Finding the right clean energy stock can be extremely difficult in a fast-moving industry. But investors don't have to pick the perfect stock to get exposure to the industry.
There are ways to build a diverse portfolio of assets in clean energy, including simply buying an ETF, but I think the best strategy is buying a high-quality basket of stocks. Unlike an ETF, you get to hand-pick the best companies rather than getting every company in the industry. Here are the stocks that I think make a great clean energy basket.
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1. Clean energy manufacturers
The first group of companies to look at are the manufacturers of products that get installed in clean energy projects. This can range from solar panels to wind turbines to racking for a utility-scale project.
Many of the companies in the industry have been commodified as Chinese manufacturers have spent billions of dollars expanding in solar panel, wind turbine production, and battery production. So, where are the companies with some differentiation?
First Solar (FSLR 2.12%) is a clear leader in solar panel manufacturing and has a track record of profitability. It's the only solar panel manufacturer that has survived for over a decade and thrived in the current market. Enphase Energy (ENPH 3.80%) is a leader in microinverters and is moving into energy storage. It can be seen as the "brains" of a residential solar installation because it's the interface that installers and customers interact with to control and track their solar energy production and now energy storage.
Long term, these are the kind of manufacturers that will give exposure to manufacturing while making sure you get a market-leading position.
2. Clean energy installers
Installers are another big piece of the clean energy ecosystem. They're the sales and development function for the industry, and the companies who do it well can generate value over time.
Some projects are developed and installed by utilities or their ultimate owners, which I'll get to, but companies like SunPower (SPWR 5.85%) and Sunrun (RUN 5.97%) sell, finance, and install solar panels on rooftops across the U.S.
Installers are impacted by interest rates, which is why they're down in 2023, but there are some tailwinds on the horizon. Costs for items like inverters and solar panels are expected to go down because demand has dropped. More importantly, utility rates continue to rise, which will make rooftop solar more competitive with utilities across the country.
3. Clean energy asset owners
The billions of dollars being invested in clean energy assets need to be owned by someone, and that's where yieldcos come in. NextEra Energy Partners (NEP -0.89%), Brookfield Renewables (BEP 0.19%), and Hannon Armstrong (HASI 2.12%) all own renewable energy assets in a variety of clean energy industries.
Each of these companies is a little different, but the basic idea is to buy wind, solar, and energy storage assets with equity and debt and then pay dividends with the cash flows. NextEra Energy Partners is the renewable asset owner arm of NextEra Energy, and it's one of the largest wind and solar asset owners in the world. It's also getting into energy storage as demand for that asset class grows.
Brookfield Renewables started as a hydrogen power plant owner, but through acquisitions has become a powerhouse in wind and solar. Hannon Armstrong will own everything from the land under a wind farm to rooftop solar assets through a partnership with SunPower.
These companies aren't just clean energy owners -- they're great dividend stocks as well.
The basket approach is best
Buying clean energy stocks can be intimidating, but owning the industry's best companies in these three segments is a great way to build a basket in the industry.
