New Trade for November 18th, 2020

Futures for all the major indices are green this morning after a brief pause in the rally yesterday.  Dow futures are up 100 points, being lifted by Boeing stock, which has gained more than 6% in early trading.  

The promise of clean tech – creating energy from renewable resources – has lured investors to the space before only to get burned.  Is it different now, or are buyers once again flying too close to the sun? 

Energy market watchers say what makes today different from 10 years ago, when interest in clean tech was also hot, is that these power sources are now economically viable as subsidies fall away. 

There’s no getting around the fact that renewables are going to grow and continue to take global share of energy production.  So it’s easy to get caught up in the excitement and invest in companies that are far more cyclical, because as much as there’s growth, there’s parts of the industry that are still exposed to extreme demand cycles that can shift from year-to-year.  But a few companies have competitive advantages to protect themselves against those cycles.  Today we are highlighting a company that consistently generates steady cash flow and may have the edge over its peers as renewable energy use takes hold across the country.  

NextEra Energy is the world’s largest producer of solar and wind energy.  They’re owner of Florida Power & Light along with some other utilities and businesses that do wholesale energy.  They’re also the sponsor of NextEra Energy Partners, which is primarily renewable energy focused.  Renewables is a big part of NextEra’s business.  NextEra has emerged as the world’s most valuable utility, largely by betting on utilities, especially wind.  

NextEra had about 18 gigawatts of wind and solar farms at the end of last year, enough to power 13.5 million homes.  And it’s expanding significantly, with contracts to add another 12 gigawatts of renewables. 

For decades, NextEra Energy has been reducing emissions through the development of renewable energy and modernization of its generation fleet.  The company’s goal is to reduce CO2 emissions rate 67% by 2025, from a 2005 baseline.  This equates to a nearly 40% reduction in absolute CO2 emissions, despite the company’s total expected electricity production almost doubling from 2005 to 2025.  Working toward this goal, as of year-end 2019, NextEra has reduced its CO2 rate by 52.2%  and the absolute CO2 tons by 20% while their generation increased by 67.5%.  That’s pretty impressive.  

Investors have endorsed NextEra’s clean-energy strategy, with renewable energy becoming both mainstream and desirable.  At least a dozen U.S. states have policies that will eventually mandate completely clean power grids.  Plus, president elect Joe Biden has proposed a green electrical system in the U.S. within 15 years.  

“Renewable Energy is not a niche investment anymore,” said Kit Konolige, a utilities analyst with Bloomberg Intelligence.  “It’s a big industry.”  And NextEra Energy seems to be poised for a lion’s share in the future.  

NextEra has a very strong track record of success.  Between 2004 and 2019, their adjusted earnings per share grew at a compound annual growth rate of 8.4%, while dividends grew at a compound annual growth rate of 9.4%, that’s incredible growth over a 15-year period.  Over the past five years, the stock is up 231% on a total return basis.  That type of performance is not typical for a utility company which indicates that NextEra truly  is an outlier in the industry.