We're halfway through the 2010's and renewable energy is no longer an uneconomical pipe dream conjured up by wishful thinkers. Wind energy, solar energy, and first-generation biofuels for blendstock applications are all competitive with incumbents in their respective markets -- and the economics will only improve throughout the remainder of the decade. It may take another several decades for each technology group to steal a substantial market share, but advances in wind turbines, rooftop solar, and efficient fuel production processes promise to add competition to fossil fuel projects. We've asked some of our top energy analysts which renewable energy stocks they're eying for 2015. Here's what they're focusing on.
Maxx Chatsko: Another year is almost in the books and Renewable Energy Group (NASDAQ:REGI) continues to be disrespected by the market. Perhaps it has to do with its name, the general stigma surrounding biofuels, or a misunderstanding of how no active subsidies for biodiesel production in 2014 affects the company's business. Whatever the source, the market will be forced to fairly value the company eventually -- and patient investors will be rewarded.
The nation's largest biodiesel producer ended the third quarter with $128.6 million in cash (more than it started with), over $1 billion in total assets, and a fair book value just north of $16 per share (compared to current share prices under $10). Renewable Energy Group is profitable even in this challenging market and has diversified into next-generation renewable diesel production, energy services for distributing ultralow sulfur heating oils, and developing an industrial biotech platform that could enable it to tap into various high value renewable chemical markets. What, exactly, does Wall Street want to see?
With or without respect, investors can expect the momentum to continue in 2015 with production expansion, manufacturing flexibility, and exciting announcements relating to the development stage industrial biotech platform. While the EPA has dragged its feet on deciding whether or not to reinstate the Blender's Tax Credit for 2014, the agency could reinstate it retroactively next year (as it has in the past), which would allow Renewable Energy Group to collect tens of millions of dollars in profits that were deferred this year. Simply put, I believe this is one of the easiest investments on the market.
Matt DiLallo: When we think about renewable energy solar and wind are typically the first sources that come to mind. However, one of the best sources of renewable energy is hydroelectric, because unlike wind and solar its power isn't intermittent. That consistent flow of power also yields pretty steady cash flow making it a much safer investment. That said, there are few pure-play hydro options out there for investors, but the one option we do have, Brookfield Renewable Energy Partners (NYSE:BEP), is really the only one we need.
Brookfield is one of the largest renewable power businesses in the world as it owns 223 power generating facilities spread across five different countries. Currently, 85% of its generating capacity is hydro with nearly all of the rest of its power being generated by wind farms. These assets are backed by long-term contracts that generate copious amounts of free cash flow, which Brookfield sends back to investors via its very generous quarterly distribution. Currently, the company yields just under 5%, with plans to grow the payout by 5%-9% per year.
Brookfield, through its parent Brookfield Asset Management, has more than a century of experience in power generation. That experience, combined with the low-risk aspect of owning hydro stations, really makes Brookfield Renewable a less risky option for investors seeking to add some green energy to their portfolio.
Travis Hoium: Coming into 2015 the renewable energy industry is all about risk and reward. Big names like Tesla Motors, SolarCity, and SunEdison exhibit high potential but the market is pricing these stocks as if they'll perform flawlessly, meaning high risk/reward for investors. We've seen this before and usually high expectations are hard to meet in renewable energy because the industry changes so quickly.
One company who has high potential and much lower risk than many stocks is SunPower (NASDAQ:SPWR). The company makes the world's most efficient solar panel, builds solar projects, and has been holding projects on its balance sheet.
What separates SunPower from competitors is not only their differentiated module, it's that they deliver net income to shareholders. Many renewable energy companies promise future income but are losing money on the income statement today. But SunPower is making money and at the same time has 640 MW of projects under contract that will likely be turned into a publicly traded YieldCo in early 2015. This could lead to tremendous value to shareholders on top of already reported income.
SunPower is also an international company -- greatly reducing risk for investors. Subsidies and policies relating to solar change rapidly around the world and if a market like the U.S. suffers in 2017 when the investment tax credit expires SunPower can move product elsewhere, something a company like SolarCity can't do.
With SunPower, investors are getting a profitable company trading at 17 times the top end of 2015 earnings guidance. Plus, management has built value on the balance sheet that could be monetized in 2015 with asset sales or a YieldCo. Finally, SunPower is tripling manufacturing capacity over the next five years, which will drive growth. Add it all up and I think investors are getting a good value in a stable, growing renewable energy company.
Matt DiLallo owns shares of Brookfield Asset Management. Maxx Chatsko owns shares of Renewable Energy Group. Travis Hoium owns shares of SunPower. Travis Hoium has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.