Renewable energy stocks are in a slump.
An ongoing emphasis on common sense sustainability, interest rates, and increased bond yields are putting pressure on the most promising long-term renewable energy stocks. Yet, these and other economic factors haven’t stopped innovation. Instead, debt costs are simply higher and investors can get more bang for their buck through fixed-income investments.
The “best in class” renewable energy stocks typically have large capital expenditure requirements and limited short-term profitability. Or, in the case of Tesla (NASDAQ:TSLA), the company relies heavily on consumer cyclical demand. Pressur for high-end sustainable products is lagging as households cut budgets, as evidenced by Tesla’s recurring price cuts.
And yet, there is plenty of hope for renewable energy stocks. Tomorrow’s biggest winners are among the most undervalued renewable energy stocks today. They represent an ideal buying opportunity for investors interested in capturing a slice of sustainability’s future.
Edison International (EIX)
California-based Edison International (NYSE:EIX) combines two of 2023’s hardest-hit sectors – renewable energy stocks and utility stocks.
Renewable energy stocks dropped 20% over the past two months, with utilities faring little better (losing 7% since January). But that combined short-term weakness makes EIX one of the most undervalued renewable energy stocks today.
EIX is unique because, unlike nearly all utilities with defined markets and limited expansion opportunities, it’s considered a growth stock. Its broadening potential comes from two intertwined sources. First, California (EIX’s home base) has the densest electric vehicle (EV) population. Second, California is leading the charge to revamp its entire energy infrastructure to achieve net-zero goals by 2045.
Despite crippling state regulation, EIX is one of the first utilities with a mandate to build tomorrow’s grid from the ground up. Edison International is already rolling out a suite of commercial and enterprise fleet EV charging solutions. This highlights the company’s potential to build revenue streams even in a low-margin industry.
Of course, revitalization of this magnitude comes with a high capital expenditure cost, which has damaged EIX’s recent price performance. Still, with a price-to-book ratio of just 1.72, EIX is seriously undervalued, considering its potential.
Brookfield Renewable Partners (BEP)
Brookfield Renewable Partners (NYSE:BEP) is unique among undervalued renewable energy stocks. Rather than a direct-to-market company offering services or products, BEP is a wing of a larger alternative investment management firm.
BEP holds many smaller renewable energy companies in its investment portfolio. It focuses on long-term value over short-term potential. BEP’s portfolio companies pay attention to what matters rather than pleasing shareholders or wondering where the next check comes from.
If anything, considering much of BEP’s parent company focuses on distressed debt investments, today’s tight economy represents a massive opportunity for BEP. Smaller firms, unable to raise equity capital or afford debt, may be fighting for M&A opportunities with BEP.
BEP’s holdings span hydroelectric power, wind, utility-scale solar, and energy distribution solutions. This wide-ranging series of business interests means BEP can capitalize on emerging trends and tech in specific sectors while aligning with sustainability’s long-term trajectory.
BEP targets a 12%–15% total return by growing existing assets and grabbing deals on the open market. A double-digit return in today’s market is rare. That potential makes this undervalued renewable energy stock a great alternative to cheap fossil fuel-based stock picks.
First Solar (FSLR)
Analyst sentiment pegs First Solar (NASDAQ:FSLR) as perhaps the market’s most undervalued renewable energy stock.
According to research firm EquitySet, First Solar’s analysts’ ratings strongly indicate buy, with 21 analysts assigning that recommendation to the stock. Just eight recommend hold, and none say investors should sell. Likewise, the analyst price consensus is that FSLR is about 50% undervalued today.
FSLR holds a solid 30% of the total U.S. solar utility market. Clearly, First Solar is sufficiently solid to grab more than a quarter of the country’s market despite a glut of competitors, including those using illegal trade tactics to keep prices low.
Also, FSLR has plenty of room to grow further. The 30% market share fuels a snowball effect as adoption rates compound. Considering we haven’t yet seen the full impact of the 2022 Inflation Reduction Act fruit, which incentivizes solar adoption, FSLR’s long-term prospects and current pricing make it an easy buy.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
