The energy industry is in the midst of a tectonic shift away from fossil fuels and toward renewables, fueled by growing climate change worries and a dramatic drop in costs. Because of those factors, renewable energy companies are growing briskly and appear poised to continue doing so for years to come. Given the growth that's up ahead, now is a great time to buy clean energy stocks, with Tesla (TSLA -4.23%), TerraForm Power (TERP), and SunPower (SPWR -3.78%) being three that we believe have the power to outperform from here.
Tesla is about more than just cars
Rich Smith (Tesla, Inc.): There's a non-zero chance that I'm going to regret this, but I think I'll pick Tesla as my top energy stock to buy right now. (And no, not just because Elon Musk is opening a roller rink).
Rather, as I explained last week, I think there's a good chance 2018 will be a breakout year for Tesla. First off, there's the thing that everybody knows about, and everybody is waiting for: Tesla's Model 3 sedan. Tesla's failure to get Model 3 produced at promised production rates weighed heavily on the stock last year. But now Musk has given himself another six months in which to try to get production unstuck. Given time, I think he'll succeed.
What interests me more about Tesla, though, is its role in energy infrastructure. Last year, Tesla succeeded in building a backup battery system for Australia for $50 million. It did so just in time to (a) win a bet that Musk made, and (b) head off not one, but at least two separate electricity blackouts before they could knock South Australia's grid offline.
Here in the U.S., power outages cost Americans an estimated $150 billion a year in spoiled food, lost productivity, damage to and from burst and frozen water pipes, and so on. If Tesla markets its new Powerpack utility-scale batteries as a solution to this problem, I see that as a strong argument in favor of more utilities -- not just abroad, but right here in the U.S. -- hiring Tesla to build them backup battery systems. At $50 million apiece, success in this one venture could make up for a lot of unsold Model 3s.
A plan to outperform
Matt DiLallo (TerraForm Power): Wind and solar power generator TerraForm Power has burned investors over the years, shedding nearly two-thirds of its value since going public in 2014. However, that's mainly because the focus of company's former parent was on expanding as quickly as possible no matter the cost instead of creating value for investors. Because of that, TerraForm issued mounds of new stock and debt to buy wind and solar facilities, often paying a high price for both capital and the assets it acquired.
However, those days of growing for the sake of growth are now in the rearview mirror after renowned value creator Brookfield Asset Management (BN -0.64%) took over management by purchasing a 51% stake in the company. Brookfield has already helped TerraForm Power craft a plan to generate value from its current portfolio of renewable power plants, while also putting the company on the pathway for sustainable growth.
That plan should see TerraForm reinstate a high-yield dividend this year, with it on pace to sustainably grow that payout by 5% to 8% annually over the next several years. Cost-savings initiatives will fuel most of that growth in the near term, while a combination of reinvesting its retained cash flow on high-return projects and targeting value-based acquisitions will also help drive cash flow and dividend growth in the coming years. It's a strategy that has the potential to generate double-digit total annual returns for investors, which makes TerraForm a great energy stock to buy now.
The premium solar play
Travis Hoium (SunPower): It's become clear that solar energy is a disruptive force in energy and is already upending the multitrillion-dollar energy industry. Not only is solar energy competitive with fossil fuels today, it can be installed in places like rooftops that allow customers to own energy production, upending the utility business model.
One of the leaders in the solar industry is SunPower, the high-efficiency solar panel manufacturer. SunPower is a leader in rooftop solar with its industry-leading X-Series solar panels, which are over 22% efficient, and is now attaching energy storage to up to 75% of new bookings in some commercial markets. And management says residential energy storage will likely see similar adoption starting in late 2018. Financially, the high-efficiency rooftop solar business has been good for SunPower with margins between the mid-teens and mid-20% range. The reason the stock hasn't done better is the power plant business.
In power plants, SunPower has struggled to sell high-efficiency solar panels, which is where recent financial losses have come from, so it's changed its model and is making a product called P-Series that's built with commodity solar cells and assembled in a unique way to create a panel that's slightly more efficient than competitors. When combined with a racking, design, and maintenance platform called Oasis, SunPower has a full offering that's gained traction with well-known utilities like AES and NextEra Energy.
SunPower is well positioned as the premium solar panel provider in residential and commercial markets, and it has the opportunity to build a large power plant business with P-Series and Oasis. It's also trading at an incredible value with a price-to-sales ratio of just over 0.5, a depressed level because of losses in recent quarters. But if financials turn around in 2018, as management expects, SunPower has a lot of upside for investors, and that's why I think it's a great energy stock to buy now.