEra Energy (NYSE:NEE), ticker NEE. A $139 billion market cap. Jason, why is NextEra Energy part of this renewable energy basket?
Hall: Because it’s the largest utility that generates solar in the world. I think that’s their big takeaway, that they are a huge focus on renewable energy. They’re the owner of Florida Power & Light, some other utilities, and they have some businesses that do wholesale energy, they’re the sponsor of NextEra Energy Partners, which is their primarily renewable energy focused yieldco. They’re really focused on renewables; that’s a very big part of their business.
I remember maybe two years ago, it might have just been last year, but one of their executives, on an earnings call, made a statement that I think just really underpins so much of what’s happening. And they said that they expect that within five years the cost of renewable energy, so whether it’s wind or solar, the production plus the cost of energy storage on a levelized cost basis, meaning you’ll have to worry about just how much it costs to produce and generate and distribute the power, renewables are going to be cheaper than anything, anything else, right, even the newest, most efficient natural gas turbines. That’s enormous. So, that tells you they’re looking at this, again, kind of like Brookfield. Because you can make money out of it, right. And, oh, by the way, [laughs] it’s also zero emissions and better for the environment and all of those other benefits that are critically important.
And I love that about the business. But here’s what makes it really compelling. Florida is a big, growing market, it’s a big state, it’s a state that’s continuing to grow its population, it’s a really dynamic place to do business, so a lot of businesses are moving there, people retire there, people are moving there to raise their families. And guess what, it’s called the Sunshine State, right? [laughs] So, it’s a great market to develop renewables, and they’re taking advantage of that. They’re taking advantage of those commodity wars that the panel makers are going through. The commodity wars that the battery manufacturers are going through to drive costs down.
And I think it’s going to continue to be a winning investment, it’s a utility that’s a growth stock, that’s an anachronism if there ever was one.
Sciple: Yeah, that’s what’s crazy. So, I pulled some stats between 2004 and 2019, NextEra’s adjusted earnings per share grew at a compound annual growth rate of 8.4%, while dividends grew at a compound annual growth rate of 9.4%; really incredible growth over a 15-year period. Over the past five years, the stock is up 231% on a total return basis, kind of crazy to get from a utility — and then throw on top, just in the past couple of weeks, the company announced a 4-for-1 stock split. A utility with that type of performance and a 4-for-1 stock split, Jason, I mean, it’s such an outlier when it comes to the utility sector.
Hall: It really is. And again, if you think about utilities, you know, historically these are, what is it, orphans and grandmothers, right, [laughs] that’s super slow growth and they pay cash, they just give all their cash flows out to dividends. And if they grow 2% or 3% a year and if they pay a 3% to 4% dividend yield, you’re doing great, right; that’s like a super-big, winning investment. Because they’re secure, but that’s the idea, right? It’s lower risk, lower volatility, and they hold their value and you can get a relatively predictable return. It’s very rare that you find a utility out there that’s been able to grow at the rate that it has. I saw, I think it was floated — I don’t know if it was a rumor and I don’t know if anybody substantiated it, did they just make an offer to try to buy Duke Energy? Did I hear that?
Sciple: Yes, that was the rumor out there. And Duke Energy is the largest regulated utility in the U.S. This is a $60 billion company. So, the reporting has said that NextEra Energy approached Duke Energy and Duke Energy rebuffed that offer. But when you see this type of merger even floated out there, Jason, I mean, what was your reaction to that?
Hall: Yeah, it was surprising. But I think it’s a reminder that this is a management team that’s focused on building a bigger, better business. And I think they look at Duke and they look at the geographies that Duke is in, it essentially lines up pretty closely with where they already are. They know the market. I guarantee they have the data to know where they can roll out renewables in those areas that make more cost effective, more cost competitive. And Duke’s had some stumbles, right? I mean, it’s had some struggles over the past few years with some of the things that they’ve attempted to develop on the hydrocarbon side. So, I don’t know, it’s a little scary when you hear about those kinds of big mergers, but I can’t think of a better management team in the utility space than the folks at NextEra.
Sciple: Yeah. I think NextEra, of this group I would say, is probably the one I’m most confident in, they have this really strong track record of success, but it’s also going to be the least likely to probably 10-bag of this group. But such a strong management team, and again, the geography is such a huge advantage for them as well. The only downside I can think of being located in Florida, is that every once in a while a hurricane is going to hit and you’re going to have to pay for insurance to defend against that, but other than that things are really set up strongly for this business and the market it operates in.
Hall: Well, with that in mind. You know I live in California, and the wildfires have been the story of California for the past couple of years, and the utilities, and their inaction to do things to prevent the grid from A., No. 1, being a cause of fires. [laughs] And B. being hardened against it. And NextEra, I think they’re spending, what, $3 billion or $4 billion to harden against — so, things like burying power lines and that sort of thing to limit the implications of both power loss, but also the risks of harm from a hurricane to their infrastructure.
Sciple: Yeah. So, that’s really important. We’re seeing, and as you mentioned, in California, some of the negative effects of maybe not investing for the future and taking care of your infrastructure in the proper way. So, that’s our basket for everybody, if you’ve got a fun acronym you want to give us, it’s NTVAB, are the tickers here. So, I’ve got VAN-TB, and I’ve got BANT-V, which one of those you like better, Jason?
Hall: Whoa! I’m going to have to think about that. Eh!
