This past year was a challenging one for the renewable energy sector. Surging interest rates drove up financing costs, making it more difficult for some industry players to fund their growth. That weighed on valuations across the sector.
However, that growth headwind should fade in 2024 as the Federal Reserve lowers rates. That makes now a great time to grab some high-quality renewable energy stocks. Canadian Solar(NASDAQ: CSIQ), Brookfield Renewable(NYSE: BEPC)(NYSE: BEP), and Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A) stand out to a few Fool.com contributors as the top ones to buy before the new year. Here's what they had to say about these three renewable energy growth stocks.
It's so cheap that you have to ask, "Is something wrong?"
Tyler Crowe (Canadian Solar): For the most part, renewable energy companies rarely trade for cheap valuations. They typically vacillate between a "meh" valuation and "too expensive." That is except for Canadian Solar. As of this writing, the company trades for 0.6 times its tangible book value, meaning that the market values this business for $0.60 on the dollar of its assets, net of its debt.
This either means "this is absurdly cheap" or "there is something fundamentally wrong with this business." I don't see it as the latter case. Historically, the company's results would swing between profitable and unprofitable depending on when its solar development business sold an asset.
Today, its solar panel production business has achieved enough scale that it is significantly larger than its development arm. It has also achieved enough production scale that selling panels has become consistently profitable. As of the most recent quarter, gross margins for solar panels and development were 16.6% and 27.7%, respectively.
Perhaps the greatest concern for the company is its ambitious growth plans. Growing production means new facilities, which means higher capital spending rates and, maybe, more debt. Its current debt position isn't a great concern (about $300 million net of cash and restricted cash), but spending billions on new production could compromise the balance sheet.
That said, I think much of this risk is baked into the stock's cheap valuation. A 0.6x price-to-tangible book ratio means a lot would need to go wrong for this company not to be a decent investment over the next few years.
The supercharged growth should continue
Matt DiLallo (Brookfield Renewable): Brookfield Renewable has grown at an above-average rate over the years. The renewable energy producer has increased its funds from operations (FFO) per share at a more than 10% annual rate over the past decade. That gave the company the power to grow its dividend at a 6% annual rate during that timeframe.
Brookfield's growth drivers are stronger than ever. Increasing demand for renewable energy is pushing up power prices and the need for more capacity. These factors drive its view that it can organically grow its FFO per share by 7% to 12% annually through at least 2028. Meanwhile, the company believes acquisitions could add more than 9% to its FFO per share each year.
The company has closed three deals over the past few months. They'll supply significant incremental FFO in this year's final quarter, which will carry over into 2024. That puts it in a strong position to deliver 10%-plus FFO per share growth in 2023 and 2024. While Brookfield is on the verge of losing another needle-moving acquisition, the company sees no shortage of high-return investment opportunities. Because of that, it's as confident as ever in its ability to achieve its five-year growth targets.
Despite its strong growth, Brookfield Renewable underperformed the market this year. While shares are up around 3%, that pales in comparison to the S&P 500's roughly 23% gain. Meanwhile, shares are down nearly 20% from their high earlier this year.
Higher interest rates were the main factor weighing on the company's share price. They caused investors to worry that Brookfield might not deliver on its growth plans. However, that headwind started to fade after the Federal Reserve recently revealed that it anticipates cutting rates over the next year.
With more growth ahead and a potential hindrance fading, now's the time to scoop up shares of Brookfield Renewable before they soar in 2024.
The "baby" Brookfield Renewable
Jason Hall(Clearway Energy): Taking a page from Matt's book here, I think investors should also look very closely at Clearway Energy. Like Brookfield Renewable, Clearway is a renewable energy producer. It primarily owns wind and solar, selling the power on long-term contracts.
It's a slow-growth business at the asset level, with slightly above gross domestic product (GDP) revenue growth over the length of its contracts. But at the industry level, the growth potential is significant. More utilities are seeking more clean energy, both to meet growing power demand and to replace older, more expensive power from assets like coal when possible. And like Brookfield Renewable, Clearway Energy has a powerful partner in its corner, constantly feeding it access to new project opportunities.
Clearway actually has two significant backers: privately held Global Infrastructure Partners and oil and gas giantTotalEnergies jointly own 42% of Clearway, and both are heavyweights in the growth of global energy. In the near term, its stock fell on concerns that rising interest rates would cause the industry to collapse under debt refinances, but Clearway remains poised to continue its growth.
With a strong balance sheet and minimal debt maturities in the next few years, investors should take advantage of the fear and buy shares. At recent prices, Clearway stock is still down 35% from its 2022 highs, pushing its still-growing dividend yield above 6%.
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Jason Hall has positions in Brookfield Renewable, Brookfield Renewable Partners, Canadian Solar, and Clearway Energy. Matthew DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and Clearway Energy. Tyler Crowe has positions in Brookfield Renewable and TotalEnergies Se. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
