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In this article, we discuss the 11 best green energy stocks to buy. If you want to skip our analysis of energy stocks, go directly to 5 Best Green Energy Stocks To Buy.
We prepared this article back in July this year. At that time the stocks mentioned in the article looked strong. Our criteria for this stock selection was long-term growth catalysts, analyst ratings and hedge fund sentiment, which at that time we gauged from our database of the holdings of 912 elite hedge funds we tracked as of the first quarter.
It'd be interesting for the readers to see how these stocks performed over a period of these four months, and whether those Wall Street analysts and hedge funds were right about these stocks. For each stock we have mentioned its performance over the past six months (as of November 17).
But first, let's take a look at the industry outlook of the green energy sector.
There has been a rapid transition from conventional carbon-based fossil fuel energy sources toward clean and green energy sources like hydroelectric, solar, and wind in the recent past. This has been due to increasing concerns related to climate change and to lower the dependence for energy on foreign powers. It is estimated that in the next 30 years, the transition from conventional energy sources to green energy sources will result in an investment of $100 trillion.
In June 2022, US President Joe Biden executed the Defense Production Act (DPA) to increase the production of green technologies and make a move toward carbon neutrality. The seriousness of the Biden administration can be gauged by the fact that the administration has executed DPA in the last two years to combat the shortages of COVID-19 vaccines and infant formula. The third instance of executing DPA was to ensure the supply of precious minerals for the production of electric vehicle (EV) batteries. The DPA gives the Federal government power to move resources to address an issue promptly without requiring any approval from Congress. Previously, the act was only used by the Department of Defense, but the Trump and Biden administrations have brought it into use as a policy-making tool.
Climate change is also forcing corporations to take initiatives to make their operations carbon neutral. As a result, they are signing purchase power agreements (PPAs) for power generated by renewable energy sources with independent electric generation and utility corporations. For many executives, creating green enterprises is of utmost importance. According to a report by McKinsey, 92% of employers believe that new enterprises created in the next five years will have sustainability at the core of their operations. Around 40% of yearly global energy spending will be directed towards renewable energy from 2018 through 2025. This amounts to an outlay of about €300 billion, which is nearly thrice the spending on fossil fuel generation. Furthermore, an additional 40% will go toward building the transmission and storage infrastructure. Some of the notable companies involved in renewable energy initiatives include Bloom Energy Corporation (NYSE:BE), Canadian Solar Inc. (NASDAQ:CSIQ), and SolarEdge Technologies, Inc. (NASDAQ:SEDG).
Best Green Energy Stocks To Buy
11. Clearway Energy, Inc. (NYSE:CWEN)
Number of Hedge Fund Holders as of Q1: 24
Stock Price Change Over the Past Six Months as of November 17: +7%
Clearway Energy, Inc. (NYSE:CWEN) is a New Jersey-based renewable energy yield company that owns battery storage, natural gas, solar, and wind facilities across the US.
The company received a boost recently after French integrated energy company TotalEnergies SE (NYSE:TTE) acquired a 50% stake in Clearway Energy, Inc.’s (NYSE:CWEN) parent company. This will result in a faster expansion of renewable energy infrastructure for the company, which will help in enhancing shareholder returns. Clearway Energy, Inc’s (NYSE:CWEN) dividend yield stands at 4.4% as of June 29.
Clearway Energy, Inc. (NYSE:CWEN) has a production capacity of 7.7 gigawatts (GWs). This is enough to power three million homes. The output from these facilities is sold to utility companies. Furthermore, Clearway Energy, Inc. (NYSE:CWEN) has also formed a consortium to find suitable manufacturers that can commit to providing 7 GW of solar modules every year from 2024 onwards. The consortium has pledged $6 billion for this endeavor.
ClearBridge Investments shared its stance on Clearway Energy, Inc. (NYSE:CWEN) in its Q4 2021 investor letter. Here’s what the firm said:
“Clearway Energy primarily owns and operates contracted renewable generation assets. It also owns and operates conventional generation and thermal infrastructure assets. Clearway Energy’s share price continued to benefit from the completed sale of its thermal assets, which was above expectations, generating USD$1.3 billion in incremental proceeds. Additionally, there was optimism surrounding a stimulus bill passthrough which contains renewables subsidies.”
