Although renewable energy has been a trending topic for the last few years, the industry still has a long way to go. At the COP 28 conference in December 2023, it was recognized that global greenhouse gas emissions need to be cut down by 43% by 2030, compared to 2019 levels, if we are to keep global warming below 1.5°C.
While 2022 was the year of fossil fuels due to the Russia-Ukraine war, the industry didn’t perform well the next year. Oil and gas prices normalized during 2023, and the super majors’ profits took a tumble. The energy sector saw investments worth $2.8 trillion, and 60% of the investments were directed toward renewable energy in 2023. For the oil and gas sector analysis, you can go to 13 Oil Stocks with Biggest Upside.
Investments in Clean Energy Technologies Surge
According to the Business Council for Sustainable Energy, the United States saw the deployment of $303.3 billion in financing for clean energy technologies as part of its transition toward sustainable energy in 2023. In the year, 42 gigawatts (GW) of additional renewable power generation capacity was added to the U.S. grid. Tax rebates and other incentives have been the driving force behind the rise in renewables. Since the announcement of the Inflation Reduction Act (IRA) in 2022, the number of planned renewable energy manufacturing facilities has risen to 104, compared to 9 in August 2022.
Despite record-breaking investments, the renewable energy industry did not perform well in 2023, and related stocks declined significantly compared to the broader market. The most in-demand segment in renewable energy was solar, yet Global X Solar ETF (RAYS) and Invesco Solar ETF (TAN) performed poorly, showing declines of over 35% and nearly 27% in 2023, respectively. On top of that, the security and protection company ADT Inc. (NYSE:ADT), which was also involved in the residential solar business, announced its exit from the industry in January due to facing challenges caused by worsening conditions in the sector influenced by broader economic factors. At the company's Q4, 2023 earnings call, ADT Inc.'s (NYSE:ADT) interim CFO and president of corporate development and chief transformation officer, Jeffrey Likosar said:
"The Solar segment generated $50 million of revenue and a $28 million adjusted EBITDA loss in the fourth quarter. For the year, Solar's adjusted EBITDA loss was $117 million on $330 million of revenue. We had previously written off all solar goodwill and impaired certain other assets in connection with our partial shutdown in 2023. As announced in January, and as Jim mentioned, we are now winding down operations altogether. As we refocused our business during the past year, we continued strong cash generation in CSB. Total company adjusted free cash flow, including interest rate swaps, was $525 million for the full year. This was down slightly versus 2022 driven by solar performance and higher net interest expense offsetting the CSB progress."
High interest rates and labor wages leading to high costs have been the primary hurdles in the growth of the sector. However, on March 20, the Fed seemed to be firm on its decision of three rate cuts this year and kept the interest rates steady. Furthermore, compared to the fossil fuel industry, the renewables segment is still in its infancy and is expected to grow at a fast pace. According to a report by The Business Research Company, the global renewable energy market was estimated at $1.02 trillion in 2023 and will reach $1.55 trillion by 2028. The industry is expected to register a nearly 9% compound annual growth rate (CAGR) during the forecasted period.
The Basel III Endgame: A Potential Headwind for Renewables
Despite the growth prospects of the renewable energy industry, there are still some hurdles that it is facing. The latest one is "Basel III: Endgame", which was proposed in July 2023, as reported by Reuters. The Basel III framework was introduced in response to the financial crisis of 2007 - 2009, providing capital and liquidity standards for the global banking system. It requires banks to keep a certain amount of money on the side as a safety net when they invest in equities or projects to cover potential losses and maintain stability. Currently, investments like renewable energy and a few others are considered to carry a 100% risk unless they make up more than 10% of a bank’s capital, which means that the banks have to set aside one dollar for every dollar invested. If they exceed 10%, the risk weighting increases to 400%. The new regulations (Basel III: Endgame) proposed by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) seek to remove this 10% threshold and aim to keep risk weighting to 400% for all investments. These proposed changes could negatively affect the investments made in the renewables industry.
NorthStar CIO Bullish on Clean Energy
Nevertheless, NorthStar Asset Management's CIO and senior portfolio manager, Nimrit Kang, is quite bullish on the renewable energy sector in the long term. In an interview with CNBC posted on March 6, she said that the market has performed well recently and is "due for a pause" in the near term, but looking forward 5 to 10 years, the market trajectory is still "upward". She further added that a lot of money could be made from the clean energy sector. One stock that Kang recommends is Eaton Corporation plc (NYSE:ETN) due to its operations in electrical infrastructure and also its products being used in data centers amid the recent AI revolution.
