In the world of energy stocks, green energy investments may be the trickiest to figure out. Since many of these companies are based on emerging technologies or are dependent on economic conditions and public policies that can change rapidly, it can be hard to pick top renewable energy stocks... or, for that matter, even decent ones.
Recognizing the difficulty, however, we asked three Motley Fool contributors to tell us which renewable energy stocks they see as having high potential for investors right now. They came back with SunPower (SPWR -10.78%), TPI Composites (TPIC -5.27%), and TerraForm Power (TERP). Here's why they think these are worthy of a second look.
A high tech solar stock
Travis Hoium (SunPower): The solar industry is returning to some semblance of stability: Demand around the world is rising, and manufacturers have been holding back on adding capacity that could put the industry into a state of oversupply. Those trends are providing tailwinds for SunPower, but they're not the only reason I like this renewable energy stock long term.
SunPower's high-efficiency solar panels are perfect for space-constrained home roofs, and that's really the company's bread-and-butter business. Residential solar systems were just 11% of the megawatts of solar panels deployed in the second quarter, but 36% of revenue. That's because residential solar panels sell for a higher price, and are accompanied by high-value components like inverters, racking, and even energy storage.
Over the next few years, SunPower will be upgrading to a manufacturing process that will make larger solar cells, which will cut its costs to be more in line with commodity-level competition. That should help push gross margins from the 8% last quarter to over 20%.
The biggest upside for SunPower will be from the commercial market, where it's the domestic market share leader. Its commercial solar segment is smaller than its residential segment, with 47 GW and $83.4 million in sales last quarter, but the business is growing steadily in the U.S. as companies try to find ways to lower their energy costs and improve their environmental footprints.
SunPower isn't profitable, but it's heading in that direction, and if current trends continue, it could start turning profits by the end of 2019. If that happens, SunPower has a big market to tap, with residential solar leading the way for the foreseeable future.
Caught in the doldrums today, TPI Composites could spin higher soon
Rich Smith (TPI Composites): Shares of windmill blade-maker TPI Composites crashed hard in August after the company reported an earnings beat -- but also made a big reduction in its guidance. With roughly 40% of its production lines for windmill blades either still spinning up, or in the process of being retooled to produce new models, TPI's currently operating 30% under full capacity.
Which is a curious coincidence -- because its stock is also down 30% since the earnings report.
And yet, due to that big drop in share price, by one measure at least, TPI stock is cheaper to own that it's been in years. It's trading at an enterprise value of just 0.7 times its $1.2 billion in trailing sales, a valuation last seen in March 2018. According to data from S&P Global Market Intelligence, the company has never closed out a quarter with a valuation this low.
While currently unprofitable, it's promising to more than double its trailing earnings before interest, taxes, depreciation, and amortization (EBITDA) to more than $80 million by year's end. And by 2022, analysts predict the company will more than triple its annual EBITDA to nearly $300 million. Actual GAAP earnings should follow in short order. From a loss this year, analysts forecast TPI will grow to earn more than $4 a share in just three short years.
If you agree with those estimates, you'd better buy shares now, because TPI Composites stock won't stay this cheap for long.
Green energy plus dividend
John Bromels (TerraForm Power) Yes, you read that right -- a green energy stock that pays a dividend! Most renewable stocks (including those recommended by my colleagues above) are too young and focused on growth (or just too cash-poor) to swing a dividend. But a handful of them -- mostly renewable yieldcos -- do offer dividends, and TerraForm Power's is one of the best, currently yielding about 4.6%.
Things have changed a lot in recent years for this wind and solar farm operator. It was spun off from the now-defunct SunEdison in 2014 to operate its parent's renewable assets. In 2016, though, SunEdison went bankrupt, sparking a crisis at TerraForm involving debt entanglements, lawsuits, and a suspended dividend. Luckily, the well-managed Brookfield Asset Management stepped in as TerraForm's majority shareholder and sponsor, and the company has experienced a dramatic turnaround.
Since 2016, TerraForm has made progress in reducing its debt load. It also improved its earnings and cash flow through its purchase of Spanish wind and solar company Saeta. Management has targeted an annual dividend increase of 5% to 8% a year through 2022, and looks on track to achieve that goal. The market has been catching on to its successes, though, which is why investors sent its shares up more than 50% over the past year.
While most people don't think of renewable energy and dividends as being compatible, TerraForm looks like a buy for dividend investors and green energy fans alike.