The world will need to invest an astounding amount of money if we are to put a stop to carbon emissions. In the U.S. alone, it will take a jaw-dropping $4.7 trillion to switch the power sector over to renewables, according to an estimate by energy industry research firm Wood Mackenzie. That's a massive market opportunity for companies operating in the solar industry.
Three of our energy contributors' favorite investment ideas for the solar trend are Brookfield Renewable Partners (NYSE:BEP), Pattern Energy (NASDAQ:PEGI), and SolarEdge Technologies (NASDAQ:SEDG). Here's why they believe these solar stocks could be big winners in the coming years.
Betting big on solar
Matt DiLallo (Brookfield Renewable Partners): Renewable energy powerhouse Brookfield Renewable Partners doesn't currently generate much solar power. Overall, the hydroelectric-focused company produces only 4% of its electricity from the sun. However, that will change in the coming years.
Two factors drive that view. First, the company's parent, Brookfield Asset Management, formed a joint venture last year to develop and operate rooftop solar projects in China. The company and its partner will install solar panels on logistics and commercial buildings in the country. They aim to install 1 gigawatt of capacity in the coming years, with a target of 300 megawatts (MW) in the first three years. Brookfield Renewable is participating in this partnership, which will make solar a much more meaningful future contributor.
In addition to that, Brookfield Renewable recently formed a joint venture with private equity giant KKR to own Spanish solar developer X-Elio. That company currently operates 273 MW of solar capacity. However, it has another 1,413 MW of solar under construction and an additional 4,800 MW in development. These projects are not only in Spain but also in the U.S., Mexico, Chile, and Japan.
These two growth drivers will significantly expand Brookfield's solar platform, which currently consists of 1,800 MW of capacity. They'll also help the company grow its cash flow at a healthy rate, with Brookfield projecting that it can expand earnings at an annual pace of 6% to 11% in the next five years. This growth will enable Brookfield to increase its 5.4%-yielding dividend at a 5% to 9% yearly rate. That growing income stream should give Brookfield the power to continue generating market-beating total returns. Brookfield's upside makes it one of the top solar stocks to buy these days.
Higher risk, but a reward worth investing in
Jason Hall (Pattern Energy): First off, I'll agree with Matt's pick of Brookfield Renewable. It's one of my favorite solar stocks, with the backing of the best asset management company in the world. At the same time, I think investors willing to take on a little more risk could be greatly rewarded if they consider Pattern Energy as well.
Another yieldco, Pattern owns solar and wind energy production assets, making its money by selling electricity on long-term contracts to power utilities and industrial users, and then rewarding investors with a big dividend. Standing above 7% at recent prices, Pattern's dividend is certainly one of the biggest in the yieldco space.
It's also one that comes with some risk. Pattern has had to pay out essentially all its cash flows the past couple of years to maintain its dividend, giving it very little room for error. Management must work to correct this or risk being forced to cut the payout.
There's already good news on that front, with the company growing cash flows 23% in the first quarter, putting it ahead of schedule on its two-year plan to reach an 80% cash payout ratio. And while there's still some risk to the dividend if the company struggles to find outside funding to power its growth plans, so far management has proven it has the chops to do it.
Other yieldcos like Brookfield Renewable offer lower, safer yields that could be the better choice if it's income for today you're after. But as part of a growth-oriented long-term strategy for investors not counting on income now, Pattern's risk/reward profile looks worth investing in today.
A smart bet on smart solar power components
Tyler Crowe (SolarEdge Technologies): During solar power's relatively short life on Wall Street, it has been hard to find a business able to generate respectable profit margins over a long period. The rapid advances in technology for this industry have typically led to rapid commoditization of products and a race to the bottom on price.
So far, though, SolarEdge Technologies has been able to defy that trend and has produced a string of respectable quarters in which it has maintained gross margins above 30%. It continues to grow at the pace you would expect from a fast-growing industry like solar.
What makes SolarEdge unique is that the components it manufactures -- instruments that convert power from DC to AC voltage and optimize power output from panels -- are incredible value-adds for smaller installations like residential rooftop systems. What's more, SolarEdge has carved out considerable market share in this particular business with a suite of components that can monitor, control, and optimize each individual panel while also being able to scale up to larger systems. It has been able to use this innovative platform to expand into other aspects of residential and commercial installations such as battery storage and remote monitoring software. These bundled offerings have allowed SolarEdge to command price and margin that few companies in this industry have been able to replicate.
The goal now for SolarEdge Technologies is to maintain that position. That will be hard, though, because the solar industry is fiercely competitive. With a profitable business now and a considerable cash balance with which to invest in new technology and avoid taking on debt, SolarEdge Technologies looks like one of the better bets in the solar industry.