Editors' pick: Originally published March 7.
When investment guru Warren Buffett speaks, the world listens.
So when, in his annual letter to Berkshire Hathaway (BRK.A - Get Report) (BRK.B - Get Report) shareholders, Buffett said that with government help, renewable energy may threaten the businesses of traditional utilities, investors should take notice. Following Buffett's predictions has been a proven path to reliable investment gains.
"Tax credits, or other government-mandated help for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost operator," Buffett wrote in his letter.
Buffett's concerns about climate change and the resulting faith in the sector is evident from Berkshire's pledge in July to nearly double its $16 billion investment in renewables.
With Buffett putting his money where his mouth is, we think investors should follow suit. Here are three undervalued renewable energy plays that could make your portfolio shine in the years to come. These stocks should be a part of your long-term wealth building plan.
San Francisco-based Pattern Energy Group is a premium power company involved in the development, construction, ownership and operation of wind power plants.
With the recent completion of a 150-megawatt wind farm in Benton County, Ind., all 16 of Pattern Energy's wind power facilities are fully operational, and its total operational capacity now stands at 2,282 MW. The latest facility will sell 100% of the electricity produced to Amazon's Amazon Web Services.
Over the past year, the stock has fallen about 32%, and the company's bottom line has missed analysts' estimates in three of the past four quarters. Analysts expect the stock to make significant gains in the next year, however. Their median 12-month price target for the stock is $25.50, which is 36% higher than recent levels.
Despite the weak performance in the stock, Pattern Energy recently announced it was increasing its quarterly dividend to 38.1 cents from 37 cents. This represents a $1.52 annualized dividend and a yield of 8.76%.
Late last year, Bank of America's Merrill Lynch unit upgraded its rating on the stock to buy from neutral, and in September JPMorgan initiated coverage on the stock with an overweight rating. Currently all 14 analysts covering the stock rate it a buy or a strong buy.
Founded in 2001 by Shawn Qu, Canadian Solar is one of the world's largest solar power companies. It manufactures solar photovoltaic modules and panels and solar power systems.
Stocks of renewable energy companies such as Canadian Solar and SolarCity rallied in the wake of the COP21 in Paris late last year, which reached a legally binding climate agreement.
Solar power's share of electricity generation is on the rise. The U.S. Energy Information Administration recently said that solar power would account for the largest portion of expected additions to U.S. electricity-generation capacity in 2016:
"Electric generating facilities expect to add more than 26 gigawatts (GW) of utility-scale generating capacity to the power grid during 2016. Most of these additions come from three resources: solar (9.5 GW), natural gas (8.0 GW), and wind (6.8 GW), which together make up 93% of total additions. If actual additions ultimately reflect these plans, 2016 will be the first year in which utility-scale solar additions exceed additions from any other single energy source."
Over the next five years, analysts expect annual earnings growth for the company of 20%, vs. 9.3% for the industry and 5.3% for the S&P 500.
At a price-to-earnings ratio of 7.2, Canadian Solar is much lower than the industry average of 23.45, putting it among a group of reliable growth investments that should soar in 2016.
Unlike the two companies mentioned above, which are pure energy plays, Hannon Armstrong Sustainable Infrastructure Capital is a real estate investment trust that provides debt and equity financing to the energy-efficiency, sustainable-infrastructure and renewable-energy markets.
This company's business should benefit not only from the Paris climate conference but also from Congress' recent multiyear extension of tax credits for wind and solar.
The REIT also has a diverse pipeline of more than 100 investments in excess of $2.5 billion, which should shield it from big losses if any single investment goes bad.
Hannon Armstrong recorded 12% growth in core earnings per share in its 2015 fiscal year. It also has recently increased its dividend to 30 cents a share, giving it an attractive yield of 6.6%. The company is expecting strong growth this year and next, saying core earnings should grow between 14% to 19% a share in 2016 and see double-digit growth in 2017.
Analysts are bullish on the company. They expect average annual earnings growth of 11.4% over the next five years. This figure comfortably beats expected growth of 9.9% for the industry and 5.3% for the S&P 500.
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