Everybody's talking about oil right now: oil stocks, oil prices, oil tankers stuck offshore because there's no room for their cargo in storage. But the outlook for the oil industry is uncertain at best, and most investors should probably avoid it.
Rather than investing in the oil industry, which everyone's talking about, you might want to consider putting your money into stocks that nobody's talking about. We asked five of our Motley Fool contributors what under-the-radar energy stocks they're keeping an eye on right now, while everyone else is distracted by oil.
They came back with two renewable yieldcos, two solar energy companies, and a natural gas equipment manufacturer. Here's why they like Clearway Energy (NYSE:CWEN)(NYSE:CWEN.A), Vivint Solar (NYSE:VSLR), Chart Industries (NYSE:GTLS), SolarEdge Technologies (NASDAQ:SEDG), and Atlantica Yield (NASDAQ:AY).
Turning the page
John Bromels (Clearway Energy): Electricity generator Clearway Energy is certainly "under-the-radar." With just over 7 gigawatts of generation capacity, it's a small fish in a very big pond. However, Clearway has made some smart investments in renewable power: Roughly 60% of its capacity comes from solar and wind farms. The remainder is from natural-gas-fired power plants -- no coal here!
Clearway has had a rough couple of years. In 2018, one of its biggest customers, utility giant PG&E, declared bankruptcy in the wake of the California wildfires. That forced Clearway to slash its dividend by 40% -- never a good look for a yieldco -- and shares promptly fell 25%. Even now, this yieldco is yielding just over 4%.
After the dividend debacle, a new controlling investor took the reins of the company and gave the go-ahead for Clearway to invest in some wind energy projects, which management sees as a way to grow both revenue and the dividend. Even though nothing's a sure thing right now, Clearway is looking much stronger than it did a couple of years ago.
More than the sum of its parts
Travis Hoium (Vivint Solar): Solar energy is the fastest-growing source of energy in the U.S. (as you can see below) and Vivint Solar is one of the industry's leaders in the residential sector. The company installs rooftop solar projects and finances them by selling future cash flows and tax benefits to investors, often for more than the cost of installation.
What Vivint Solar keeps for itself is what's known as retained value, or the present value of all incoming and outgoing cash flows. Right now, management estimates that it has $1.23 billion of net retained value, or $9.99 per share, on the balance sheet. That's not accounting for any value from future projects, so with shares trading at $6.34 as I'm writing, there should be upside in the stock.
While the current economic crisis may be a challenge, I think it also brings tailwinds to the solar industry. Low interest rates will reduce borrowing costs and allow Vivint Solar to keep more retained value long term. And the struggles of coal and natural gas suppliers could raise the cost of fossil fuels long term, making solar energy even more competitive. If you're looking for an energy stock with a lot of potential, Vivint Solar is a great place to start.
The value of a diversified business
Jason Hall (Chart Industries): The maker of cryogenic gas processing and handling equipment is best known by investors as a play on the growth in demand for natural gas around the world. This has been expected to be a massive part of Chart's business in the years ahead.
The catch, of course, is that a lot of the infrastructure to export all that natural gas is going to be funded by integrated oil companies. And in the midst of the worst oil crash in history, they are slashing capital spending budgets, including delaying and even backing out of export facility projects for now.
As a result, Chart shares are off by more than half from the pre-coronavirus crash peak; the massive wave of LNG orders Chart was on track to ride this year and next are now likely to be a ripple.
Fortunately, Chart isn't just an energy-related supplier. The company also makes equipment necessary in the medical, food and beverage, and industrial gas industries, and business is booming. For instance, hospitals don't just need ventilators; they must have adequate supplies of oxygen, and Chart is a key supplier of liquid oxygen storage equipment for the medical industry.
Yes, the energy industry remains Chart's biggest source of business, and its other segments won't completely offset the implications of the oil downturn on LNG project spending. But it will go a long way toward bridging the gap in the near term. And in a post-coronavirus world, those LNG projects will still be necessary. Buying Chart today at half price is a below-the-radar way to invest in both the increased demands of the now, while positioning your portfolio to profit from the return to normal.
A solar company generating gobs of cash
Tyler Crowe (SolarEdge Technologies): There are a lot of superlatives you can use to describe the solar industry, but "a consistent cash generator every quarter" isn't one of them. The cyclical nature of panel sales, the hypercompetitive pricing environment, and the constant need to innovate make this a tough industry. One company that has so far bucked that trend, though, is SolarEdge Technologies. The company has been able to produce both strong revenue growth and consistent free cash flow, two things that make this a compelling stock to own.
SolarEdge doesn't build panels but builds a lot of the other components needed for residential and commercial solar installations. Its bread-and-butter products are inverters and power optimizers, a device that converts DC power from the panel to the AC power used in outlets. The company's system is built in a unique way such that it can optimize the power output at the individual panel level as well as scale to larger installations. This product combined with new energy storage (batteries) and power management software have created a compelling offering that gives the company some pricing power, which management has used to maintain gross margins above 30% and be profitable within the first year of going public.
Thanks to all that excess cash coming in the door, SolarEdge has built up a net-cash (cash minus debt) position of $540 million. That much financial flexibility in uncertain times gives management a lot of wiggle room as it anticipates a slowdown in the coming quarters.
Built for the future of energy
Matt DiLallo (Atlantica Yield): Atlantica Yield is one of the more recent additions to my portfolio. While it's far from a well-known company, I like how it has quietly built up an impressive portfolio of sustainable infrastructure that includes renewable energy assets, natural gas power plants, electric transmission lines, and water desalinization facilities. Long-term contracts underpin each of those assets, which provide Atlantica with predictable cash flow. It pays out the bulk of that money to investors via a dividend that yields an enticing 7%.
The company expects to continue expanding that portfolio through additional acquisitions and investments. It recently formed a renewable energy partnership in Chile, which just acquired a solar asset. Meanwhile, it anticipates increasing its interest in PTS -- which is a recently completed natural gas transportation platform in the Gulf of Mexico -- from 5% to 70% later this year. Finally, it has the option to buy out a partner's interest in a U.S. solar plant. In addition to those identified growth opportunities, the company has several strategic partnerships that will provide it with more options to expand its portfolio.
This growth will boost its cash flow, which should give it the power to continue increasing its dividend. That steadily rising income stream makes this relatively unknown energy stock an attractive one for yield-seekers to buy.