How bad has it been for renewable investors this year? Very. The Invesco Solar ETF (TAN 2.46%), which tracks the MAC Global Solar Energy Index, has lost almost half its value from its 2023 peak. Given the big drop, should investors avoid renewables right now? After all, the industry is going through a pretty painful downturn.
Three Fool.com contributors think the answer is "no." Instead of avoiding renewables, they see lots of opportunities to profit. Eventually, the cycle will return to growth, and possibly even higher highs.
Here are these contributors takes on renewable energy stocks Clearway Energy (CWEN 0.26%) (CWEN.A 0.28%), Enersys (ENS 0.32%), and Canadian Solar (CSIQ 4.48%). While the near term is hard to predict, the best times to invest in renewables in the past have always been during downturns like now.
A fully powered growth plan
Matt DiLallo (Clearway Energy): Clearway Energy's price fell along with most renewable energy stocks this year. It lost more than a third of its value in 2023, weighed down by concerns about rising interest rates and potentially lower profit margins in the space. Surging rates made it harder for companies to secure the capital needed to build and/or buy renewable energy assets. That's affecting their growth.
However, access to capital isn't an issue for Clearway Energy. The company sold its thermal assets last year, giving it a nearly $1.4 billion cash windfall to allocate to higher-return investment opportunities. It has already committed to invest all that capital to acquire several wind and solar energy projects currently under development.
These investment opportunities give the company a clear line of sight into its future cash flows. It expects its cash available for distribution will rise to $2.15 per share over the next few years as it closes its current slate of investments through 2025. This visible cash flow growth supports the company's outlook that it can increase its dividend in the upper end of its 5% to 8% annual target range through 2026.
That would make its payout even more attractive. The dip in the company's share price has pushed its dividend yield up to 7%. With its growth locked in, Clearway could produce high-powered total returns, especially as its share price starts recovering from its recent downdraft.
Don't overlook this established energy storage company
Tyler Crowe (EnerSys): Here's one truth: Energy storage will be a major component of a renewable future. Based on this truth, lots of investors have been looking for the "new" companies that are going to dominate this emerging industry. What some investors may be overlooking, though, are some of the established players and their ability to deliver new products to markets in which they already participate.
A case in point is EnerSys.
EnerSys has been in the energy storage business for decades -- just not in the way it's thought about lately. Most of its clients were looking for emergency backup power, remote energy storage, and shorter-term uninterrupted power supplies. Think cellphone towers, hospitals, and data centers. EnerSys has also offered some battery-powered mobility options for forklifts and similarly sized vehicles.
As recently as 2017, about 73% of its sales were for flooded lead-acid batteries (similar to the ones in your car), but since then it has shifted its business toward lithium-ion and other higher power-density and lower-maintenance products. As of the most recent 12 months, 56% of its sales are not lead-acid-based systems.
Renewable energy -- and the intermittent nature of wind and solar -- is opening up all kinds of opportunities in the energy storage industry. EnerSys has been a major supplier to this industry for more than two decades and knows how to design and build these products to meet various customer demands. Sure, some of the new players will likely have some success, but I believe so too will EnerSys.
As of this writing, EnerSys' stock trades for 10.3 times free cash flow and a price-to-earnings ratio of 17. There aren't a lot of companies in the renewable industry that have established profitability and a cheap valuation like EnerSys does.
Deep value and growth for patient investors
Jason Hall (Canadian Solar): The cyclical downturn in the solar industry affects essentially every company to some degree. Canadian Solar, which is both a manufacturer and project developer, is no exception. The coming quarters are likely to be challenging for at least one part of its business, if not both. That's why its shares are down by half over the past year, even after reporting one of its best quarters in history in the second quarter.
But despite likely headwinds (cloudy skies?) coming soon, investors should look further out to the other side of the cycle. This is because Canadian Solar is built for the long term, despite being priced for the junk heap.
At recent prices, shares trade for around 4 times both trailing and forward earnings and a mind-numbingly cheap 58% of book value. Considering Canadian Solar generated over $900 million in operating cash over the past year and has a cool $2 billion in the bank, it's built to survive a downturn and thrive on the other side.
Sure, higher interest rates will put pressure on pricing and demand while its customers adjust to the new capital environment. And that same thing will cost Canadian Solar more money to manage its own balance sheet. But at this valuation level, and with plenty of cash to fund its business and hit the ground running on the other side of the cycle, buying Canadian Solar at these levels will likely prove a wonderful decision.
