The stock market has cooled off considerably this year. The S&P 500 is down double digits while many stocks have fallen even further.
Despite that sell-off, some high-quality stocks still seem relatively expensive. Because of that, they're not screaming bargains yet. They could be if their share prices keep falling, though. Three stocks that would be much better buys if their sell-offs deepen are NextEra Energy (NEE 2.45%), Nucor (NUE -6.52%), and Brookfield Renewable Partners (BEP 2.18%) (BEPC 1.83%). Here's why our contributors think you should consider jumping aboard if they fall more.
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This pricey clean energy juggernaut is starting to get more attractive
Matt DiLallo (NextEra Energy): Shares of leading clean energy producer NextEra Energy cooled off this year, falling more than 15%. That has the utility trading at a lower valuation of about 27.5 times its forward price-to-earnings ratio, down from a peak of more than 36 times to start the year. However, it's still pretty pricey since most other large utilities fetch slightly more than 20 times their forward P/E.
NextEra Energy deserves to trade at a premium valuation. The company has grown its adjusted earnings per share at an 8.4% compound annual rate since 2006, an above-average rate for a utility. It has also delivered 9.8% compound annual dividend growth during that time frame. Those dual growth drivers have helped power market-crushing total returns over the past several years.
Meanwhile, NextEra expects to continue generating above-average growth rates in the coming years, powered by its investments in clean energy. It anticipates expanding its earnings at or near the upper end of its 6% to 8% annual target range through 2025. Further, it sees around 10% annual dividend growth through at least 2024. That should give it the power to produce attractive returns.
However, NextEra could produce even higher total returns if investors buy shares at a cheaper price. A lower stock price would enable them to lock in a higher dividend yield -- it's currently up to 2.2% following its recent slide -- further enhancing their total return potential. That's why investors might want to wait and see if they can grab shares of this high-quality clean energy-focused utility at a much more attractive value proposition.
The best is still expensive, but that could change
Reuben Gregg Brewer (Nucor): Sometimes it pays to watch and wait for the best companies to go on sale. In the steel industry, that means Nucor. The stock is down about 20% from its April highs, but it is still kind of expensive, noting that its 1.45% dividend yield is kind of low, historically speaking.
The thing about steel is that it is a highly cyclical industry prone to dramatic ups and downs. So a recession would likely send the stock into a deep tailspin, much worse than the decline seen so far. For long-term investors, however, that will be an opportunity to jump aboard. Why? The list of reasons is a long one, but some key points include:
- More than four decades of annual dividend increases (the company is a Dividend Aristocrat that is very close to achieving Dividend King status) despite the steel industry's economic sensitivity.
- Its use of electric arc mini-mills, which are more flexible than other steelmaking methods, has resulted in more consistent financial performance over time.
- An incredible relationship with its employees thanks to profit-sharing-based pay, which rewards workers during good times in exchange for giving Nucor a break on salary expenses during hard times.
- It is the largest and most diversified North American steel producer with leading share in key markets.
- And the company has a penchant for investing through the cycle to ensure it achieves higher highs and higher lows as it grows its business.
There are more growth-oriented steel options out there, like Steel Dynamics, but for conservative types it is hard to beat Nucor ... at the right, lower, price.
There's no denying the growth potential here
Neha Chamaria (Brookfield Renewable Partners): If you love passive income, you'd love Brookfield Renewable Partners stock. The renewable energy giant has, after all, grown dividends consistently over the past decade or so and intends to increase dividends annually by 5% to 9% in the long term. Shares of Brookfield Renewable Partners have also dropped almost 12% since the beginning of April, but their dividend yield of 3.6% is still considerably below what the stock offered until about a couple of years ago. So you might just want to wait a bit more if you desire a higher yield.
That's not to say Brookfield Renewable's yield isn't supported by dividend growth. Not at all. In fact, the company is growing its funds from operations (FFO) steadily, which is imperative for it to pay out higher dividends. In its first quarter, Brookfield Renewable's normalized FFO grew 18% year over year.
Earlier this year, though, Brookfield increased its dividend by only 5%. With the company expanding its wind and solar energy capacity aggressively only now in a bid to diversify from hydropower, it could take some time for it to unlock value from those projects and increase dividends at a faster pace. While that should drive its yield higher, you might just have to wait a bit to see it. Or the stock price dropping any further should offer you a better yield even now while you watch the company grow.
Brookfield Renewable has a strong development pipeline -- its pipeline, in fact, is almost thrice as big as its existing operational capacity. The company is also open to acquisitions in the near term as it plans to deploy at least $1 billion of capital each year on growth, both organic and inorganic.
All of this makes Brookfield Renewable a compelling renewable energy stock to own, and you might want to jump aboard if the stock falls any further in the near term.