As of Q1 2022, Clearway Energy, Inc. (NYSE:CWEN) was held by 24 hedge funds.
10. Vistra Corp. (NYSE:VST)
Number of Hedge Fund Holders as of Q1: 40
Stock Price Change Over the Past Six Months as of November 17: -9%
Vistra Corp. (NYSE:VST) is an Irving, Texas-based integrated retail electricity and power generation entity that caters to the demand of 4.3 million customers across the US and has a generation capacity of 38,500 megawatts (MWs).
Vistra Corp. (NYSE:VST) is a momentum stock and has been up 4.4% since the start of the year. The company has worked on reducing its debt in 2019-20 and is now focused on increasing shareholder return through a share repurchase program and higher dividends. Vistra Corp. (NYSE:VST) already has a $2 billion share repurchase program in place and offers a dividend yield of over 3% as of June 29.
The company has provided guidance to generate EBITDA of $2.8 billion to $3.3 billion in 2022. Vistra Corp. (NYSE:VST) also hedges significant exposure to energy prices, which would ensure that the cash flows remain stable and are not impacted by the fluctuations in energy prices.
Vistra Corp. (NYSE:VST) was held by 40 hedge funds at the end of Q1 2022.
9. Sunrun Inc. (NASDAQ:RUN)
Number of Hedge Fund Holders as of Q1: 37
Stock Price Change Over the Past Six Months as of November 17: +42%
Sunrun Inc. (NASDAQ:RUN) is a San Francisco, California-based provider of solar energy generation solutions and battery storage offerings mainly for residential consumers.
On June 20, Brian Lee at Goldman Sachs reiterated a Buy rating on Sunrun Inc. (NASDAQ:RUN) stock with a target price of $36. The analyst has a long-term bullish stance on Sunrun Inc. (NASDAQ:RUN) stock due to the structural growth outlook of the residential US solar industry. However, the analyst added that a prudent viewpoint needs to be adopted as all stocks do not offer the same growth story amidst rising inflation and interest rates. Both these factors could harm the demand for residential solar offerings.
Horizon Kinetics discussed its stance on Sunrun Inc. (NASDAQ:RUN) in its Q2 2021 investor letter. Here’s what the firm said:
“What this table did not cover is valuation. What’s expensive, what’s cheap? A good business that is too expensive is not a good investment. The most expensive business in the table is Sunrun. Sunrun is the nation’s largest residential rooftop solar panel system seller/installer. Sunrun’s valuation might also shed Thumbnail valuation.
To start at the top of the income statement, Sunrun shares trade at 10.3x revenues. The most profitable company in the S&P 500, Microsoft, trades at 13x revenues. Sunrun operates at a loss. Obviously, not only is tremendous growth anticipated, but tremendous profitability, too.
Let’s simply accept that investors have correctly anticipated Sunrun’s future success and make that the starting point for a valuation exercise.
If, 10 years from now, Sunrun is ultimately valued at 25x net income, and if today’s $9.5 billion valuation is appropriate, that would require $380 million of net income ($9,500 million ÷ 25). Let’s say Sunrun will have the same net profit margin as the average S&P 500 company, which is 10%. That means it would need $3,800 million of sales to generate that level of earnings ($380 mill ÷ 10%). Since sales are now $920 million, they would have to rise by 4.1x in the next 10 years. That would require annual sales growth of 15.2%.
You see how neatly that all works: investors accept the company’s 10-year, 15% annual sales growth projections, and if a 10% net profit margin and a P/E of 25x earnings are reasonable, then the company will have a $9.5 billion market cap at that time. Except that is the current price. That means a 10-year return of zero.
In order to get a 10% annualized return from the stock, Sunrun would need to be priced at a P/E of 65x its earnings 10 years from now, if at a 10% net margin. Or it would have to have some combination of lower P/E and higher growth and/or higher profit margin.
In the meantime, this is Sunrun’s recent pattern of revenue growth and profitability (the company did recently increase its estimate of installed-capacity growth in 2021 from 20-25% to a new estimate of 25% to 30%).
For the time being, Sunrun loses an extraordinary amount of money, an amount that has been getting larger. Perhaps there are scale economies that will manifest in the future,so that it will attain profitability. Perhaps from the roughly one-half of Sunrun’s revenues that are from long-term customer service agreements that run up to 25 years. For now, though, the company would seem to require a lot of external financing, and that is one of the greatest of business risks.”
