Clean or alternative energy, such as wind and solar, is by far the world’s fastest growing energy source. And the trend will only accelerate going forward. But is this sector too volatile for conservative investors? Not if you pick the right investments—here’s how.
Investing is about the future. Amazing returns are to be had by getting ahead of a powerful trend. It’s not so much about where we are, but where we’re going. Nothing seems to excite and capture the imagination of investors like getting in ahead of a future wave.
For example, the performance of internet related companies in the 1990’s was incredible, even before many of those companies were making any money. Take a look at the performance of electric car company Tesla (TSLA). That stock has averaged a return of 58% per year over the last ten years. The stock is up 768% over the past year, and the price has doubled in the last month.
The company now far exceeds the market capitalization of the biggest car companies in the world—not because the company is making so much money, but because Tesla is ahead of the curve and stands to inherit the future. The overwhelming majority of cars still run on gasoline and will for a while. But that won’t be the case in the future. And Tesla has emerged as the dominant player in tomorrow’s world.
But Tesla isn’t an island. In fact, it fits into a broader theme from which many other companies and stocks will thrive. The theme is alternative energy. Alternative or clean energy, such as wind and solar, is by far the world’s fastest growing energy source. And the trend will only accelerate going forward.
Skeptics may point to the fact that the world still generates 85% of its energy from fossil fuels (oil, coal and natural gas), and the U.S. still generates about 80% of energy from those sources. It’s also true that fossil fuels are not going away anytime soon. But the trend toward clean energy is undeniable, and it’s not about politics.
It doesn’t matter where you stand on the issue of Climate Change. Regardless of that issue, fossil fuel is dirty and not optimally efficient. Whether because of politics, profit or technological evolution, clean energy will dominate the future. That fact is already playing out in the stock market.
The iShares Global Clean Energy ETF (symbol ICLN), a fund that invests in 30 stocks involved in the solar, wind and other clean energy sources, is up over 40% year-to-date. It’s up over 93% in the past two years, compared to an 11% return for the S&P 500 over the same period. And most of the companies in the portfolio are dogs that aren’t even making any money.
Clearly alternative energy is an area where great profits will be had going forward. But it can be like the Wild West picking the right stock. More conservative investors cede this oh-so-profitable ground to more aggressive investors and take a pass. But you don’t have to.
You can get in on the amazing growth in this incredible sector by investing in a certain utility stock. That’s right, a utility. You can gain exposure and profits from the clean energy juggernaut by simply investing in one of the most defensive and reliable stocks on the market. You can have your cake and eat it too.
NextEra Energy (NEE)
NextEra Energy is the world’s largest utility. It’s a monster with about $20 billion in annual revenue and a $133 billion market capitalization.
Ordinarily, when you think of a huge utility you probably think it has lackluster growth and a stable dividend. But that’s not true in this case. Earnings growth and stock returns have well exceeded what is normally expected of a utility.
For the last ten-, five-, three- and one-year periods, NEE has not only vastly outperformed the Utility Index but it has also blown away the returns over the overall market. NEE stock has more than doubled that of the S&P 500 over the last ten years (587% with dividends reinvested). It has also more than doubled the index return over the last five years, three years and one year.
How can that be? It’s because it isn’t a regular utility. It’s two companies in one. It has one of the best regulated utilities in the country, which accounts for about 55% of earnings and provides steady cash flow, but it also has a world-renowned alternative energy company, which accounts for about 45% of earnings and provides a higher level of growth. Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s like a football player that’s not only huge but fast as well.
Florida Power and Light is the largest regulated utility in the U.S. It has over 5 million customers in Florida. It is one of the very best electrical utilities in the country. There are a few good reasons why Florida is a great place to operate a utility.
The state has a growing population. Utilities have a limited geographical range and a stagnant population can make it tough to grow. Plus, it is one of the most regulator friendly areas in the country. That’s huge for getting approvals for periodic expansions and price hikes. It also doesn’t hurt that Floridians run their air conditioners like crazy, and just about all year long.
The alternative energy company, NextEra Energy Resources, is the world’s largest generator of renewable energy form wind and solar. Alternative energy is the future and this company is the top of the heap. The government and regulators love them for it. It’s also a huge benefit that the cost of clean energy generation constantly gets cheaper as technology advances.
There is also a huge runway for growth projects. Energy Resources grew earnings at 13.3% in the last quarter. And the company plans to deploy $50 to $55 billion between 2019 and 2022 on growth expansions and acquisitions.
Alternative energy isn’t going away. There’s no reason why this stock can’t continue to perform as it has in the past. It’s also worth noting that NEE achieved those returns with a beta of 0.21, meaning it is less than one quarter as volatile as the overall market.