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3 Alternative Energy Stocks to Buy Amid Rising Cost of Installation
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Per the U.S. Energy Information Energy (EIA), wind generation in the United States is projected to increase 5% year over year in 2024, which should bode well for the alternative energy stocks. However, the rising price of wind turbines and the strained U.S.-China relationship might negatively impact the growth rate of these stocks. Nevertheless, as the electrification of the transportation sector booms, the U.S. electric vehicle market is expected to register solid growth in the near term. This should bolster alternative energy stocks’ prospects. The forerunners in the U.S. alternative energy industry are Talen Energy Corporation (TLN - Free Report) , TXNM Energy (TXNM - Free Report) and FuelCell Energy (FCEL - Free Report) .
About the Industry
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 is engaged in the 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 lately. Per the International Energy Agency’s latest World Energy Investment report published in June 2024, global spending on clean energy technologies and infrastructure is on track to reach $2 trillion in 2024. This surely reflects the solid growth opportunities that the clean energy industry has to offer to its participants.
3 Trends Shaping the Future of the Alternative Energy Industry
Wind Energy – A Key Growth Catalyst: Among alternative energy sources, wind energy has been making noticeable progress in the United States. Per a report by EIA, wind turbines were the source of about 10.2% of total U.S. utility-scale electricity generation in 2023. Looking ahead, per EIA’s latest Short-Term Energy Outlook published in September 2024, wind generation in the United States is projected to increase 5% year over year in 2024. This reflects a solid growth opportunity for the U.S. wind market at present, which, in turn, should boost the overall expansion of the alternative energy industry.
EV Market Boom to Boost Clean Energy: Electric Vehicle (EV) plays a critical role in decarbonizing the transportation sector. Therefore, as electrification booms in this space, more individuals are choosing to switch from gasoline-powered vehicles to EVs each year, thereby boosting the market for EVs. In the United States, favorable government policies and support in terms of subsidies and grants, tax rebates, and other non-financial benefits in the form of carpool lane access, along with declining battery prices, have been boosting the EV market. To this end, it is imperative to mention that the U.S. EV market size is expected to register a CAGR of 6.6% between 2024 and 2029, as estimated by a report from Statista. Such an impressive outlook bolsters the prospects of clean energy stocks, which offer the largest electric vehicle charging network in the United States.
Rising Costs & Other Headwinds: The steadily rising cost of renewable installations in recent times has been posing a significant challenge for clean energy installers. In particular, the rising price of steel, which is used to make giant wind turbine blades, has been pushing up the cost of wind installation lately.
Apart from steel, the most significant mineral requirements in the wind industry are copper, zinc, manganese, chromium, nickel, molybdenum and rare earths. The average price of these seven metals has risen 93% between January 2020 and March 2023 (as stated by an IMF report). Resultantly, the levelized cost of electricity of a subsidized U.S. offshore wind project has increased almost 50% in 2023 from the 2021 level in nominal terms, according to a report published by BloombergNEF in August 2023.
Further, the fallout in the bilateral relationship with China can have a direct impact on the green energy industry. This is because China accounts for up to 90% of refining capacity for the so-called rare earth elements used in electric motors, wind turbine generators and other green energy products, per the Energy Transitions Commission. So, any deterioration in the relationship with China might impact the green energy supply chain in the United States, thereby impacting the alternative energy industry.
Zacks Industry Rank Reflects Dim Outlook
The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #201, which places it in the bottom 20% 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 outperform 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 Beats Sector, Lags S&P 500
The Alternative Energy Industry has outperformed its sector over the past year but underperformed the Zacks S&P 500 composite. The stocks in this industry have collectively surged 24.2% in the past year against the Oils-Energy Sector’s 2.6% decline. The Zacks S&P 500 composite has gained 27.5% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 9.06 compared with the S&P 500’s 18.90 and the sector’s 3.09.
Over the past five years, the industry has traded as high as 9.97X, as low as 7.68X and at the median of 8.71X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Alternative Energy Stocks to Buy
Talen Energy Corporation: Based in Houston, TX, the company owns and operates power infrastructure, principally in the United States. On Sept. 5, 2024, Talen Energy announced that its board of directors has approved the upsizing of its previously announced share repurchase program, increasing the remaining capacity to $1.25 billion through the fourth quarter of 2026. This reflects the company’s solid financial position.
TLN boasts a four-quarter average earnings surprise of 140.71%. The consensus estimate for the company’s 2025 sales is pegged at $2.29 billion, implying an improvement of 16.3% from the previous year’s estimated figure. TLN currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: TLN
FuelCell Energy: Based in Danbury, CT, the company develops and markets ultra-clean power plants that generate electricity with up to twice the efficiency of conventional fossil fuel plants with virtually no air pollution and reduced greenhouse gas emissions. On Sept. 5, 2024, FuelCell Energy released its third-quarter fiscal 2024 results. Its generation revenues increased 22% year over year. As of July 31, 2024, its backlog increased approximately 12.6% to $1.20 billion.
FCEL boasts a four-quarter average earnings surprise of 18.75%. The consensus estimate for the company’s 2025 sales is pegged at $2.29 billion, implying an improvement of 84.5% from the previous year’s estimated figure. The company currently carries a Zacks Rank #2 (Buy).
Price & Consensus: FCEL
TXNM Energy: Based in Albuquerque, NM, TXNM is an energy holding company that delivers energy to homes and businesses across Texas and New Mexico. On July 31, 2024, the company announced its second-quarter 2024 results. Its operating revenues improved 2.3% year over year, while operating income surged 14.5%.
TXNM boasts a four-quarter average earnings surprise of 1.96%. The stock holds a long-term earnings growth rate of 2.5%. The company currently carries a Zacks Rank #2.
