The energy sector is a volatile place right now, but there are opportunities for growth and income if you know where to look.
This basket of three very different stocks will give you the stability you need to weather the present volatility, all the while providing upside for the years ahead.
Israel-based SolarEdge (SEDG -4.27%) is the gift that keeps on giving. It's a high-powered growth stock that has a nice position in the solar market because it manufactures inverters and power optimizers that pair with the solar panels themselves. SolarEdge is better positioned for large scale projects than its rival, Enphase Energy, which makes microinverters to compete with SolarEdge's products.
Although SolarEdge languished for a few years, the stock has been on a meteoric rise since about March 2019. The company simply continues to execute on dominating the U.S. residential solar market, all the while maintaining solid financials. The stock went up over 16% on Wednesday after Wall Street liked yet another one of its quarterly results.
It's perfectly understandable to be hesitant to buy SolarEdge after its recent rise, but at the very least you should consider adding the company to your watch list.
Chevron (CVX 1.03%) has always been seen as the smaller of two large U.S. supermajors, behind ExxonMobil. But after a 10-year stretch where Chevron outperformed all of its peers, the company now finds itself within striking distance of surpassing Exxon to become the largest integrated oil and gas company (excluding Saudi Aramco).
Chevron entered 2020 with the best balance sheet of the supermajors.
The company led its peers with the lowest debt to capital and the lowest debt to equity ratio, two crucial financial metrics that indicate Chevron's dependence on cash flow and equity, not debt, to run its business. This advantage is all the more meaningful in a low oil price environment where financial strength becomes key.
In late March, Chevron decided it will cut spending by 50% in the largest onshore U.S. oilfield, the Permian Basin, as well as total 2020 spending by 20%. Chevron also halted its $5 billion share buyback program.
Chevron's extreme measures are in line with its financially prudent reputation. In response to the cuts, the company's chief financial officer was quoted as saying, "Our focus is on protecting the dividend, prioritizing capital that drives long-term value, and supporting the balance sheet."
Although Chevron has one of the lowest dividend yields of the supermajors at 5.5%, income investors will appreciate this dividend for two reasons. First, it's a nice yield that doesn't overly strain Chevron's free cash flow. Second, the dividend is backed by a company that has a reputation and culture for handling the current crisis.
Rounding out this list is Kinder Morgan (KMI 0.56%), one of the largest U.S. midstream oil and gas companies. Kinder Morgan transports and stores natural gas, oil, and other valuable products for customers across North America.
Although Kinder Morgan's recent quarter reported lower earnings than a year ago, the company was able to mitigate the damage thanks to its conservative business model. More than 90% of Kinder Morgan's cash flow comes from "take-or-pay" and "fee-based" sources. It was impressive to see Kinder Morgan raise its quarterly dividend by 5% to $1.05 annually during a time when many companies are cutting their dividends. For the full year, Kinder Morgan only expects "Adjusted EBITDA to be below plan by approximately 8 percent," a relatively minor hit.
The present strength of Kinder Morgan should help it execute on its 10-year plan to dominate the transportation of natural gas from U.S. shale plays to liquefied natural gas (LNG) export terminals along the Gulf Coast. Kinder Morgan is betting that the rising population and economic might of developing countries will choose natural gas as an affordable and reliable alternative to coal. Now yielding 7%, it's difficult to find companies that yield more than Kinder Morgan without adding more risk.
The advantage of a basket
The advantage of buying SolarEdge, Chevron, and Kinder Morgan is the way the stocks work together to generate a combination of income and growth from different parts of the energy industry. Chevron and Kinder Morgan will pay you dividends while you wait for oil and gas to recover, and SolarEdge offers an attractive option for those interested in a proven player in the solar industry.