Renewable energy stocks can be some of the most rewarding and simultaneously frustrating to own on the stock market. The industry is growing like a weed and new opportunities and markets are popping up all the time, but very few companies are able to make a profit along the way.
For investors looking to jump into renewable energy stocks, I think NextEra Energy Partners (NEP), Brookfield Renewable Partners (BEP), and First Solar (FSLR) are still great buys, but right now I would avoid the hot name in town, Sunrun (RUN).
Yieldcos are a great buy
Investing in renewable energy product companies can be difficult because costs are falling rapidly and there aren't many profitable players outside of First Solar (which I'll get to in a moment). But there are relatively safe ways to invest in renewable energy projects that generate revenue for years to come.
NextEra Energy Partners is one of the best of the traditional yieldcos, which use excess cash, stock, and debt to fund new acquisitions intended to grow the dividend long term. The company is backed by utility giant NextEra Energy, which has committed to providing the projects it needs to grow its dividend 12%-15% through 2022. That's not bad on top of the 4% dividend yield investors are already getting from the stock. Keep in mind that, like most yieldcos, NextEra Energy Partners owns projects backed by power purchase agreements that ensure 20 or more years of cash flow, so this is a dividend stock for the long haul.
Brookfield Renewable Partners is a bit unique among yieldcos in that it tries to grow organically. Instead of paying out most of its annual cash flows in the form of a dividend, the company only hopes to grow the dividend, which currently stands at a 5.6% yield, 5%-9% per year with total returns coming in at 12% to 15% annually. It's also backed by hydropower plants, which comprise 85% of the portfolio, a unique asset position in renewable energy stocks.
The solar manufacturer to buy
For those looking for a way to play the renewable energy equipment market, First Solar is a leading player in the solar industry. The company is one of the few profitable solar manufacturers and will be sitting on an expected $2.1 billion to $2.3 billion in cash by year-end 2017. The existing operations with the amazing balance sheet make this a high-quality solar stock with the technical capacity and capability to adapt to the solar market as it evolves.
Avoid a high-cost installer
One solar stock I wouldn't buy right now is Sunrun (RUN). The company has higher costs than most competitors in residential solar, making up for it by selling tax equity and cash flows to pay for those installations.
Being a high-cost supplier is not a good position to be in, but the tax equity portion is what's more worrying. The tax bill the Senate just passed includes a rule that will kneecap tax equity that solar companies like Sunrun use, making the economics of systems worse. The change may not affect installers like Vivint Solar and SunPower, which have transitioned to more cash and loan sales, but Sunrun has doubled down on the lease and now relies on tax equity as a result.
Residential solar installation also makes a lot more sense for local installers rather than a national company like Sunrun. Smaller companies have a lower cost structure and can be more nimble in their financing and strategic direction as the industry changes.
None of these factors put Sunrun in a good position heading into 2018.
Renewable energy stocks have a world of potential
After more than a decade of growth, renewable energy is still just scratching the surface of its potential to provide energy around the world. But the cost-effectiveness of wind and solar and the adoption of energy storage at scale will help drive more projects and billions in investment. I think NextEra Energy Partners, Brookfield Renewable Partners, and First Solar can be great ways to play the industry's growth. But not every stock is worth owning, which is why I would stay away from Sunrun given the industry's trends right now.