Renewable energy stocks have been in turmoil over the last few months as investors wonder how energy investing will change in 2020 and beyond. Electricity consumption is down around the world because of COVID-19 shutdowns, which hurts demand for renewable energy projects large and small, but the bigger problem may come from the industry itself. With demand down, a growing supply of solar panels and wind turbines could leave manufacturers in financial trouble if they again resort to lowering prices to move volume.
However, there are companies built to survive the current environment and thrive well beyond it. Given the dynamics today and long term, I think First Solar (NASDAQ:FSLR), Brookfield Renewable Partners (NYSE:BEP), and Vivint Solar (NYSE:VSLR) are built to last.
Built to survive a crisis
First Solar is one of the biggest solar manufacturers in the world and has been one of the most profitable solar companies for more than a decade. But that's not the reason to buy the stock today.
What separates First Solar is the fact that it had a net cash balance of $1.8 billion at the end of 2019 and expected to have a net cash balance of $1.3 billion to $1.5 billion even after spending around $500 billion on capital expenditures in 2020.
COVID-19 and lower demand for solar panels broadly will have a negative impact on the company's operations, but no company in the industry has a balance sheet that can last longer through the crisis. Not only will First Solar come out stronger, but it may also be able to acquire competitors for cheap, consolidating power atop the solar industry. In times like these, a strong balance sheet is a great reason to buy First Solar stock.
The asset play
Once wind and solar farms are built, they need to be purchased and financed by someone. That's where Brookfield Renewable Partners comes in, acquiring renewable energy assets and then paying excess cash flows it generates out to investors. The company is analogous to a REIT or MLP, although it doesn't have the same tax benefits as those structures.
What I like about Brookfield Renewable Partners is its incredible scale, with 19,000 megawatts for wind, solar, and hydropower assets. The company also plans to grow organically, expecting to grow its current 4.4% dividend yield by 5% to 9% per year by using excess cash to acquire growth projects.
Few renewable energy companies have the stability of Brookfield Renewable Partners with long-term contracts to sell power to utilities and a history of slow but steady growth. If you're looking for a steady energy play today, this is a great stock for you.
Residential solar will be back
Residential solar is going through some turmoil as sales methods such as door-to-door sales have been eliminated throughout most of the country. And customers simply aren't investing in rooftop solar while in quarantine as they once did.
But this is when Vivint Solar can fall back on the value on its balance sheet. Management estimates there's $9.99 per share in value on the balance sheet in the form of the retained value of rooftop solar assets. In essence, this is the present value of all projected future cash flow minus any costs of the system.
Vivint Solar can use its retained value and the cash flow it generates to get through the current crisis, and long term, it may come out with an even stronger business. The cost of solar panels may come down, which I highlighted above, and borrowing costs are extremely low, which are both tailwinds for a solar installer that finances its solar installations. And with $9.99 per share in retained value on the balance sheet and a stock that's trading at $5.83 as I'm writing, this could be a huge winner long term.
Survivors will own a booming renewable energy market
The first order of business for renewable energy companies today is to survive. First Solar's balance sheet, Brookfield Renewable Partners' long-term energy contracts, and Vivint Solar's retained value should allow all three to at least get through the current crisis.
Once the energy world gets back to more normal levels of demand, we should continue to see growth because wind and solar energy are cheaper than fossil fuels. And that could make surviving renewable energy stocks huge winners long term. I think all three stocks are built to succeed, and that's why they're my top picks today.