Do These 2 Energy Highfliers Belong in Your Portfolio?

In this bull market, it may sometimes feel impossible to find good stocks at great prices. But sometimes the best thing to do is look for great business with long-term upside, instead of shopping in the bargain bin. The energy sector has two very important characteristics that make it worthy of consideration for any investor:

  • Energy demand will continue to grow as the world's population grows
  • As demand increases and fossil fuels get harder to extract, alternative energies like wind and solar, and unconventional sources like shale-produced natural gas will grow as a portion of the global energy supply

With that in mind, let's take a look at two companies that are central to how we will power the future. Both have seen their stocks move up significantly in the past year. Is it too late to buy, or is it still early in the game? Let's take a closer look.

Highfliers getting powered from new energy?

SPWR Chart
SPWR data by YCharts

A strong market has been left in the dust by SunPower  (NASDAQ: SPWR  ) and Vestas Wind Systems  (NASDAQOTH: VWDRY  ) , (NASDAQOTH: VWSYF  ) , both returning an astounding 400% over the past year. The thing is, these two companies are in very different situations, and different catalysts have contributed to the rise in their stock prices.

Headwinds turning
Vestas has dealt with serious challenges in its wind business over the past several years, as the lumpiness of the business and high fixed costs have led to serious losses in down years:

VWDRY Revenue (TTM) Chart
VWDRY Revenue (TTM) data by YCharts

However, management is making an effort to reduce its fixed costs, recently selling off its machining and tooling business to German manufacturer VTC Partners GmbH. Not only will the reduced fixed expense help Vestas be more nimble, VTC's ability to scale up production at these facilities to meet demand for its other customers will have a net benefit to Vestas of keeping unit costs in line with today's, without the high fixed expense of owning and operating the facilities directly.

From the press release: "The divestment of our machining and casting units is part of the plan to improve our capacity utilisation and to become a more asset-light and scalable company," says Jean-Marc Lechêne, Executive Vice President and COO of Vestas Wind Systems A/S. "VTC will continue to operate with the same high Vestas standards in relation to quality, reliability and safety..."

However, it will take time for efforts such as this to impact the bottom line. The company's Q4 and annual report is due out in early February, along with guidance for 2014. 

Additionally, Vestas faces stiff competition from General Electric  (NYSE: GE  ) , which has a diverse business and massive scale it can leverage. However, GE's diverse business can also be a detriment against a pure player like Vestas, especially if GE thinks that wind will be soft for any length of time, and dedicates resources into other areas. 

However, GE Wind is part of the power and water segment, GE's largest industrial business unit, in terms of both revenue and profit, and with the overlap in its turbine business, expect competition from this industrial behemoth to remain strong. GE is pointing at a strong 2014 in its energy business, per the 2012 annual report. 

Bright days ahead
SunPower has been one of the best stocks to own in 2013, in the midst of a bounce-back year for the entire solar industry. Chinese subsidies over the past couple of years left the domestic solar industry severely crippled, and is one of the key reasons that French energy giant Total  (NYSE: TOT  )  was able to take a major stake in SunPower in 2011. Now holding more than 60% of the company's stock, Total's investment positioned SunPower to both survive the massive beat-down the sector took, and to now thrive as technological breakthroughs have reduced its production costs and demand has helped the market to recover. 

Today, SunPower is not only making panels that are industry-leading in efficiency, but is also able to compete on cost. With global solar expansion still in the early stages, SunPower announced that it is going to expand production in 2014, as it was near 100% capacity in the third quarter of 2013. Shares of SunPower have slipped since its latest earnings release, down more than 13% since the end of October. 

Firing up the future
Vestas and SunPower are in unique positions going forward. Total's backing of SunPower is a positive for investors in both companies, as SunPower's strength adds competitive value to Total's ability as an energy supplier, while Total's financial strength positions SunPower well for continued growth. Income-seekers should consider Total, while SunPower offers massive upside for growth-minded investors willing to ride out a bumpy stock. 

Vestas, on the other hand, is a complete pure play with competition from only a few very large players like GE and Siemens. Vestas seems to be turning the corner, but it could take time for the streamlining to pay returns. I like what I see, but caution investors to not go "all-in" just yet. Start small, and let management's efforts begin to pay off in this turnaround story before filling out your position.

2014 and record energy investment levels: How can you profit from it?
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 


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