2 Energy Stocks With Major Upside

• The election could change the dynamics for energy in the US

• Clean energy investing with NextEra (NEP)

• Xcel Energy (XEL) combines traditional with alternative energy investing

 

• Three reasons why these stocks are likely to rise in the coming years

• We could see a bumpy ride if risk-off returns- Take advantage of selloffs in NEP and XEL

Traditional energy-related companies have been the redheaded stepchildren of the stock market since 2018. For many energy stocks, the prices have made lower highs and lower lows since 2014.

Since June, the oil price recovered from negative territory in April to the $40 per barrel level. The stock market experienced a V-shaped recovery that took many of the leading indices to new and higher highs; energy-related companies have not participated in the recoveries to the same extent.

In August, the Dow Jones Industrial Average dropped Exxon Mobile (XOM) from its elite list of companies. XOM is as close to a state oil company in the US as it gets. While Chevron (CVX) remains a DJIA member, the energy sector remains the Rodney Dangerfield of the stock market; it gets no respect. Even companies with consistent earnings, attractive dividends, and in the case of CVX, low levels of debt, have seen their share prices languish.

The future of energy investing has gradually turned towards those companies working towards alternative, clean energy solutions. The November 3 election in the US could substantially shift US energy policy via the regulatory environment. The United States is currently the world’s leading crude oil and natural gas-producing nation. Two companies, NextEra Energy Partners, LP (NEP), and Xcel Energy Inc. (XEL), are positioned to take advantage of the change in the energy sector.

The election could change the dynamics for energy in the US

With only a few weeks to go until the November 3 US election, polls show a commanding lead for the challenger Joe Biden in the race for the Presidency. As we learned in 2016, we should never take anything for granted when it comes to political polls. Meanwhile, if the Democrats orchestrate a sweep on Election Day and capture not only the Presidency but majorities in both houses of the Congress, it will have substantial ramifications for energy production in the United States.

President Trump has supported energy independence in the US as his administration reduced regulations to support oil and gas production. Technological advances in fracking and reserve discoveries in the shale regions lifted the US to become the world’s leading producer of crude oil and natural gas.

The Democrats’ platform addresses climate change and the impact of fossil fuels on the environment. A Biden administration would likely usher in a new era of regulation. It could reduce fracking dramatically or even eliminate the process that extracts oil and gas from the earth’s crust.

The election is, among many other issues, a referendum on US energy production when it comes to hydrocarbons. Another surprise victory by the incumbent President would likely maintain the status quo. If the pollsters get it right, the US energy business could change dramatically.

Meanwhile, even as the US continued to produce fossil fuels over the past years, technology has caused a natural evolution in energy demand. The number of EVs on the road has substantially grown. Battery-powered cars and other vehicles have become more efficient with further ranges before requiring recharging. The number of solar-powered homes is increasing. While the trend towards alternative energy will continue regardless of the election result, changes in the regulatory environment would accelerate the process.

Clean energy investing with NextEra (NEP)

NextEra Energy Partners, LP (NEP) acquires, owns, and manages contracted clean energy projects in the United States. The company owns a portfolio of contracted renewable generation assets consisting of wind and solar projects, as well as contracted natural gas pipeline assets. NEP has its headquarters in Juno Beach, Florida, and has been in business since 2014. At $68.39 per share last week, NEP traded to an all-time high.

Source: Barchart

As the chart shows, the stock has been making higher lows and higher highs since 2015. In March, during the risk-off period caused by the global pandemic, the stock dropped to a low of $29.01, before storming back to its latest record peak.

NEP has a market cap of around $4.4 billion, trades an average of 589,947 shares each day, and pays its shareholders a $2.31 dividend. The yield on the shares stood at around 3.4% at the end of last week.

Source: Yahoo Finance

As the chart shows, NEP has had a volatile earnings record over the past four quarters. The company lost $1.21 per share in Q3 2019 and delivered an EPS of 50 cents in Q4 last year. Q1 2020 was a challenge as NEP lost $3.39 per share, but the company had an EPS of 69 cents in Q2. The consensus estimate for Q3 is for EPS of 44 cents when NEP reports on October 21.

A survey of sixteen analysts on Yahoo Finance has an average price target of $63.69 per share, ranging from $57 to $74.

Xcel Energy (XEL) combines traditional with alternative energy investing

Xcel Energy Inc. is a company that generates, transmits, distributes, and sells electricity. XEL generates power via coal, nuclear, natural gas, hydroelectric, solar, biomass, wood/refuse, and wind sources. XEL also purchases, transports, distributes, and sells natural gas to retail customers and transports customer-owned natural gas. XEL develops and leases natural gas pipelines and storage and compression facilities. The company invests in rental housing projects and procures equipment for the construction of renewable generation facilities. XEL’s headquarters are in Minneapolis, Minnesota, and has been in business since 1909.

XEL has a market cap of around $38 billion, trades an average of over 2.25 million shares each day. XEL pays shareholders a $1.72 dividend, equating to 2.4% at $72 per share.

Source: Barchart

Since 2002, the shares have been steadily appreciating. In March 2020, risk-off conditions caused the stock to drop to a low of $46.58 before recovering and reaching a new record high of $73.08 this month. XEL was trading at a stone’s throw from the record high at the end of last week.

Source: Barchart

The chart shows that the company has been consistently profitable over the past four quarters. Analysts have set the bar high for Q3 with a projection of EPS of $1.09 when the company reports on October 29.

A survey of twelve analysts on Yahoo Finance has a price target of $68.08 per share, ranging from $60 to $74. The stock was trading near the high end of the range at the end of last week.

Three reasons why these stocks are likely to rise in the coming years

The factors lead to bullish prospects for NEP an XEL over the coming years. First, the trend in traditional energy-related companies like XOM and CVX remains lower. Companies involved in alternative energy generation have outperformed integrated oil and gas companies, and the trend is always your friend in markets.

Second, both companies have embraced clean energy projects via investments and acquisitions. While both companies have high valuations, their growth means that they can keep up with earnings expectations.

Finally, alternative energy is the future, regardless of which party runs the US government beginning in 2021. However, a sweep by Democrats could accelerate the growth of companies embracing clean energy sources. The dividends offered by NEP and XEL may be lower than traditional energy producers, but they are likely more sustainable in the current environment.

We could see a bumpy ride if risk-off returns- Take advantage of selloffs in NEP and XEL

I would not run in and buy shares of NEP and XEL at the current levels, but I would put the companies on your investment radar. The price action in March created compelling opportunities for both companies. We could see a return of risk-off conditions in markets over the coming weeks and months as the pandemic and election create uncertainty that could lead to fear in markets. Another spike to the downside in the stock market could be an opportunity to add NEP and XEL to your portfolio when it comes to energy exposure.

Energy has been a laggard when it comes to the overall stock market. Alternative energy companies that are flexible and evolving with the markets’ requirements are likely to continue to outperform the rest of the energy sector.

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NEP shares . Year-to-date, NEP has gained 29.07%, versus a 11.07% rise in the benchmark S&P 500 index during the same period.

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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