As of Q1 2022, 37 elite funds held a stake in Sunrun Inc. (NASDAQ:RUN).
8. TransAlta Corporation (NYSE:TAC)
Number of Hedge Fund Holders as of Q1: 14
Stock Price Change Over the Past Six Months as of November 17: -17%
TransAlta Corporation (NYSE:TAC) is a Canadian electricity power generator that operates 75 power plants across Australia, Canada, and the US.
TransAlta Corporation (NYSE:TAC) posted its Q1 2022 results on May 6. Revenue increased by 14.5% YoY to $570 million and surpassed consensus estimates of $429.45 million. The EBITDA was reported at $266 million, which was below the consensus estimates of $270 million to $310 million. Power generation from wind and solar energy was down due to harsher weather compared to the same period last year.
The revenue growth was driven by higher electricity rates that have jumped above the C$100/Mwh in Alberta, Canada. However, TransAlta Corporation (NYSE:TAC) would not be able to fully benefit from the rising power prices as 75% of its production is hedged at an average price of C$73/Mwh. Learning from this experience, TransAlta Corporation (NYSE:TAC) is now hedging only a small portion of its planned production. On the other hand, the company is locking in low natural gas prices for its planned electricity generation in 2023.
Of the 912 hedge funds in Insider Monkey’s database, 14 funds held a stake in TransAlta Corporation (NYSE:TAC) as of Q1 2022.
7. Atlantica Sustainable Infrastructure plc (NASDAQ:AY)
Number of Hedge Fund Holders as of Q1: 17
Stock Price Change Over the Past Six Months as of November 17: -15%
Atlantica Sustainable Infrastructure plc (NASDAQ:AY) is a sustainable infrastructure company with substantial exposure in the renewable energy segment.
The United Kingdom-based company has 40 assets with a generation capacity of 2,048 MW through renewable sources. Atlantica Sustainable Infrastructure plc (NASDAQ:AY) finished Q2 2022 with a cash balance of $739 million and lowered its liabilities from $824.4 million to $582 million on a sequential basis. Atlantica Sustainable Infrastructure plc (NASDAQ:AY) stock also offers an attractive dividend yield of 5.62% as of June 29.
An annual investment of $4 trillion in renewable energy sources is required to reach zero carbon emissions by 2050. This would increase the addressable market for the corporation. In 2021, Atlantica Sustainable Infrastructure plc (NASDAQ:AY) spent $480 million to acquire renewable energy assets, reflecting the company’s aggressive capital expenditure on renewable energy.
At the end of Q1 2022, Atlantica Sustainable Infrastructure plc (NASDAQ:AY) was held by 17 hedge funds.
6. Daqo New Energy Corp. (NYSE:DQ)
Number of Hedge Fund Holders as of Q1: 18
Stock Price Change Over the Past Six Months as of November 17: +25%
Daqo New Energy Corp. (NYSE:DQ) is a Chongqing, China-based producer of high-purity polysilicon for the global solar industry.
The International Renewable Energy Agency (IRENA) anticipates a compound annual growth of 10% in solar photovoltaic (PV) capacity from 2020 to 2050. Polysilicon is a raw material for highly efficient solar PV panels. Daqo New Energy Corp. (NYSE:DQ) intends to grow its annual production by 50% to 270,000 metric tons by 2024. The company has a key competitive advantage by having its production facility situated in Xinjiang. The city offers the lowest cost of electricity to manufacturing concerns due to the presence of coal reserves. Furthermore, Daqo New Energy Corp. (NYSE:DQ) is venturing towards N-type polysilicon, which will give it an absolute advantage in the long term.
Daqo New Energy Corp. (NYSE:DQ) was held by 18 hedge funds as of Q1 2022.
In addition to Daqo New Energy Corp. (NYSE:DQ), companies such as Bloom Energy Corporation (NYSE:BE), Canadian Solar Inc. (NASDAQ:CSIQ), and SolarEdge Technologies, Inc. (NASDAQ:SEDG) are on our list of the 11 best green energy stocks to buy.
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Disclose. None. 11 Best Green Energy Stocks To Buy is originally published on Insider Monkey.