Renewable Energy in Light of Election Year
At NextEra Energy, Inc.'s (NYSE:NEE) Q4 2023 earnings call, Steve Fleishman of Wolfe Research raised the question of the sustainability of the IRA in case election results are in favor of the Republicans. The CEO of the company, John Ketchum, replied that it was highly unlikely that the IRA would be affected negatively. He said:
“...in the 21 years I’ve been at the company, as we’ve changed administrations and we’ve seen changes in Congress, we’ve never seen a change or appeal of tax credits. No matter what form they’ve taken, IRA is the form we’re talking about here. So that’s the first point I would make. Second, it’s really hard to overturn existing law. I think Obamacare is a very good example of that. It’s just very difficult no matter what the political wins are. The third point I would make is that the IRA benefits both sides of the aisle. It certainly is advantageous for obvious reasons for Democrats, but it also has a big benefit to Republicans. Because if you think about where the investments are being made around IRA and where a lot of the benefit of IRA is flowing, it’s flowing to Republican states and it’s flowing to parts of those states that are really difficult to stimulate economically. And we’re talking about rural communities in these states. And so when we come in and we build a wind project, we build a solar project, we build a battery storage project, it’s a complete turnaround for these communities. We’re providing an economic base in the form of jobs. We’re providing an economic base in the form of spending that occurs in that community. We’re providing an economic base in the form of property taxes and sales tax revenues. These are 180s for these rural communities and make a huge difference on their viability going forward.”
In light of the above-mentioned data, some of the most undervalued renewable energy stocks according to analysts, include Ameresco, Inc. (NYSE:AMRC), TransAlta Corporation (NYSE:TAC), and First Solar, Inc. (NASDAQ:FSLR).
Our Methodology
For this article, we created a list of energy and utilities stocks with market caps of over $1 billion and price-to-earnings (PE) ratios of 25 or below (compared to the renewable energy services and equipment industry’s average TTM PE ratio of 37.45 according to CSIMarket) using the Yahoo Finance stocks screener. Next, we narrowed down our list to the companies involved in the renewable energy industry. We checked each company’s average analyst price target and upside percentage on TipRanks and chose the 12 renewable energy stocks with the biggest upside according to analysts as of March 21.
Hedge fund sentiment around each stock has also been added. The hedge fund data was taken from Insider Monkey’s database of 933 elite hedge funds as of the fourth quarter of 2023. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
12 Most Undervalued Renewable Energy Stocks To Buy According To Analysts
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Our Methodology
For this article, we created a list of energy and utilities stocks with market caps of over $1 billion and price-to-earnings (PE) ratios of 25 or below, cheap in comparison to the renewable energy industry’s average TTM PE ratio of 37.45 according to CSIMarket, using the Yahoo Finance stocks screener. Next, we narrowed down our list to the companies involved in the renewable energy industry. We checked each company’s average analyst price target and upside percentage on TipRanks and chose the 12 renewable energy stocks with the biggest upside according to analysts as of March 21.
Hedge fund sentiment around each stock has also been added. The hedge fund data was taken from Insider Monkey’s database of 933 elite hedge funds as of the fourth quarter of 2023. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
12 Most Undervalued Renewable Energy Stocks To Buy According To Analysts
FirstEnergy Corp. (NYSE:FE) generates and distributes electricity in the US through different resources. The company’s subsidiaries, Mon Power and Potomac Edison are working towards the company’s goal of owning 50 MW of solar generation in West Virginia by 2025. In December 2023, the construction of the Fort Martin solar site was completed. Through its subsidiaries, the company has four additional solar sites lined up in the state. The company is also involved in offshore wind energy transmission in New Jersey and battery energy storage projects in Maryland through its subsidiaries, Jersey Central Power & Light and Potomac Edison, respectively.
According to Insider Monkey’s database, 22 hedge funds held positions in FirstEnergy Corp. (NYSE:FE) in the fourth quarter, with positions worth $571.513 million. Stuart J. Zimmer’s Zimmer Partners is the top shareholder in the company as of the fourth quarter of 2023 and has a position worth $134.804 million.
As of March 21, the stock has a PE ratio of 19.55. In the past three months, FirstEnergy Corp. (NYSE:FE) has received Buy ratings from 5 Wall Street analysts. As of March 21, the average price target of $41.30 has an upside of 7.69% from present levels.
