After an incredible run over the past six months, clean energy stocks look like they could be reaching bubble territory. Price-to-earnings ratios are stretched, dividend yields are dropping, and the industry may not grow as much as investors are expecting over the next decade.
But even a market crash can leave opportunities for investors. Among all of the great clean energy stocks out there, our Foolish contributors think Hannon Armstrong (NYSE:HASI), NextEra Energy (NYSE:NEE), and Clearway Energy (NYSE:CWEN) are best positioned if a crash is ahead.
Financing the future of clean energy
Travis Hoium (Hannon Armstrong): Most clean energy companies are focused on one niche like solar manufacturing or wind power plant development, making it difficult to pivot if the market changes rapidly. That's what makes Hannon Armstrong's finance business so attractive. The company can invest where its money will go the furthest, no matter the market conditions.
Management breaks its business down into three segments: behind-the-meter, grid-connected, and sustainable infrastructure. Within each, there are different asset classes like solar, energy storage, wind, and others. Even within those segments the company has the option to invest in different types of assets. In solar energy, for example, the company owns some rooftop solar projects that generate revenue from customers for the electricity they produce and owns some land that solar power plants are built on, generating revenue from leases.
Hannon Armstrong uses the yield it generates from its investments to pay a dividend, which currently yields 2.1% for investors. And the cash flows behind that dividend have a weighted average life of 16 years remaining on revenue generating contracts.
Given Hannon Armstrong's ability to invest where the best yield and lowest rise is, I think a market crash could actually be an opportunity for this clean energy stock.
Backup power when you need it
Howard Smith (NextEra Energy): Readying your portfolio for a market crash can come in several forms. Some people make the mistake of trying to time it, pulling money out with a plan to buy back in after a drop.
That sounds great in theory, but it requires an investor to be right twice: once when they get out, and, importantly, again when they get back in. That strategy can result in missing out on further upside, and then being paralyzed with what to do next. Instead, investors should consider owning NextEra Energy. The utility offers participation in the renewable energy movement with protection from a market downturn.
NextEra Energy 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 Florida. Its other subsidiary is NextEra Energy Resources. This segment, along with its affiliates, is the world's largest generator of wind and solar power.
NextEra Energy Resources currently has a backlog of renewable projects that's larger than its existing portfolio. That growth gives NextEra Energy confidence to predict between 6% and 8% annual earnings growth through 2023, off of an even higher 2021 base than it had previously estimated. In its third-quarter earnings presentation, the company added it will be "disappointed" if results through 2023 aren't "at or near the top end" of expectations.
The stability that comes with operating a regulated utility means investors can count on the stock to provide income through any market cycles. NextEra also said in its third-quarter earnings report that it continues to expect about 10% annual dividend-per-share growth through next year.
While NextEra Energy may not see outsized returns compared to riskier names in the sector, it comes with downside protection. And shares have increased more than 33% over the past year, showing the growth component gives investors some of the best of both worlds.
Recession-proof, huge tailwinds for growth
Jason Hall (Clearway Energy): One of the challenges with market crashes is that even great companies can see their stocks get pummeled, if even only briefly. The key to avoiding financial harm as an investor is to own businesses that are resilient, and will eventually prove out as both safe and undervalued.
That's certainly the case for Clearway Energy. While its stock price did fall sharply back in March when the market crashed, it also fell much less than the broader market, recovered more quickly, and has continued to surge higher ever since:
That's because investors have seen the compelling reasons to own this business. Clearway is a renewable energy yieldco, meaning it operates utility-scaled wind and solar (and a small amount of high-efficiency natural gas) power plants, selling the electricity on long-term contracts to utility companies. As a result, Clearway's business is recession-proof and also has wonderful growth prospects. Demand for clean energy is on track to explode over the next decade, and Clearway is set to be a huge winner.
And it's not just the renewables trend that makes Clearway a compelling investment: This is an incredible dividend growth stock, and pays a dividend yield of more than 3% at recent prices. That means it's an investment that both income investors and growth investors can love. If you're worried about the next market crash, Clearway Energy belongs in your portfolio.
Prepare yourself for a market crash
We know that a market crash is coming, we just don't know when. Keeping some defensive stocks in your portfolio that can take advantage of a weakened market is wise, and these three stocks are all prepared for the uncertainty ahead.