Navigating risks in the clean energy transition with these renewable energy stocks
Overall, renewable energy is considered to be one of the most promising industries for long-term investment; however, not every one of these renewable energy stocks is poised to bring a profit.
The renewable energy sector is highly dependent on government policy and subsidies, which are not always reliable due to the political environment. Variations in the levels of regulatory support can affect the feasibility and returns of renewable energy projects. Thus, companies almost entirely dependent on subsidies or operating in territories with high policy volatility may be at risk of higher susceptibility to various risks.
Meanwhile, operational problems and challenges in technology are some of the issues affecting some renewable energy companies. A firm that has not embraced innovation stands a chance of struggling in the market. Also, those who have high operational costs and those who do not adopt efficient ways of production are likely to have low levels of profitability.
This means there are renewable energy stocks I feel investors should consider abandoning by next year. Here are three of them.
First Solar (FSLR)
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As a company, First Solar (NASDAQ:FSLR) has many operational risks even while it is in a good position in the market. The first risk stems from its capacity expansion plans, which are rather ambitious and accompanied by a high level of implementation risk. Expanding the facilities in a short period of time can create quality and production management problems and increase costs, which can be detrimental to FSLR.
However, there are other more immediate issues for the company. According to First Solar’s financial report, its inventory turnover ratio is 1.81, which is rather low and may point to problems in marketing products or improper management of the inventory.
The company’s low effective tax rate of 7.77%, coupled with the fact that it depends on government subsidies, is concerning. Investors could be in for a nasty surprise if these tax policies change by the government and it decides to pivot to a different energy source instead, such as nuclear or hydrogen.
Sunrun (RUN)
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Sunrun (NASDAQ:RUN) has many operational and financial risks that put the company’s future sustainability in jeopardy. The company’s structure is very much pay-as-you-go, with practically no free cash flow, and has billions of dollars in deficit each year. This cash burn rate, if not controlled, can lead to serious liquidity problems.
Needless to say, the financial position of the company is poor. The company has incurred a massive net loss of $1.45 billion in the last year and a loss per share of $6.67. Such a tremendous loss, accompanied by a negative operating income of $1.93 billion, suggests there are some critical problems with the company’s strategy.
Sunrun’s Altman Z-Score of 0.07 suggests a high risk of bankruptcy, and the high short interest of 23.54% of outstanding shares indicates significant market skepticism in the short term. So, the market seems to think shares will crater in the short term, while its bleak fundamentals paint a worse picture. I think, then, that RUN is one of those renewable energy stocks that investors can safely avoid.
Xcel Energy (XEL)
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Xcel Energy (NASDAQ:XEL) is, in some ways, a victim of its own success. The firm is facing a perfect storm, which includes a rise in capital investment, expensive energy transformation and inflation. Furthermore, higher interest rates are also increasing the cost of borrowing, which may impact its income generation capacity.
The company aims to increase the share of renewable energy sources to 70% by the year 2030. That is likely going to need a lot of capital, which the company intends to source through $13 billion of additional debt over the course of the next four years up to the year 2028.
XEL is already highly leveraged, and I think people are understating how risky such a massive transformation would be. For reference, it has $500 million in cash and $28 billion in debt, with a negative net cash position of negative $50.60 per share.
This may not be so bad, but XEL’s free cash flow has been negative each year from 2019 to the current day and pays over a billion dollars in interest expenses each year. I think most investors would prefer not to invest in a company with a pile of debt while its top and bottom lines are expected to grow only in the single digits for the foreseeable future, per analysts. That makes it one of those renewable energy stocks to sell.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.
