Renewable energy stocks haven't quite hit the mainstream for investors the way oil and gas stocks have, despite being one of the few growth industries in energy today. And within renewable energy, there are a lot of hidden gems that could be winners for long-term investors.
We asked three of our contributors for an under-the-radar renewable energy stock, and Hannon Armstrong (NYSE:HASI), Switchback Energy Acquisition (NYSE:SBE), and Vestas Wind Systems (OTC:VWSY.F) were at the top of the list.
The finance company
Travis Hoium (Hannon Armstrong): There aren't many companies that have the flexibility to invest in almost any form of renewable energy. But Hannon Armstrong can do just that with its flexible financing model. The company will invest in everything from the equity in wind and solar projects to buying land that projects are built on to financing efficiency improvements for government buildings.
The model allows Hannon Armstrong to invest in assets with the best return for the risk being taken and return a portion of those profits to shareholders in the form of a dividend. You can see below that revenue, earnings per share, and dividends paid have all risen over the past decade.
The renewable energy industry goes through periods when one type of asset is generating very high returns and others are not. So Hannon Armstrong can buy or sell assets depending on where returns are best. And as one of the few companies that will invest in energy efficiency, ecological restoration, stormwater remediation, and resiliency at scale, there are opportunities that Hannon Armstrong will find in the market that no other company sees.
Hannon Armstrong's potential market is growing as well. Management says its pipeline is over $2.5 billion in the next 12 months, and the renewable energy industry continues to grow. This may be an under-the-radar stock, but its financing is important to the renewable energy industry and it comes with a 2.5% dividend yield for investors.
Picks and shovels
Howard Smith (Switchback Energy Acquisition): The road to electric vehicles ultimately replacing fossil fuel-powered transportation is currently being paved. It may still be a fairly long way off, but massive infrastructure projects take time.
While multiple technologies will likely take part in replacing internal combustion engines, battery-electric power is proving to be one that can be rolled out at scale. For that to happen, though, there has to be charging infrastructure. The leading company in that market is ChargePoint, which is merging with special purpose acquisition company (SPAC) Switchback Energy to become a public company by the end of this year.
For investors, this means there's an opportunity to participate in a "picks and shovels" investment for a sector with massive growth potential. ChargePoint sells charging stations, software, and services. It supplies residential, commercial, and fleet customers in North America and Europe.
Founded in 2007, ChargePoint operates one of the oldest and largest electric vehicle (EV) charging networks. It says it has a 73% market share of North American level 2 charging networks, which utilize 240 volt power. Its closest competitor has a mere 10% market share. ChargePoint also operates in 16 European markets.
The company estimates that its charging point shipments -- excluding single family home stations -- will grow 10 times by 2026, and annual revenue will correspondingly increase to over $2 billion. ChargePoint and Switchback say that the combined company will have an implied enterprise value of about $2.4 billion.
A picks and shovels investment thesis -- where the expectation is on growth of the sector itself, and not dependent on which company emerges as a leader -- seems to be a good way to bet on EVs. Many new EV manufacturers are emerging, but one thing they will all have in common is the need for charging stations. ChargePoint is a leader in this area, and investors who want to add money to a speculative renewable energy name would be smart to look at investing through Switchback Energy.
Don't miss this big tailwind
Jason Hall (Vestas Wind Systems): At recent prices, shares of Vestas are near all-time highs. Yet plenty of investors have never heard of the company, one of the largest makers and servicers of wind turbines in the world. It's time to pay attention.
Last quarter, Vestas delivered the most turbines in a single quarter in its history, and reported another strong quarter of order intake, with customers ordering 4.2 GW of new wind turbines to deploy. At the end of the quarter, the company had a turbine order backlog worth over $17 billion as more and more of its customers focus their energy investments on renewables.
Vestas isn't just growing sales of new turbines, either. The company's backlog for services, which has become an increasingly important part of its business, reached $23 billion. Not only is this a very profitable segment, but it will help Vestas' bottom line during the occasional cyclical downturn in wind turbine demand.
Vestas' position as the biggest player in onshore turbines is getting bolstered by its partnership with Mitsubishi Heavy Industries offshore. The joint venture has deployed 5.6 GW of offshore turbines and has another 5.2 GW in future orders secured.
Vestas' margins have gotten pinched this year due to some bottlenecks in the supply chain, made worse by the coronavirus pandemic. But management is working to resolve those growing pains quickly, which should result in better margins -- and bigger profits -- in the near future.
For investors, even with shares near the all-time high, Vestas is worth buying. Even with the supply chain problems and the COVID-19 impacts, operating cash flows increased 27% over the past year. Investors looking to add some wind energy exposure to their portfolio should absolutely have Vestas on their radar.
Energy's growth industry
There are tailwinds for renewable energy stocks with wind and solar production growing rapidly over the past decade. And both energy sources are now competitive with fossil fuels without subsidies, so there's no reason growth will slow.
Given this backdrop, these under-the-radar stocks are well positioned for long-term growth, and that makes them worth a look for your portfolio.