Renewable energy stocks have had a great year in 2020, not because they've had outstanding growth or earnings, but because investors are speculating that the future will be very bright. The Biden administration coming into office in January will likely bring more favorable policies, low interest rates have been like rocket fuel for financing wind and solar projects, and even big corporate buyers are seeing that there's a financial benefit of going renewable, along with the PR boost.
As we look ahead to 2021, there are a few stocks our contributors think have room to run higher. SunPower (SPWR -3.04%), NextEra Energy (NEE 0.26%), and TPI Composites (TPIC -4.53%) are our top renewable energy picks for the year.
The new-age solar company
Travis Hoium (SunPower): Let's face it, SunPower has been both an industry leader and an incredibly disappointing company over the past decade. It was once one of the biggest and most valuable solar panel manufacturers in the world but it's changed strategic directions multiple times and the stock has floundered for most of the last four years. Starting in summer 2020, the narrative started to shift.
SunPower spun off most of its manufacturing business into Maxeon Solar Technologies, retaining the North American residential and commercial development businesses. The move was strategic, but it was also about moving to an asset-light business model. At the end of the third quarter of 2020, the company had $325 million in cash and $888.4 million in debt, which would have been crushing if it had to invest potentially hundreds of millions of dollars in manufacturing plants to drive growth.
The secret gem on SunPower's balance sheet is 4.5 million shares of Enphase, which it acquired when it sold Enphase its inverter business. The stake is worth $782 million at today's stock price. In other words, SunPower has about $219 million in net cash if it sold the entire Enphase stake and doesn't have to invest in manufacturing.
So, what is SunPower doing? It is now more of a solar technology company. It's creating the tools installers need to sell, quote, and install solar systems. It generates leads and quick design estimates on its website and then funnels those leads to installers, who do the "last-mile" work of getting solar onto the roof. SunPower provides everything they need, like racking, Maxeon solar panels, monitoring, financing, and now energy storage.
The effect has been rising margins for SunPower, which expects residential gross margins to top 20% in the fourth quarter. But the real improvement could be when residential and commercial energy storage starts to be a more standard piece of the installation package. SunPower will be able to aggregate thousands of small energy storage systems together into a "virtual power plant" and bid energy and services into the grid. This creates a new revenue stream for SunPower as well as homeowners and commercial building owners. And it's a growth market that SunPower has a lead in as one of the biggest solar developers in the country.
A shift to an asset-light model is just what SunPower needed in 2020, and I think the momentum will continue as operations turn the corner in 2021.
Growth, with a hedge
Howard Smith (NextEra Energy): Investor interest in renewable energy took off in 2020. There's little doubt that the transition from fossil fuels to renewables will continue into 2021 and beyond.
But after such a strong year in the sector and the stock market in general, it would be wise to add some protection to a new investment for 2021. NextEra Energy is ideal to provide plenty of long-term growth in renewable energy generation, while still providing some protection if a market correction is on the horizon.
In its latest quarterly report, the company said its NextEra Energy Resources subsidiary has a renewables project backlog of more than 15,000 megawatts (MW), which is larger than its existing renewables portfolio. That backlog secures growth in the segment that constructs and operates wind and solar power generating facilities. It also includes the world's largest stand-alone battery storage project.
But NextEra comes with some market protection, too. It 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 northwestern Florida. This makes it the world's largest utility company in addition to being the world's largest generator of wind and solar power.
That's a nice combination for an investor who wants to participate in renewable energy growth, but is fearful of a turbulent market year in 2021. The Energy Resources segment differentiates it from other utilities, and helps support NextEra's estimate of 6% to 8% earnings-per-share growth through 2023. And the reliability of a utility allows the company to expect about 10% annual dividend per share growth through 2022.
Shares don't provide income seekers the level of dividend typical of a regulated utility. But with a dividend yield approaching 2%, and the growing energy resources subsidiary, NextEra Energy is my top pick in renewable energy for investors who want the growth of renewables, but may need some stability from a volatile stock market in 2021.
A key cog in the future of wind power and EVs
Jason Hall (TPI Composites): Investors tend to focus on the most recognizable brands when they invest, and for good reason, since brand power is a sign of competitive strength. But if you just focus on brands, you will miss out on equally great investments powering the best growth industries.
That's certainly the case for TPI Composites. Chances are if you've seen a wind farm, you've seen a TPI wind turbine blade in operation, even if you've never heard of the company, since it supplies blades to the companies that provide the vast majority of the world's onshore wind turbines. TPI's geographical diversity is a competitive advantage since it is able to supply turbine makers with blades in markets where they don't have a significant presence, and that are too far from their own manufacturing to make it cost-effective to ship blades.
And business is very good. TPI management says the company should generate $1.65 billion in revenue in 2020, 15% growth from 2019. And sales growth has accelerated, with revenue up 24% in the third quarter. This trend is likely to continue, as wind turbine manufacturers increasingly look to outsource more logistically challenging components to suppliers like TPI.
And there's even more reason to like TPI. The company's strength in composites manufacturing and design makes it an excellent partner for electric vehicle manufacturers as those companies look to build lighter, stronger bodies, and need a supplier that can quickly scale up to meet demand.
As these two trends continue to accelerate, TPI is positioned to be a big winner in 2021 and for many years to come.
Renewable energy has momentum on its side
With low interest rates, a new presidential administration, and costs that are now lower than fossil fuels in most electricity markets, renewable energy is set up for a strong year in 2021. These three stocks could lead the way.