Wind and solar energy stocks have rewarded investors with some monster returns. Just last year, the First Trust Global Wind Energy exchange-traded fund (ETF) and the Invesco Solar ETF returned 59% and 234%, respectively, well exceeding the market's 16% gain. 

ETFs contain industry-leading companies that are meant to reflect a sector's overall performance. Investing in an ETF has the benefit of diversification, but individual companies can provide even greater upside. Leading solar companies like SolarEdge, Enphase, SunPower, Sunrun, and other solar hidden gems are well known. But what about wind energy stocks? Here's a breakdown of why investing in wind energy can be challenging, what to look for, and how you can find the best wind energy stocks.

Wind turbines offshore

Image source: Getty Images.

Why you should consider investing in wind energy

Onshore and offshore wind energy investments are gaining traction in developed countries around the world. Government subsidies and environmental policy help, but one of the biggest growth drivers has been the reduction in renewable energy costs. According to the U.S. Energy Information Administration (EIA), new onshore wind and solar PV projects are now cost-competitive with fossil fuel-supplied power generation. In fact, both could be cheaper than fossil fuels by 2025. Also surprising is that the International Energy Agency (IEA) estimates that renewables comprised 90% of new capacity installations in 2020, mainly due to growth in Europe, China, and India. U.S. green policies, tax incentive extensions, and public interest in renewables bode well for continued wind energy investment. 

FAN Chart

FAN data by YCharts

The challenges of investing in wind energy

As of 2019, wind energy provides around 7% of U.S. power generation needs, more than four times solar. So why is it so hard to find wind energy stocks? The main problem is that many wind energy businesses are a small part of an otherwise massive industrial conglomerate (like General Electric (NYSE:GE) or Siemens), a part of a multi-faceted utility, or are listed on stock exchanges outside the U.S. Just 12% of the companies in the aforementioned wind energy ETF are traded on the Nasdaq or the NYSE. Of those eight companies, only two could be considered pure-play wind energy investments. They are independent wind turbine blade manufacturer, TPI Composites (NASDAQ:TPIC), and American Superconductor Corporation (NASDAQ:AMSC), which makes electronics, software-based control systems, and provides customer support to wind turbine manufacturers. The reverse is true for the previously mentioned solar ETF, where over 75% of companies are traded on the Nasdaq or the NYSE and well over half are pure-play solar investments. 

Misconceptions about wind energy investing

On the surface, solar energy has been a much better investment than wind. The average stock in the Invesco Solar ETF has outperformed the average stock in the First Trust Global Wind Energy ETF despite big declines in solar in 2016 and 2018. 

ETF 1-Year Gain 3-Year Gain 5-Year Gain
Invesco Solar 236% 335% 380%
First Trust Global Wind Energy  65% 79% 141%

Data source: YCharts

Again, the outperformance of solar stocks has to do with the fact that there are more pure-play solar companies available on U.S. exchanges than wind, not that solar is necessarily a better investment than wind. Wind investment is healthy. For example, GE pivoted away from coal toward wind. For the nine months ended Sep. 30, 2019, GE's onshore wind revenues grew 39% year over year (YoY). The segment then grew 11% YoY for the nine months ended Sep. 30, 2020. Decreased growth was due in part to COVID-19 effects on the sector. With onshore wind revenues of $7.91 billion, renewable revenues of $11.22 billion, and total revenue of $57.69 billion for the nine months ended Sep. 30, 2020, onshore wind still comprises less than 15% of GE's revenue and renewables are less than 20%. Because wind remains a minor part of GE's revenue stream, albeit a major part of its growth, there's a limit to how much it can be considered a wind energy stock despite GE being one of the largest wind turbine manufacturers in the world. 

The best wind energy stocks

In a perfect world, an investor could just buy stock in GE's wind energy business and avoid all the ancillary complications that come with the rest of the company. Since that isn't an option right now, the best solution is to find the rare pure-play wind investments and identify the conglomerates and utilities that are taking wind seriously.

TPI Composites is arguably the best pure-play wind energy investment. The company is a leading independent manufacturer of wind turbine blades and sells them to original equipment manufacturers (OEMs) like GE. In 2019, it accounted for 18% of global onshore wind turbine blade sales on a power generation basis. TPI is trading for a mere 1.4 price-to-sales (P/S) ratio and has several long-term contracts to supply wind turbine blades to all the major OEMs. The company has grown revenue by more than 140% over the past five years.

A wind turbine manufacturing facility.

Image source: Getty Images.

NextEra Energy (NYSE:NEE) is a prime example of a utility that is serious about investing in wind energy. Wind accounts for two-thirds of its renewable capacity, and it's investing billions to grow its renewable output even more. Despite considerably higher spending, the company continues to grow earnings and increase its dividend payment. In this way, wind energy stocks like NextEra offer a safer alternative than a company like TPI Composites because they have a larger, established, and more diversified business and they pay dividends

A contrarian approach for investing in wind energy is through an oil and gas company like Equinor (NYSE:EQNR). Like NextEra Energy, Equinor is investing in wind energy assets to diversify away from fossil fuels. But unlike TPI, GE, or NextEra, it isn't included in wind energy ETFs. Its existing wind energy capacity is low, but its plans are impressive. Shares of Equinor continue to trade at a discount because the company is still mostly an oil and gas company. But management is committed to transforming Equinor into a leader in offshore wind.

Takeaways

Wind energy has a lot of potential, but finding pure-play wind energy investments is harder than finding pure-play solar investments. There is plenty of value in wind energy, often embedded in larger companies that are increasing their wind investments. Although wind energy appears to have underperformed solar, this is mainly the result of many "wind stocks" being larger, slower-growing companies whose wind division is still a small part of their business.

Aside from finding quality pure-play wind stocks, the trick is to differentiate between the large companies that are serious about increasing their exposure to wind and those that are flashing their investments for positive press. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.