FirstEnergy Corp. (NYSE:FE) is one of the most undervalued renewable energy stocks to buy according to analysts, along with Ameresco, Inc. (NYSE:AMRC), TransAlta Corporation (NYSE:TAC), and First Solar, Inc. (NASDAQ:FSLR).
“FirstEnergy Corp. (NYSE:FE) is an Ohio-based public utility holding company that we purchased in 2020 in the face of a bribery scandal. The company paid fines, and senior management changed as a result; since then, the company has performed well operationally, which has translated into good stock performance. While increasing interest rates in 2023 caused its stock to drop from its highs (along with the Interest Rate Caps), it continues to trade at a substantial discount to its peers and offers a 4.5% dividend yield.”
Duke Energy Corporation (NYSE:DUK) is an energy company that generates electricity using renewables as well as traditional sources. Under its subsidiaries like Duke Energy Renewables and Duke Energy Sustainable Solutions, the company owns and operates various solar, hydroelectric, biopower, landfill gas, and wind energy projects.
On March 11, BMO Capital raised the price target on Duke Energy Corporation’s (NYSE:DUK) stock to $101 from $100 and maintained an Outperform rating on the shares. Over the past three months, 12 Wall Street analysts have given their recommendations on Duke Energy Corporation (NYSE:DUK), with 7 recommending to Buy the stock. As of March 21, the stock’s average price target of $103.27 implies an upside of 8.05% to its current price. The stock’s PE ratio is 17.88 as of March 21.
Duke Energy Corporation (NYSE:DUK) was part of 30 hedge funds’ portfolios in the fourth quarter of 2023 with a total stake value of $321.774 million. John Overdeck And David Siegel’s Two Sigma Advisors is the biggest shareholder in the company and has a position worth $71.140 million as of Q4 of 2023.
Portland General Electric Company (NYSE:POR) owns and operates several renewable energy facilities, including wind farms, solar farms, and hydroelectric plants in Oregon and Washington. Portland General Electric Company (NYSE:POR) is one of the top most undervalued renewable energy stocks and has a PE ratio of 17.55 as of March 21.
Portland General Electric Company (NYSE:POR) was held by 16 hedge funds in the fourth quarter of 2023. The total stakes of the funds amounted to $121.797 million. As of December 31, 2023, billionaire Israel Englander’s Millennium Management is the most dominant shareholder in the company, with a position worth $42.140 million.
In the past three months, 7 Wall Street analysts have covered Portland General Electric Company (NYSE:POR), and 4 maintain a Buy rating on the stock. At the time of writing on March 21, the average price target of $45.29 has an upside of 11.03%.
NextEra Energy, Inc. (NYSE:NEE) is a Florida-based company that produces electricity through conventional sources as well as renewable ones like wind and solar. Its subsidiary, NextEra Energy Resources, has 126 wind energy generation sites and operates 2,000 megawatts of universal-scale solar energy. As of March 21, the stock has a PE ratio of 17.38.
NextEra Energy, Inc. (NYSE:NEE) was covered by 9 Wall Street analysts over the last three months, and 6 kept a Buy rating on the stock. The average price target of $69.78 represents an upside of 11.51% from the last price of $62.58 as of March 21.
On February 16, NextEra Energy, Inc. (NYSE:NEE) increased its quarterly dividend by 10.2% to $0.515, which was paid out on March 15 to the shareholders of record on February 27. The stock’s dividend yield is 3.01% at the time of writing on March 21.
In the fourth quarter, hedge fund sentiment was positive toward NextEra Energy, Inc. (NYSE:NEE), as 65 hedge funds had investments in the stock, compared to 58 funds in the third quarter. Two Sigma Advisors is the largest shareholder in the company, with 3.9 million company shares worth $237,208 million, as of Q4 of 2023.
ClearBridge Investments mentioned NextEra Energy, Inc. (NYSE:NEE) in its third quarter 2023 investor letter. Here is what it said:
“Many businesses are threatened by a higher cost of capital, but one where reality has set in, and which also touches many other growth areas of the market, is the utility company NextEra Energy, Inc. (NYSE:NEE). Over the past few years, the company developed into a growth darling thanks to its strong track record in renewable energy development and tailwinds from the global energy transition and incentives in the Inflation Reduction Act. The problem for NextEra, and the transition broadly, is that this transformation is immensely capital intensive and many renewables projects offer lower returns on that capital. This requires high capital expenditures – often resulting in negative free cash flow – to meet the growth and financing needs of companies like NextEra. To help, the company leaned on financial engineering by using a publicly traded limited partnership called NextEra Energy Partners, providing further capacity for its parent to continue its development plans. NEP used layers of its own financial engineering to fund its own negative free cash flow and a large, growing dividend yield that we believe it could not sustain organically. Ultimately, the higher cost of debt from rising rates led NEP to lower its own growth ambitions, driving concerns about whether NextEra can execute on its extensive backlog. As a result, the stock has declined by approximately 30% year to date.”
