2014 will bring plenty of exciting investment opportunities, especially in the energy space. The oil and natural gas bonanza in the United States has paid off handsomely for investors but its not too late to join the party. Our analysts share three stocks that are set to soar in the new year.
Travis Hoium: A few years ago, solar power was a highly subsidized pipe dream of tree huggers and technology hopefuls. But a funny thing happened over the past few years: The cost of solar power is now competitive with the grid because the cost of a solar system has dropped 50% since 2010 and the cost of a panel is down 60% since 2011. That's left a lot of companies that couldn't cut cost fast enough bankrupt but for those who have survived, the solar industry has finally turned a corner to long-term profitability.
There are plenty of positive signs to point to. 2013 saw a huge expansion in residential leases in the U.S., which can be offered to homeowners with $0 down and lower electricity bills. SunPower (SPWR -1.02%) announced a 70 MW utility scale project in Chile that will be subsidy-free and compete with other energy sources on the grid. The cost of solar power has become low enough that module prices have even gone up slightly because demand is so strong. Long term, I think the entire industry will grow, but one of the biggest beneficiaries is SunPower, the high-efficiency module manufacturer.
Over the past year, SunPower's non-GAAP gross margin has increased from 14.1% to 19.1% and the company has earned a non-GAAP profit of $1.32 per share. Demand for modules was so high last quarter that residential installations were put off in lieu of sending modules to Japan, Europe, and utility scale projects. The next 18 months worth of production is already sold out and another 350 MW plant is being planned for the Philippines.
SunPower's panels are in high demand and with exposure to high-margin markets like utility scale project development, residential leases, and Japan's solar market, I could see margins improve next year. Then there's the C7 Tracker, which concentrates like 7X onto solar cells, is starting to be deployed and gives leverage to existing manufacturing capacity. Overall, profit should grow in 2014 and, with the 350 MW capacity expansion slated for early 2015, I think there will be a lot of momentum for results.
There are also some great technical reasons to love SunPower in 2014. Total (TTE -0.32%), who owns a majority stake in SunPower, can increase its stake in June , so a buyout is possible. Then there's the 33.1% short interest, which could act like rocket fuel for the stock if earnings continue to be strong.
The bottom line is that the solar industry is improving rapidly and SunPower is taking a leadership and increasing capacity and profitability as a result. All of those factors bode well for SunPower and is why it's my top stock for the energy boom in 2014.
Matt DiLallo: Looking ahead to 2014, I think Concho Resources (CXO) has the potential to really profit from the energy boom. The company is a leading pure play in the Permian Basin, which already produces 14% of America's oil. However, oil companies like Concho Resources are just starting to transition to horizontal drilling in the basin and it's unlocking a tremendous amount of oil.
The Permian Basin is one of America's best and oldest oil fields. It has produced more than 29 billion barrels of oil since 1921, which is as much oil as all of America's current proved reserves combined. The legacy basin, however, has a lot more oil to give, with some estimates suggesting it still holds 50 billion barrels of recoverable oil and gas making it one of the largest oil fields in the world.
With 630,000 net acres and a deep inventory of high-return drilling opportunities, Concho is poised to grow rapidly over the next few years. Because of its vast potential, the company recently launched an accelerated growth plan that is expected to double its production by 2016. Bottom line, Concho is a great way to play the energy boom in the year ahead.
Tyler Crowe: I'm going to go a little against the grain and say that Ultra Petroleum (UPL) will have a fantastic 2014. It may not sound like a great idea to choose a company that has lost 50% of its value over the past two years, but there are a couple of signs that the future looks much more promising.
Two things stand out when looking at Ultra Petroleum: its unique assets and its production efficiency. Ultra Petroleum has developed a reputation as the low-cost natural gas producer in the U.S. Today, all-in costs to produce a thousand cubic feet of natural gas is $2.80, and the company is continually bringing that number down. One reason that is possible is because its Pinedale field wells have one-year decline rates in the low 20% range, which is drastically lower than the 60% or greater in shale plays like the Haynesville and Marcellus.
The company also made a very smart acquisition this year by going into oil at the Uinta basin. Even at $80 per barrel of oil, these assets generate a rate of return of greater than 100%, and it is a long life asset that has similar geology to its operations in the Pinedale, at which Ultra has proven to be an expert.
With an excellent asset portfolio, a major ramp-up in natural gas demand coming, and a stock that's fallen out of favor with investors, Ultra Petroleum is lined up to have a great year.
