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Near-Term Outlook for Alternative Energy Industry Bright

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The Zacks Alternative Energy industry can be fundamentally segregated into two sets of companies. While one group is involved in the generation and distribution of alternative energy and electricity from sources like wind, natural gas, biofuel, hydro and geothermal, the other set is engaged in development, design and installation of renewable projects involving these alternative energy sources. The industry also includes a handful of stocks that offer fuel cell energy solutions, which have gained popularity as an affordable clean energy of late.

Per a report by Bloomberg, in 2018, global clean energy investment totaled $332.1 billion, with investment exceeding $300 billion for the fifth year in a row and America being the second-biggest investing nation.

Here are the three major themes in the industry:

  • Thanks to multi-year federal tax incentives, U.S. alternative energy stocks are growing rapidly.  Moreover, rapid expansion of the nation’s offshore wind capacities, as majority of the electricity demand comes from coastal areas, is also commendable. Per American Wind Energy Association’s latest report, the nation’s wind power capacity either under construction or in advanced development in 2018 registered 22% year-over-year increase.  The fact that the nation is the largest and fastest growing wind market worldwide should significantly boost the prospects of the alternative energy industry.
  • The outlook for the alternative energy industry is also favorable as utilities and corporations are increasingly shifting to renewables. This shift can be attributed to lower cost of generating electricity from alternative energy sources and storing the same, thanks to rapid technological advancements in recent times. Per Lazard’s annual Levelized Cost of Energy (LCOE) analysis reports, wind costs have dropped an extraordinary 69% since 2009 while coal costs have increased 9%. Moreover, a new report highlighted in Forbes reveals that 42% of global coal capacity is currently unprofitable and the United States could save $78 billion by closing coal-fired power plants in line with the Paris Climate Accord’s climate goals. This indicates the profitability that alternative energy sources can offer to a nation. With the National Renewable Energy Laboratory projecting onshore wind costs to decline 30% by 2050, stocks in this industry should remain prudent choices for investors.
  • Trump dealt a blow to the U.S. alternative energy industry by imposing an import tariff of 25% on steel and 10% on aluminum in March 2018. Steel and aluminum are widely used as raw materials to construct critical wind turbines, storage and hydroelectric components. GTM Research, MAKE Consulting and Wood Mackenzie collectively calculated that such imposition can push up levelized cost of energy for U.S. renewable power plants by 3 – 5%, thereby leading to slightly lowered forecasts for project deployments or slightly lowered project returns.

Zacks Industry Rank Reflects Bright Outlook

The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #98, which places it in the top 39% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 and Sector

The Alternative Energy Industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively lost 1.9% while the Oils-Energy Sector and the Zacks S&P 500 composite have gained 2.6% and 5.1%, respectively in the same timeframe.

One-Year Price Performance


Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 2.91 compared with the S&P 500’s 9.88 and the sector’s 5.21.

Over the last five years, the industry has traded as high as 3.57X, as low as 2.75X, and at the median of 3.31X, as the charts show below.



Bottom Line

Currently electricity is the fastest-growing form of end-use energy, with renewables likely to become a major source for electricity generation in the coming years. Rapidly increasing corporate investments from the nation in renewables should allow stocks in this space to continue generating positive shareholder returns in the near future and help the United States to remain a forerunner in the alternative energy space.

However, China’s emergence as leading investor in clean energy projects, with the nation lately making substantial investments in wind power, poses serious threat to U.S based operators.

Nevertheless, given its favorable industry rank, investors may take advantage of the cheap valuation and bet on a few alternative energy stocks that exhibit a strong earnings outlook. Also, there are a few players in this space that shareholders might want to hold on to.

Here we present three alternative energy stocks with a Zacks Rank #2 (Buy) or #3 (Hold) that investors may want to invest in or hold on to for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Evergy Inc. (EVRG - Free Report) : For this Kansas City, MO-based company, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 15.6%. It came up with a positive surprise of 4.76% in the last reported quarter. It carries a Zacks Rank #2.

Ameresco Inc. (AMRC - Free Report) : For this Framingham, MA-based company, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 7%. It came up with an average positive surprise of 164.96% in the trailing four quarters. It carries a Zacks Rank #3.

Bloom Energy Corp. (BE - Free Report) : For this San Jose, CA-based company, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 262.82%. It came up with average positive surprise of 28.29% in the trailing four quarters. It carries a Zacks Rank #3.


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