Sempra (NYSE:SRE) is an American utility company headquartered in San Diego, California. According to the company, it has created over 3,700 EV charging port sites and connected over 270,000 rooftop solar systems through its subsidiary, San Diego Gas & Electric (SDGE). Apart from several other renewable energy projects, Sempra (NYSE:SRE) has 20 hydrogen research and development projects under development.
As of the fourth quarter of 2023, 33 hedge funds have investments in Sempra (NYSE:SRE) with positions worth $1.021 billion. According to our database, Ken Griffin’s Citadel Investment Group is the most prominent shareholder in the company, with nearly 3 million shares worth $223.212 million as of December 31, 2023.
On March 14, Barclays increased Sempra’s (NYSE:SRE) price target to $79 from $77 while maintaining an Overweight rating on the company shares. The price target revision came after the firm updated its calculations for the power and utility sector based on the Q4 reports.
Over the last three months, 9 out of 10 Wall Street analysts have kept a Buy equivalent rating on Sempra (NYSE:SRE). With an average price target upside of 18.18% from the current price of $69.90 and a TTM price-to-earnings ratio of 14.61 at the time of writing on March 21, it is the 8th most undervalued renewable energy stock to buy according to analysts.
ClearBridge Large Cap Value Strategy made the following comment about Sempra (NYSE:SRE) in its Q3 2023 investor letter:
“Our two utilities Sempra (NYSE:SRE) and Edison International were also negatively impacted by rising rates, although both outperformed the utility benchmark. We maintain a large active overweight to Sempra and added opportunistically to Edison to reflect its strong fundamentals.”
PG&E Corporation (NYSE:PCG), through its subsidiary Pacific Gas and Electric Company, utilizes renewable energy sources like biopower, small hydroelectric, solar, and wind power. The company provides its customers with battery storage systems and helps them connect rooftop solar to the electric grid. The stock has a PE ratio of 15.51 as of March 21.
PG&E Corporation (NYSE:PCG) has a consensus rating of Strong Buy as per the 7 Wall Street analysts that have covered it over the past three months. The average price target of $19.33 implies an upside of 18.59% from the current levels as of March 21.
On February 14, PG&E Corporation (NYSE:PCG) declared a quarterly dividend of $0.01, payable by April 15 to the shareholders of record on March 28. As of March 21, the stock’s dividend yield is 0.24%.
In the fourth quarter of 2023, 58 hedge funds had stakes in PG&E Corporation (NYSE:PCG) with total positions worth $2.888 billion. This is compared to 49 funds with positions worth $2.467 billion in the preceding quarter. As of December 31, 2023, Dan Loeb’s Third Point is the largest shareholder in the company, with a stake worth $1.043 billion.
Xcel Energy Inc. (NASDAQ:XEL) is a Minnesota-based regulated electric company with a PE ratio of 16.35 at the time of writing on March 21. As of 2022, over 40% of the company’s total energy mix consists of renewables, including 33% from wind, 4% from solar, and 3% from other renewables.
As of Q4, 2023, 26 hedge funds held positions in Xcel Energy Inc. (NASDAQ:XEL) at a combined value of $618.741 million, up from 25 hedge funds in the prior quarter with positions worth $584.847 million. Israel Englander’s Millennium Management increased its holdings in Xcel Energy Inc. (NASDAQ:XEL) by 52% to 4.3 million shares worth $268.353 million and is the largest shareholder in the company as of December 31, 2023.
Based on price targets of 12 Wall Street analysts, Xcel Energy Inc. (NASDAQ:XEL) has an average price target of $62.17, representing an upside of 18.60% from current levels on March 21. On March 11, Barclays upgraded Xcel Energy Inc.’s (NASDAQ:XEL) stock from Equal Weight to Overweight with a $54 price target.
Ameresco, Inc. (NYSE:AMRC), TransAlta Corporation (NYSE:TAC), and First Solar, Inc. (NASDAQ:FSLR) are some of the most undervalued renewable energy stocks to buy according to analysts, in addition to Xcel Energy Inc. (NASDAQ:XEL).
