3 Buys in This Year's Renewable Energy Rally

NEW YORK ( TheStreet) -- Over the last two decades, the U.S. has seen major moves forward in the renewable energy space. Subsidies and government mandates have created a supportive environment for everything from biofuels to wind and solar energy as potential alternatives to fossil fuels.

On a comparative basis, however, there is still significant room for growth -- and below I detail three companies to watch.

According to data from the Energy Information Administration, in 2011, renewable energy consumption was a quarter of what was seen in petroleum consumption, a third of yearly consumption in natural gas, and less than 10% of national energy consumption as a whole.

Nonetheless, the progress in transitioning to renewable energy has been impressive. Power generation in wind energy has more than tripled since 2000. Productivity levels in ethanol have more than quadrupled since 2003.

All of these factors point to positive trends with significant potential for growth. A recent report from the IEA supports these positive possibilities, suggesting that global renewable energy sources (such as wind, water, and solar energy) will eclipse both nuclear energy and natural gas by 2016.

Specifically, the IEA report shows that rising demand in emerging markets and lower production costs will allow for increased competition with fossil-fuel power generation. As this happens, power generation from renewables is expected to double that of nuclear energy in the next three years.

Longer term, the trend continues to build. The IEA report predicts renewable power will rise by 40% in the next five years, and make up nearly 25% of global energy consumption by 2018. This is a significant increase from similar projections released just a few years ago.

Even the White House has unveiled plans to reduce its reliance on fossil fuels, with President Obama articulating goals for the federal government to direct 20% of its energy needs to draw from renewable sources by 2020. The combination of these factors helps paint a brighter outlook for investors looking to gain exposure to the renewable energy space.

So, while it is unlikely any of us will live long enough to see a world that meets a majority of its energy needs using renewable sources, there are still many ambitious companies with solid fundamentals that present highly attractive investment opportunities for those with broad time horizons. Here, we will look at three stock choices with more upside potential in this year's bull market.

This year's gains in Renewable Energy Group ( REGI) have been nothing short of stellar, with the stock rising by more than 147%. But this is just another market example of a company that has been largely undervalued, rather than one that is posting an over-extended run. In fact, the growth assets scheduled to come online suggest the company remains undervalued despite that run higher.

In 2012, the company achieved $1 billion in annual revenue for the first time and could soon be seen producing as much as 25% of the total supply in U.S. biodiesel markets. Annual capacity levels are currently seen at nearly 250 million gallons, but ongoing construction projects will soon bring these volumes near the 400 million gallon mark. The latest rally in REGI has been massive, but any downside retracements from here should be viewed as a new opportunity to buy given this positioning.

Next, we look at SunPower ( SPWR), which is set to add to its growth in residential markets. Solar energy stocks have seen some well-documented volatility in the last few years, but there are reasons to believe most of the carnage is behind us. SunPower's panel efficiency is expected to reach an industry-leading 23% by 2015, along with a 35% reduction in power generation costs.

SunPower has seen an even more impressive, momentum-fueled rally (of more than 290%), but we are still well-below the 2007 highs and the company is positioned to assume a commanding position in the sector for years to come.

Last, we look at a less conventional clean energy choice in Valero ( VLO), which is now the third-largest producer of ethanol in the U.S.

Known more for its production in traditional refineries, recent acquisitions in bio-refineries set the company on a path to enter into new markets (key progress has already been made in wind and algae farms). Transitions of this nature cannot be made overnight, but for investors looking for large-cap exposure to the renewable energy space, recent changes at Valero present an interesting alternative.

Furthermore, Valero works better as a contrarian play, after its large drop-off in the second quarter put its year-to-date gains just above 4%.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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