With President Joe Biden now inaugurated, focus is likely to be on sectors that are on his priority list. And without doubt, the clean energy or alternative energy sector tops the list. Planned investment of $2 trillion is the first step towards achieving a net-zero emissions economy by FY2050.
It’s worth noting that alternative energy stocks have surged in the last few quarters. And as investments flow in the sector in the coming years, I expect the positive trend to sustain. However, given the broad market valuations, I would look at considering fresh exposure to these stocks on corrections.
This column will discuss seven alternative energy names that are expected to get a Biden boost. And over the next three to five years, these stocks will be value creators.
- Plug Power (NASDAQ:PLUG)
- First Solar (NASDAQ:FSLR)
- Enphase Energy (NASDAQ:ENPH)
- Albemarle Corporation (NYSE:ALB)
- TPI Composites (NASDAQ:TPIC)
- Renewable Energy Group (NASDAQ:REGI)
- Sunrun (NASDAQ:RUN)
Now, let’s dive in and take a closer look at each one.
Alternative Energy Stocks: Plug Power (PLUG)
The rally in PLUG stock has been nothing short of amazing. In the last six months, the stock has skyrocketed by 585%. Joe Biden’s victory coupled with positive business developments have triggered the rally. But even for PLUG stock, I would wait for a correction. The best part of the company’s growth is still to come, and the stock would be attractive after a 15% to 20% correction.
Recently, Plug Power has delivered a flurry of positive news. The company has formed a strategic partnership with South Korean SK Group. The latter will be investing $1.5 billion in Plug Power. This partnership will explore growth opportunities in Asia.
The company has also signed a Memorandum of Understanding with Groupe Renault. The joint venture is targeting 30% market share of “the fuel cell-powered light commercial vehicle (LCV) market in Europe.”
As of November 2020, the company reported $1.7 billion in cash balance. The cash will be utilized to build five regional green hydrogen facilities in the United States. The big plans and partnerships justify the stock surge. However, the stock has gone parabolic and it makes sense to wait for some correction before fresh exposure.
First Solar (FSLR)
In the last six months, FSLR stock has trended higher by 66%. Accumulation on corrections is a good idea for a stock that currently trades at a forward price-earnings (P/E) ratio of 25.9. According to analyst estimates, the company’s annual earnings growth over the next five years is likely at 17.4%. And with that, FSLR stock is likely to be a value creator.
Looking at the company’s third-quarter results for 2020, I see several positives. First Solar reported over 100% capacity utilization for its Ohio and international factories for the quarter. This is an indication of the impending demand. Furthermore, the company has 6.7GW contracted deliveries for the current year. In addition, contracted deliveries are at 3.6GW across the next two years. And as order inflow remains robust, I expect strong earnings to sustain.
Specific to the United States, it’s expected that the market will install 113GW of capacity between last year and FY2025. That said, I expect order bookings to remain the strongest in North America. Therefore, the company has a multi-year industry tailwind coupled with strong fundamentals for growth. The company’s Series 6 modules can boost the EBITDA margin and cash flows in the next few years.
Overall, FSLR stock is likely to see some correction after the big rally. And the stock is a buy on dips, as focus on alternative energy will ensure sustained growth.
Alternative Energy Stocks: Enphase Energy (ENPH)
ENPH stock has been another value creator with an upside of 237% in the last six months. On correction, EHPH stock is another name among solar energy stocks that’s worth considering.
In its October 2020 report, the International Energy Agency opined that “solar is the “new king of electricity.” In the coming decade, the adoption of solar energy will accelerate globally and Enphase Energy is well-positioned to benefit.
It’s important to note that for Q3 2020, the company reported only 21.6% of revenue from international markets. The novel coronavirus pandemic has impacted growth in the United States as well. However, in the coming quarters, revenue is likely to trend higher in the U.S. Biden’s clean energy plan will benefit the company as tax incentives remain. Also, an increase in solar storage capacity will continue to trigger growth.
At the same time, I expect international revenues to grow in the long-term. Recently, the company launched Enphase Installer in Australia. Solargain, one of Australia’s largest solar energy providers has also selected Enphase microinverters. I expect Enphase to further expand its global reach, which will translate into sustained growth.