Price & Consensus: TXNM
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Per the U.S. Energy Information Energy (EIA), wind generation in the United States is projected to increase 5% year over year in 2024, which should bode well for the alternative energy stocks. However, the rising price of wind turbines and the strained U.S.-China relationship might negatively impact the growth rate of these stocks. Nevertheless, as the electrification of the transportation sector booms, the U.S. electric vehicle market is expected to register solid growth in the near term. This should bolster alternative energy stocks’ prospects. The forerunners in the U.S. alternative energy industry are Talen Energy Corporation (TLN - Free Report) , TXNM Energy (TXNM - Free Report) and FuelCell Energy (FCEL - Free Report) .
About the Industry
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 is engaged in the 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 lately. Per the International Energy Agency’s latest World Energy Investment report published in June 2024, global spending on clean energy technologies and infrastructure is on track to reach $2 trillion in 2024. This surely reflects the solid growth opportunities that the clean energy industry has to offer to its participants.
3 Trends Shaping the Future of the Alternative Energy Industry
Wind Energy – A Key Growth Catalyst: Among alternative energy sources, wind energy has been making noticeable progress in the United States. Per a report by EIA, wind turbines were the source of about 10.2% of total U.S. utility-scale electricity generation in 2023. Looking ahead, per EIA’s latest Short-Term Energy Outlook published in September 2024, wind generation in the United States is projected to increase 5% year over year in 2024. This reflects a solid growth opportunity for the U.S. wind market at present, which, in turn, should boost the overall expansion of the alternative energy industry.
EV Market Boom to Boost Clean Energy: Electric Vehicle (EV) plays a critical role in decarbonizing the transportation sector. Therefore, as electrification booms in this space, more individuals are choosing to switch from gasoline-powered vehicles to EVs each year, thereby boosting the market for EVs. In the United States, favorable government policies and support in terms of subsidies and grants, tax rebates, and other non-financial benefits in the form of carpool lane access, along with declining battery prices, have been boosting the EV market. To this end, it is imperative to mention that the U.S. EV market size is expected to register a CAGR of 6.6% between 2024 and 2029, as estimated by a report from Statista. Such an impressive outlook bolsters the prospects of clean energy stocks, which offer the largest electric vehicle charging network in the United States.
Rising Costs & Other Headwinds: The steadily rising cost of renewable installations in recent times has been posing a significant challenge for clean energy installers. In particular, the rising price of steel, which is used to make giant wind turbine blades, has been pushing up the cost of wind installation lately.
Apart from steel, the most significant mineral requirements in the wind industry are copper, zinc, manganese, chromium, nickel, molybdenum and rare earths. The average price of these seven metals has risen 93% between January 2020 and March 2023 (as stated by an IMF report). Resultantly, the levelized cost of electricity of a subsidized U.S. offshore wind project has increased almost 50% in 2023 from the 2021 level in nominal terms, according to a report published by BloombergNEF in August 2023.
Further, the fallout in the bilateral relationship with China can have a direct impact on the green energy industry. This is because China accounts for up to 90% of refining capacity for the so-called rare earth elements used in electric motors, wind turbine generators and other green energy products, per the Energy Transitions Commission. So, any deterioration in the relationship with China might impact the green energy supply chain in the United States, thereby impacting the alternative energy industry.
Zacks Industry Rank Reflects Dim Outlook
The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #201, which places it in the bottom 20% 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 outperform 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 Beats Sector, Lags S&P 500
The Alternative Energy Industry has outperformed its sector over the past year but underperformed the Zacks S&P 500 composite. The stocks in this industry have collectively surged 24.2% in the past year against the Oils-Energy Sector’s 2.6% decline. The Zacks S&P 500 composite has gained 27.5% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 9.06 compared with the S&P 500’s 18.90 and the sector’s 3.09.
Over the past five years, the industry has traded as high as 9.97X, as low as 7.68X and at the median of 8.71X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Alternative Energy Stocks to Buy
Talen Energy Corporation: Based in Houston, TX, the company owns and operates power infrastructure, principally in the United States. On Sept. 5, 2024, Talen Energy announced that its board of directors has approved the upsizing of its previously announced share repurchase program, increasing the remaining capacity to $1.25 billion through the fourth quarter of 2026. This reflects the company’s solid financial position.
TLN boasts a four-quarter average earnings surprise of 140.71%. The consensus estimate for the company’s 2025 sales is pegged at $2.29 billion, implying an improvement of 16.3% from the previous year’s estimated figure. TLN currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: TLN
FuelCell Energy: Based in Danbury, CT, the company develops and markets ultra-clean power plants that generate electricity with up to twice the efficiency of conventional fossil fuel plants with virtually no air pollution and reduced greenhouse gas emissions. On Sept. 5, 2024, FuelCell Energy released its third-quarter fiscal 2024 results. Its generation revenues increased 22% year over year. As of July 31, 2024, its backlog increased approximately 12.6% to $1.20 billion.
FCEL boasts a four-quarter average earnings surprise of 18.75%. The consensus estimate for the company’s 2025 sales is pegged at $2.29 billion, implying an improvement of 84.5% from the previous year’s estimated figure. The company currently carries a Zacks Rank #2 (Buy).
Price & Consensus: FCEL
TXNM Energy: Based in Albuquerque, NM, TXNM is an energy holding company that delivers energy to homes and businesses across Texas and New Mexico. On July 31, 2024, the company announced its second-quarter 2024 results. Its operating revenues improved 2.3% year over year, while operating income surged 14.5%.
TXNM boasts a four-quarter average earnings surprise of 1.96%. The stock holds a long-term earnings growth rate of 2.5%. The company currently carries a Zacks Rank #2.
Price & Consensus: TXNM