The market sell-off is intensifying. Although no one likes to see their portfolio go down, having an even-keeled temperament when stock prices fall will pay the highest dividends over the long term.
After a meteoric rise in 2020, even the best solar and wind stocks looked fairly expensive. However, many of those stocks have lost 10%, 20%, or even 30% of their value in just a few weeks, providing a lower entry point. Here's why Equinor (NYSE:EQNR), TPI Composites (NASDAQ:TPIC), and NextEra Energy (NYSE:NEE) are great choices if you're looking to invest in a cleaner planet.
With 2020 production of over 2 million barrels of oil equivalent per day (boe/d), Equinor may not conjure up ideas for a cleaner planet. Yet this oil major has its sights set on becoming the world's leading offshore wind energy operator.
After 50 years of drilling the North Sea, many of Equinor's easily recoverable reserves have been depleted. In response to this challenge, Equinor is cutting spending and increasing operating efficiencies to profit as much as it can from what it has left. Instead of investing in other oil and gas assets, it's choosing to spend a large part of its growth capital expenditures on renewable energy — mainly offshore wind.
The NCS is uniquely shallow, making it well suited for offshore wind projects. As for Equinor's oil and gas business, the company has done an excellent job reducing emissions. It estimates that 2020 CO2 intensity per barrel of oil was just eight kg, down from 9.5 kg in 2019 and less than half of the global average.
In terms of performance, Equinor estimates that its cost and spending reductions give its portfolio an average free cash flow (FCF) breakeven at just $30 per barrel Brent, one of the lowest in the industry. Equinor had one of its worst years on record in 2020, but higher oil prices could give the company the momentum it needs to hit its renewable energy transition in full stride.
2. TPI Composites
After a nearly 200% increase in 2020, shares of independent wind blade manufacturer TPI Composites have come under fire lately. Wall Street loved the company's 2020 results, namely its record revenues. However, the company is guiding for a mere 7.8% increase in revenue this year, indicating that the wind energy industry is growing increasingly competitive.
Despite these short-term headwinds, TPI Composites is optimistic about the global growth of wind energy. It beefed up its manufacturing capabilities so that it can land more contracts with major Original Equipment Manufacturers (OEMs). The company has $4.6 billion in potential revenue contracted under long-term supply agreements (LTSA), which is significant considering it's guiding for around $1.8 billion in 2021 sales.
TPI's revenue is slowing, but its profit margins and adjusted EBITDA are growing at an impressive pace because the company is returning to profitability. TPI's international expansion resulted in more spending during the last three years than it did from 2013 to 2017. That expansion came at a cost, as TPI failed to book a profit in 2020 or 2019. However, the company is expecting a small profit of between $13 million and $22 million in 2021.
TPI's slowing growth and small profit prospects may not seem like much. But it's worth noting that the company remains the industry-leading independent wind turbine blade manufacturer. To its credit, TPI showed it could grow revenue during a challenging market environment.
In order to grow from here it needs to land more LTSAs with new OEMs, continue to renew contracts, and prove that its investments were worth it. Given this uncertainty, the market is currently pricing shares of TPI at a discount relative to their potential.
3. NextEra Energy
Equinor is in the early stages of its expansion into renewable energy, and TPI Composites is transitioning from hypergrowth to profitability. Meanwhile, NextEra Energy is the largest U.S.-based utility and the world's most profitable solar and wind company. Like most fossil fuel companies interested in renewables, NextEra had to spend a lot of money to get to where it is today — and it's not even done growing.
The company's clean energy segment, NextEra Energy Resources, is expected to double its renewable capacity over the next four years. If that happens, NextEra's renewable portfolio will become bigger than its fossil fuels.
NextEra Energy is one of the safer ways to invest in a cleaner planet. The company has steadily increased earnings and raised its dividend, and generates the majority of its revenue from regulated and predictable sources. The two biggest downsides of NextEra are its rising payout ratio and its valuation. The company is now distributing over 93% of its net income to shareholders through dividends compared to 70% a year ago and 50% to 60% from 1995 to 2017. Its price-to-earnings (P/E) ratio is close to 50, around double the market average. The reason for the jarring numbers is because NextEra's GAAP earnings have been declining while its dividend is rising. However, this is due to writedowns and other charges that aren't indicative of how the company's operations are performing.
Given the consistency of NextEra's track record, the stock is one of the best entry-level options for new renewable energy investors — albeit at a premium price.
A Versatile Trio
Equinor, TPI Composites, and NextEra Energy illustrate just some of the many ways to invest in renewable energy. Similar to replacing coal plants with wind and solar, oil companies like Equinor that are investing in renewable energy offer one of the most effective ways to reduce carbon emissions.
TPI Composites is a smaller, lesser-known way to invest in wind energy. If successful, it could grow faster than larger conglomerates. Finally, NextEra Energy is one of the largest energy companies by market cap and a solid dividend stock for more conservative investors. Together, these three companies offer a diversified way to invest in a cleaner planet.
Daniel Foelber owns shares of Dominion Energy, Inc, Equinor ASA, and TPI Composites and has the following options: short March 2021 $70 calls on TPI Composites, short April 2021 $17.50 calls on Equinor ASA, short August 2021 $60 puts on TPI Composites, short August 2021 $50 puts on TPI Composites, and short January 2022 $80 calls on Dominion Energy, Inc. The Motley Fool recommends Dominion Energy, Inc, Duke Energy, NextEra Energy, and TPI Composites. The Motley Fool has a disclosure policy.