Renewable energy as an asset class is booming around the world, as wind and solar power plants become more competitive against fossil fuels. But renewable-energy stocks haven't been guaranteed winners because cost pressure has hampered investment returns.
Given the competitive landscape, three of our Foolish contributors scoured the industry for their best renewable-energy stock picks. And Bloom Energy (BE -2.92%), NextEra Energy (NEE 0.62%), and Clean Energy Fuels (CLNE -1.31%) made it to the top of the list -- for very different reasons.
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Upending energy
Travis Hoium (Bloom Energy): If renewable energy is going to be a mainstay on the grid, there needs to be a way to store energy made by solar and wind farms for later use. I'm not talking about a battery that charges during the day and discharges at night. I'm talking about a solar power plant in the Mojave Desert generating extremely low-cost summer electricity that can be stored and used in the Midwest or Northeast in winter months when demand rises and solar production is low. Bloom Energy may have cracked the code on this energy storage.
Bloom Energy recently announced a solid oxide electrolyzer that will convert electricity and water into hydrogen fuel, which is usable in electricity-generating fuel cells. This could make hydrogen a viable fuel for shipping, long-haul trucking, and even grid applications. It's even possible that hydrogen fuel could be pumped around the country using pipelines, much like oil and natural gas is transported around the country.
BE Revenue (TTM) data by YCharts.
Bloom Energy isn't yet profitable, but it has the chance to upend fossil fuel energy as we know it. And that's worth buying a starter position in this disruptive renewable-energy stock.
Not just a utility
Howard Smith (NextEra Energy): NextEra Energy is a Florida-based company that owns Florida Power & Light, the largest regulated electric utility in the U.S. by retail megawatt-hour sales, as well as Gulf Power, which serves the northwest part of the state. Its other subsidiary is NextEra Energy Resources. This segment, along with its affiliates, is the world's largest generator of wind and solar power, and invests in battery storage.
NextEra estimates it can provide investors an annual total return of 10% to 12% through 2022 with earnings growth and dividends, in large part due to growth in the renewables segment. It estimates growth in the wind and solar market will average about 15% annually through 2022. The additional returns from NextEra Energy Resources have helped create a track record of earnings-per-share (EPS) and market capitalization notably higher than more traditional utilities like Consolidated Edison (ED 0.85%), Duke Energy (NYSE: DUK), and Dominion Energy (D -0.45%):
NEE EPS Diluted (TTM) data by YCharts. TTM = trailing 12 months.
The International Energy Agency (IEA) supports the company's growth estimates for renewables. In its 2020 and 2021 market-outlook update, the organization predicts that additions to global renewable-energy capacity will resume growth to new highs of almost 200 gigawatts (GW) in 2021. That forecast accounts for a pandemic-related dip in 2020, though as of May 2020, the agency still expected capacity-addition growth in the U.S. for 2020.
NextEra believes the U.S. will see about 80 GW of renewable demand through 2022. In its recent second-quarter 2020 earnings report, the company showed it is managing the impacts of the pandemic, maintaining its guidance for the full year. It reported strong results for the period ending June 30, with adjusted EPS growth of over 11% compared to the year-ago period. Adjusted earnings exclude acquisition-related expenses and disposal-related gains, the effects of hedges, and other items not directly related to the core business.
NextEra pays investors a respectable dividend (currently yielding about 2%) and expects that to grow by 12% in 2020. While its share price has rebounded to pre-pandemic levels, the recently announced results should bolster the confidence of investors considering an investment now.
The under-the-radar transportation fuel
Jason Hall (Clean Energy Fuels Corp): Clean Energy Fuels hasn't been a good investment over the past seven or eight years. Management made a leveraged bet that trucking would shift quickly from diesel to natural gas. But the bet backfired during the last oil collapse when growth slowed to a crawl, and the company was left with a balance sheet drowning in expensive debt and limited resources to deal with it.
As a result, investors took a bath as the company issued stock at super-low prices to convert much of the debt. This meant essentially none of the company's growth has added any per-share value.
Instead of focusing on those past mistakes, investors would do well to take a hard look at the company. The biggest past risk -- the balance sheet -- is now a strength, with more cash than debt and a plan to pay off all debt before year end. The company is cash-flow positive and still growing fuel volumes at a steady (and high) rate.
Here's the major reason it's a buy-now stock: For all the press that electric and hydrogen trucks get, renewable natural gas is the leader in zero-emissions fuels for trucking and is likely to remain so for years to come. Clean Energy Fuels is the dominant supplier of renewable natural gas, with some 50 refueling stations. No electric or hydrogen-powered trucks are commercially available yet, and they're likely to cost more than double a natural gas-fueled truck but with similar net emissions profiles.
Instead of chasing the next shiny object, investors would do well to consider this under-the-radar leader that's already dominating the alt-fuel trucking market.
Betting on a renewable-energy future
These are three great ways to bet on the future of renewable energy and its continued growth. And as the fossil fuel industry's financial fortunes decline, we could see a flood of investment in renewable energy, helping everything from electricity-generation assets to renewable fuels.