Sciple: [laughs] Any honorable mentions that you wanted to include on there, but just didn’t make the list for whatever reason?
Hall: Yeah, I know we’re going to get some folks that are going to listen to this and they were expecting to hear us talk about SolarEdge, and Enphase, and First Solar and some of the usual suspects. And then they heard us talk about Brookfield again, [laughs] and they heard us bring up Atlantica Yield again, and they heard us talk about NextEra Energy, which we talked about before. And yeah, this is a dynamic space and there are other companies in this space. But I think it’s important to remember that sometimes the best new idea is the one that you already own, sometimes it’s best to focus on the great companies that continue to be great. David Gardner talks a lot about winners keeping winning, and I think that’s really important to remember in this space too, and not try to be too acute or too precise and buy the marginal price solar panel maker just because the stock fell 50% when their competition might continue to be tough.
With that in mind, we did talk about SolarEdge, SEDG; and Enphase, ENPH. SolarEdge is a Stock Advisor recommendation, I think, or is it maybe Rule Breaker, anyway, it’s a pick in at least one of those services, maybe two. These stocks, they’re pricey right now. And I will say this, I think it’s worth thinking about, if you don’t own either SolarEdge or Enphase. Now, these are companies that manufacture the module level electronics, and they control, like, 90% of the U.S. distributed solar market — so, that’s rooftop solar. Every solar panel that gets installed in the U.S. now has to go through these panel-level electronics to protect the grid, protect grid workers. And they own that market right now.
But they’re really expensive, they’re like 6X and 14X sales, you know, for SolarEdge and Enphase. And their valuations are really, really stretched right now. But with that said, I own them both. And I would say, with both, because they are dynamic and because they’re growing, and they’re stepping into things, like, energy storage and SolarEdge is also stepping into, like, the electric vehicle powertrain business and remote energy storage and remote backup and all that kind of thing. They have some really neat optionality, and the growth is going to be awesome.
These might be good, just get some skin in the game, buy a little bit, you know? If you want them to be 3% of your portfolio when you finish buying: You want to spend 3% of your money on them. Start off and just buy 1%, get some skin in the game. And follow them and as the market gives you better opportunities to add, maybe the shares fall just because we have a big market sell-off or something like that, take that opportunity to add to them.
But again, the thing is, the valuations are really stretched, and I think even great businesses you have to pay a reasonable price for. And I’m a little concerned, especially with Enphase that now is just too expensive. So, I wouldn’t suggest going whole hog on those. So, that’s what those at.
Let’s talk about solar panel makers. We talked a little bit about it, and you want to talk a little bit about our concerns with that space and just why we didn’t go to any solar panel makers?
Sciple: Yeah, I’ll just say that the big problem with solar panel makers is a very commodified business. We had massive investments, particularly in China, to scale up capacity. That led to us being at a point where things were massively oversupplied. Like Jason said earlier, some of those dynamics you see with wind energy, the difficulties of distribution, it’s really not that… with solar panels you just through them on the boat and ship them off. And so, that allows the market to be much more efficient, which is great for purchasers of energy, but it’s not great for ones who are investing in the people who are trying to sell the energy. Which is why the solar panel makers are […], also the cyclicality is really tough for some of the same reasons.
Hall: Yeah, and that’s why, again. That’s why we led off with Brookfield, we led off with Atlantica. While the solar panel makers are getting killed on pricing and demand, guess who wins, the people buying the solar panels, right? So, they benefit from the growth, they also benefit from the downturns in the commodity cycle that give them better opportunities to buy the equipment that’s getting installed. So, those are some real — now with that said, the industry is starting to consolidate, we’re seeing some consolidation, and I think that’s going to help and there could be some opportunities. One of the reasons that I do continue to like First Solar, because they’re in the utility scale business, that’s where they focus, and I think there could be some opportunity there. But, again, I think I would buy Vestas over First Solar, you know, every day of the week, and twice on Sunday.
Then also you look at a business like SunPower. SunPower recently split off its solar panel manufacturing business, so now I own a little bit of SunPower and I think it’s an interesting follow now as kind of an asset-light R&D business, because they’re not the panel makers anymore and they have some licensing agreements that are going to generate a lot of their cash flows. So, I’m watching. I’m going to give it a year and really see how it plays out and then I’ll consider if I want to add more. But again, I don’t think it should be a core of that renewable energy basket, I think those companies that we talked about today make up a far better core, and I think they should return in better gains and returns for investors. Which is the whole idea, right? It’s not just owning really cool businesses that do the stuff, it’s the ones that are going to make you money. And I think that the ones that we put forth are the ones that get you there.
Sciple: Yeah. And, you know, your mileage may vary, if folk want to disagree, feel free to tweet us on Twitter and we’ll be happy to hear any of your thoughts. If you have other companies that we should look out on the podcast, please let us know. But I think this group of five companies, if you want to get some exposure into the renewable energy space in a way that you can be comfortable and you can sleep at night and have some pretty predictable returns over time, I think you could do a lot worse than this group that we gave you today.
Jason, thank you so much for taking the time to join us and share all your knowledge of this renewable energy space with us.
Hall: It’s too much to talk about in one episode, so we’ll do more. And let’s do that salinization one, that sounds like fun.
Sciple: Yeah, we’ll keep everybody on the edge of their seats for that one.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for mixing the show. For Jason Hall, I’m Nick Sciple, thanks for listening and Fool on!