The renewable energy industry has had a resurgence in 2020 as wind and solar energy have continued to become more economically viable against fossil fuels around the world. And that’s created an opportunity for investors in renewable energy stocks. But navigating the industry can be complicated.
We asked three of our renewable energy experts for stocks they think are buys in November and Canadian Solar (NASDAQ:CSIQ), Clearway Energy (NYSE:CWEN), and TPI Composites (NASDAQ:TPIC) made the top of the list.
Solar manufacturing is a buy again
Travis Hoium (Canadian Solar): The solar manufacturing business has been a terrible industry for investors over the last decade because manufacturers have been in a state of oversupply and have been fighting each other by lowering prices year after year. That’s resulted in a number of high-profile bankruptcies in the U.S., Europe, and even China from firms who couldn’t compete. But in the last few years, the industry has consolidated to the point where there are only a handful of viable competitors and they’re competing less on price than they were a few years ago.
One of the biggest beneficiaries is Canadian Solar, one of the world’s largest solar manufacturers. The company’s primary business is making solar panels but it also does some utility-scale solar project development.
As you can see below, over the last eight years the business has been steadily improving. Revenue isn’t growing much as price reductions offset increases in manufacturing capacity, but margins are up a significant amount and the company is now solidly profitable.
A decade ago, I would have said financials could swing at a moment’s notice, but I don’t think that’s the case today because there are fewer major suppliers and solar energy is now competitive with fossil fuels without subsidies.
Canadian Solar’s stock is also attractive because of its value. Shares trade at just nine times trailing earnings right now and looking at the margin trends above the company could continue to grow the bottom line over the next few years. And that value is what pushes Canadian Solar over the top as a renewable energy stock I would buy today.
A dividend opportunity
Howard Smith (Clearway Energy): Clearway Energy owns and operates a portfolio of clean-energy generating installations, and sells its electricity to power utilities under long-term contracts. Earlier this year, Clearway was a high-risk investment. One of its largest customers, California utility PG&E, had filed for bankruptcy protection, freezing access to almost $168 million in cash Clearway was owed.
The company responded by reducing its dividend in early 2019 to conserve cash as the PG&E bankruptcy process progressed. After the utility emerged from its restructuring and Clearway was able to access its funds, it raised its dividend with a 49% increase for 2020’s third quarter. It also reaffirmed its annual target of 5% to 8% annual dividend growth.
Though the share price also jumped once the PG&E situation stabilized, the risk level dropped accordingly. Now investors have an opportunity to get a 4.4% yield with a company that is able to focus back on growth.
Clearway’s recently reported third-quarter earnings showed that the company remains on track. It raised the quarterly dividend by another 1.8%, and said it expected the increase in 2021 to be at the high end of its targeted range.
Clearway president and CEO Christopher Sotos also highlighted a new investment opportunity in Mesquite Star, a 1.6 gigawatt renewable project partnership, saying it “will lead to further sustained dividend growth.” The company reported cash available for distribution (CAFD) that supports its dividend growth target at 80% to 85% payout ratio.
Clearway also announced $108 million in completed new growth investments in the third quarter earnings release, taking its 2020 investment total to $450 million. The results support an investment case for those looking for a dividend greater than 4%. Underlying growth in the renewable energy sector should support the future planned increases in shareholder payouts.
With shares down about 8% since the first week in October, Clearway looks to be a good renewable energy dividend stock to buy for November.
This winner in wind should keep on winning
Jason Hall (TPI Composites): Shares of this contract manufacturer for the wind turbine industry have rocketed 121% higher this year, as TPI Composites has enjoyed the tailwind of strong interest in renewable energy stocks. But the stock’s big gains aren’t just due to investor interest in all things alternative energy: They’re also the product of a business that’s delivering incredibly well.
TPI just reported third-quarter earnings, and the results were incredible:
- Revenue up 24%
- Operating income up 141% to $29 million
- Net income of $42 million compared to a $4.6 million loss in the year-ago period
- Free cash flow of $49.5 million
Management also announced full-year revenue guidance of $1.65 billion at the midpoint, which would be 15% higher than last year’s result, and adjusted EBITDA expectations of $95 million at the midpoint.
Simply put, all of the things that make TPI Composite an attractive investment on the future of wind energy are playing out. Demand is strong and on the rise and costs are falling, making wind generation competitive with any other source of electricity. TPI serves a critical role in helping turbine manufacturers compete in many markets, and that should continue to pay off for investors.
Renewable energy is the future of energy
All three of these companies benefit from the trend in the energy industry toward renewable energy. It’s now lower cost than new coal, natural gas, or nuclear plants and that economic reality will drive decades of growth for renewable energy assets. Canadian Solar, Clearway Energy, and TPI Composites should have a long runway of growth ahead as a result.