The energy industry is still going through a variety of transformational changes as renewable energy and electric vehicles take market share from legacy commodities like coal and oil. And that's made energy a particularly volatile sector for investors over the last decade.
As we look toward the next decade, I think investors should look to have the macro tailwinds at their backs and pick leaders in renewable energy as wind, solar, and EVs take market share. That's why First Solar (FSLR 1.37%), Hannon Armstrong Sustainable Infrastructure Capital (HASI -1.57%), and Xcel Energy (XEL 0.49%) are my top energy stocks today.
Image source: Getty Images.
Growing in solar energy
One of the surprising winners in the energy industry over the last year has been First Solar. The company has not only benefited from higher demand for solar panels and rising costs for competitors' raw materials, it's also benefiting from import restrictions that will make its domestic manufacturing more valuable.
On top of its strong strategic position, First Solar had $2.1 billion in cash to end the second quarter of 2021. Management projects it will have a net cash balance of $1.35 billion to $1.45 billion at year end after a $1.4 billion investment in new capacity that will come online in 2023.
First Solar's financial power can be seen below. The slump in net income starting in 2017 was due to upgrading manufacturing capacity, but you can see that earnings have come back quickly, and the company is now expanding again.
FSLR Net Income (TTM) data by YCharts
As the solar industry expands, First Solar has shown that it can grow profitably, which most companies in the industry can't say. That's why it's a top renewable energy stock today.
A renewable energy dividend play
One of the biggest challenges in growing renewable energy and energy efficiency assets is finding financing. Whether it's a rooftop solar project or a wind farm, financing is key to any project getting done. And Hannon Armstrong is one of the most versatile financiers in energy today.
Hannon Armstrong will invest in anything from rooftop solar to the land under a wind farm to energy efficiency projects in government buildings. The company aims to generate the best return for what it views as the lowest risk. And right now the payoff for investors is a 2.3% dividend yield.
What I like about this company long-term is that it's more flexible than most renewable energy finance companies. It'll invest in new asset classes and find interesting financing structures. And with the amount of growth in renewable energy around the world, the company has a long growth runway ahead.
A utility that's built to last
Utilities have been in a difficult strategic position over the last decade as new energy sources like wind and solar have replaced coal, nuclear, and even some natural gas plants. And rooftop solar and electric vehicles have created a new dynamic where consumers can produce their own energy and consume it without the grid.
In Xcel's territories in the midwest and mountains, however, customers have been slower to adopt energy sources like rooftop solar, and the company has begun building production and transmission options that allow customers to buy clean energy without losing control of the assets. As an Xcel customer myself, I buy 100% wind energy for my home at prices that are barely higher than the standard electricity rate.
That's allowed Xcel Energy to grow earnings and dividends over the last decade, even as some utility stocks have struggled. Today, the stock yields 2.7%
XEL EPS Diluted (TTM) data by YCharts
The region a utility operates in is important -- and particularly in Minnesota, Wisconsin, Upper Michigan, Colorado, and the Dakotas, which account for over 80% of Xcel's earnings, Xcel isn't likely to see disruption from solar or energy storage very soon. And it could see demand grow as more electric vehicles hit the market, making the trends in the auto industry a tailwind. That stability and potential growth are great selling points for investors, and explain why I think this is one of the best energy stocks today.
Investing in energy today
Each of these companies is working to exploit the growth in renewable energy rather than fighting it. That's why I think they're well-positioned for future growth and should be able to beat the market long-term.
