Best Bets for Alternative Energy

12/22/2020 5:00 am EST


Clif Droke

Weekly Contributer, Cabot Top Ten Trader

A Chinese proverb informs us that with crisis comes opportunity. That has certainly been true for the alternative energy sector in 2020, and it looks like the party is just getting started for companies in this space, asserts Clif Droke, contributing editor to Cabot Wealth Network.

Here we’ll look at four stocks and ETFs in the solar power and hydrogen cell industries that have attractive capital appreciation potential in the coming months and years.

Solar power generation has averaged 49% of new power generation in the last decade, and the International Energy Agency believes the solar industry will see at least 15% growth for the next 10 years, which is good news for U.S. solar panel producers and alternative energy stocks.

And after the flagging sales of recent years, solar panels are back in vogue as COVID-related restrictions have meant more people staying home and using more electricity — and therefore trying to save on their monthly light bills.

Shutdowns have indeed been good for the solar industry this year. The industry’s benchmark exchange-traded fund, the Invesco Solar ETF (TAN), is up over 300% from its March low in reflection of the improving fortunes for publicly-traded solar companies.

Indeed, solar stocks have been among the market’s recent relative strength leaders, thanks to an improved sales and profit outlook for solar providers in the face of increasing COVID restrictions in several states.

If ETFs are your bag, TAN is arguably the best option for participating in the alternative energy bull market. The ETF is based on the MAC Global Solar Energy Index and invests at least 90% of its total assets in the solar energy stocks, ADRs, and global depositary receipts that comprise the index.

TAN can be volatile at times, so be prepared for a bumpy ride on occasion. But the longer-term path of least resistance for this ETF is up.

SunPower (SPWR) makes high-efficiency solar panels for U.S., Europe, and Asia markets. The firm boasted record bookings, along with expanding gross margins, in a third quarter which saw the addition of 10,000 customers. A confident management subsequently raised earnings guidance for Q4.

SunPower further reported seeing increased customer demand for its recently launched SunVault and Helix storage solutions, as consumers increasingly turn to solar power to cut their energy bills (its current backlog is 50,000 homes!).

All told, it’s a solid story and the stock can be considered as an attractive portfolio candidate for growth-oriented investors looking for alternative energy exposure.

One of the key demand drivers in the white-hot solar energy industry is microinverters, which convert the DC current from solar panels into AC current that can be used in an electrical grid.

Enphase Energy (ENPH), the world’s top supplier of microinverters, is leading the charge toward more efficient solar energy production, and its microinverters are in very high demand. As proof that business is good for Enphase, the firm was able to increase its revenue by 42% sequentially in Q3.

Strong, consistent cash flow generation during even difficult economic periods has also been a consistent feature of the firm (it exited Q3 with $662 million in cash). As well, Enphase plans to accelerate the introduction of new products over the next 18 months, which should provide a further boost.

But a big reason why Enphase’s growth story still has plenty of upside is its just-launched Encharge battery system. The new system will allow homeowners to generate, store, and control energy in a single system for the first time ever. It looks to be a revenue leader for Enphase, as well as justifying a higher share price in the years to come.

And it not just solar power that’s in high demand right now, but also hydrogen fuel cells, which are benefiting from the expanding trend toward electric cars.

It has been predicted that by next year, most of the leading automakers will have started electric fuel cell vehicles worldwide (Toyota, Honda, Hyundai, Daimler and BMW have already developed vehicles with hydrogen fuel cell technology).

China, meanwhile, has announced a long-range goal of building out its fuel-cell supply chain and developing more hydrogen-powered trucks and buses by 2035.

Plug Power (PLUG) makes hydrogen fuel cell systems that replace conventional batteries in equipment and vehicles powered by electricity. The firm achieved a 106% increase in gross billings in Q3, a quarter which the company described as “a strong validation of our business model in years to come.”

Demand for Plug shares among investors can be seen in the fact that the company’s recent $1 billion capital raise (its largest ever) was upsized by nearly $100 million. The company’s sizable cash holdings should be sufficient to allow management to reach their aggressive longer-term financial goals for the company.

Although its top line is expected to keep growing by double digits, Plug Power isn’t yet profitable and should thus be considered more of a momentum play.

But the seemingly insatiable demand for shares of this fuel cell company, combined with its relentless revenue-generating ability and broader alternative energy trends, should keep the stock price uptrend intact in the months ahead.

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