Overall, ENPH stock looks expensive at current levels, but the company is likely to grow at a strong pace with cash flow acceleration. I personally believe that $150 to $170 would be a good accumulation zone.
Albemarle Corporation (ALB)
Like all alternative energy stocks, ALB stock has also surged in the recent past. And I do expect some correction before the stock is worth considering.
I am bullish on ALB stock with the demand for lithium expected to remain robust in the coming years. Evercore ISI analyst Stephen Richardson opines that the “indisputable truth of the lithium market is that demand will treble (from 2019 baseline) sometime around 2025.” The reason is sustained growth in the electric vehicle market that triggers demand for lithium batteries.
Passenger EV sales are expected to increase from 1.7 million units last year to 8.5 million units by FY2025. With Biden’s focus on clean energy, EV sales are likely to be strong in the United States even as China and Europe maintain leadership position.
For Albemarle Corporation, 37% of the revenue is derived from the sale of lithium. In the last 12-months, the segment has delivered $1.2 billion in sales and a healthy adjusted EBITDA margin of 34%. I believe that lithium prices will trends higher with demand and EBITDA margin will expand in the next few years.
Therefore, with access to three of the largest, highest grade resources in the world, Albemarle Corporation is an attractive play in the alternative energy sector. Over the next few years, ALB stock will continue to trend higher with dividend growth.
Alternative Energy Stocks: TPI Composites (TPIC)
TPIC stock is another interesting name to consider in the alternative energy sector. TPI Composites has been focused on the wind energy sector and provides composite wind blades.
For Q3 2020, the company reported 23.5% increase in sales. I believe that strong top-line growth is likely to sustain for the company. A key reason for this view is that the company has long-term supply agreements. The company’s current contracts provide $5.1 billion in revenue visibility through FY2024. TPI Composites has also been generating free cash flows and that strengthens the balance sheet.
Specific to the United States, the country had just 42 MW of offshore wind capacity installed in FY2020. The American Wind Energy Association believes that “the U.S. also has a vast offshore wind energy resource with a technical potential of more than 2,000 GWs, or nearly double the nation’s current electricity use.”
Given this potential, and the fact the Biden is focused on clean energy, I expect the order inflow for the company to remain robust. As a matter of fact, wind electricity generation as a percentage of total electricity generation in the U.S. has been increasing. TPIC stock is therefore attractive even after a surge of 135% in the last six months.
Renewable Energy Group (REGI)
REGI stock has gone ballistic, with an upside of 256% in the last six months. And as a producer of biofuel, I remain bullish on the company as the demand for alternative energy grows.
For Q3 2020, the company reported healthy numbers with $576 million in revenue and $58 million in EBITDA. The sale of blends of biodiesel and renewable diesel increased by 70% for the quarter on a year-over-year (YOY) basis. Amidst the positives, the company’s EBITDA margin has contracted with rising vegetable oil prices. However, the company’s downstream integration is likely to result in margin expansion in the coming years.
I believe that an important stock upside trigger is capacity expansion. The company expects to add a capacity of 250 million gallons per year at a project cost of $825 million. The capacity expansion will be completed towards the end of FY2023. This will trigger strong top-line and EBITDA growth.
Even after the recent upside, REGI stock trades at a forward P/E ratio of 16.9. Fresh exposure can be considered at current levels with a long-term investment horizon.
Alternative Energy Stocks: Sunrun (RUN)
Sunrun is a leading home solar energy provider in the United States. RUN stock has been surging higher, and I believe that near-term valuations might be stretched for most alternative energy stocks. However, there is no second through in my mind that RUN stock is a buy on any deep correction.
As of Q3 2020, the company reported 326,000 customers, which was higher by 20% on a YOY basis. However, with the acquisition of Vivint Solar, the combined customer base of over 500,000. As the adoption of home solar energy increase, customer base growth is likely to remain robust. This will translate into top-line and EBITDA growth.
In the near-term, the company’s cash burn is likely to sustain. Loss from operations has increased for year-to-date (YTD) FY2020 as compared to the prior year period. This is another potential reason to remain cautious on the stock for the foreseeable future. In particular, after a sharp rally.
Overall, RUN stock is worth keeping in the radar. In the next few years, I expect strong customer growth. A key stock upside trigger will be profitability at operating levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and “commodities sector.
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