With the gift-giving season barely in the rearview mirror, the idea of hitting up another store and waiting in another line are far from the top of my wishlist. Logging onto my online brokerage firm's website, on the other hand, seems a lot less daunting -- and a lot more enjoyable.
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Representing various niches of the renewable energy sector, Ormat Technologies (NYSE: ORA), Pattern Energy Group (NASDAQ: PEGI), and Covanta Holding (NYSE: CVA) are all companies that represent compelling opportunities at the moment. And if one of my holiday presents had included the funding of my account instead of more socks and sweaters, there are definitely some stocks that I'd be eager to pick up.
On solid ground
Providing geothermal solutions for more than 50 years, Ormat Technologies distinguishes itself as the only vertically integrated geothermal company. After adding four new geothermal power plants, or 87 MW of new capacity, in 2017, Ormat now owns and operates assets totaling 800 MW -- a portfolio which has a geographic footprint that extends through six countries on three continents. Looking forward, Ormat foresees adding 126 MW to 136 MW of capacity by the end of 2019 with a longer-term goal of growing its portfolio to 1,150 MW of capacity by 2022.
Although Ormat's stock, as of this writing, is trading near its all-time high, I would still welcome the opportunity to pick up shares if given the chance. For one, the company has excelled, over the past five years, at expanding its gross and operating margins.
In addition, the company has been steadily growing both the top and bottom lines over the same period. If the company achieves the midpoints of its guidance for fiscal 2017, it will represent compound annual growth rates of 5.3% and 7.5% for revenue and adjusted EBITDA, respectively, since fiscal 2013.
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An independent power company, Pattern Energy has a portfolio that includes 20 wind power facilities, representing an ownership interest in 2.7 GW of generating capacity, located in the United States, Canada, and Chile. Looking to the future, Pattern Energy recognizes numerous opportunities for growth.
As a yieldco, it has a right of first offer (ROFO) agreement with its parent company Pattern Development, which has a 5.9 GW project pipeline consisting of solar, wind, and transmission projects located in the U.S., Canada, Mexico, Chile, and Japan.
Currently, shares of Pattern Energy appear attractive for several reasons. For one, the stock seems like a compelling opportunity from a valuation perspective; it trades at 8.8 times cash from operations, which is well below its three-year average of 16.4 according to Morningstar. A second reason stems from the tax overhaul that President Trump recently signed. In a letter to shareholders, Mike Garland, Pattern Energy's president and CEO, stated his belief that the tax bill "provides the opportunity for continued expansion of the renewable power sector." Citing reports from Morgan Stanley and Lazard, Garland also states that "Utility-scale wind and solar power generation are now recognized as the lowest cost forms of new power generation in the United States" -- something he and the rest of Pattern Energy's management "do not see that changing as a result of the tax bill." Although he does articulate some reasons to be circumspect, Garland, overall, appears optimistic that Pattern Energy has the wind at its back following the passage of the tax legislation.
And the company's commitment to returning cash to shareholders provides another reason why I'd gladly add the stock to my portfolio. Raising its dividend over the past 15 consecutive quarters, Pattern Energy has increased its dividend 35% since its IPO in late 2013.
One man's trash is this company's treasure
Covanta, an industry leader in environmental solutions, develops, owns, and operates a network of solid and liquid material processing, recycling, and energy-from-waste (EfW) facilities across the United States. Expanding its geographic reach, Covanta recently commenced operations at its new EfW facility in Dublin -- which is expected to contribute about $60 million in EBITDA annually -- and it has three projects, located in the United Kingdom, in its pipeline. In total, Covanta estimates its 42 EfW facilities have a total capacity of more than 1.4 GW, earning it a place in this renewable energy peer group.
Trading at a price-to-book ratio of 6.6, Covanta may appear expensive considering its five-year average ratio is 3.1, but the stock seems reasonably priced by other metrics. For one, it trades at 1.3 times sales, which is below its five-year average of 1.5; moreover, it appears attractive since it trades at 8.8 times cash flow -- well-below the industry average of 12.2 according to Morningstar. The stock also has the support of Wall Street. Last summer, analysts at Stifel and Barclays both upgraded the stock to buy and overweight, respectively.
One of the wisest -- and most inexpensive -- practices that investors can adopt is keeping a watchlist of stocks. For some time, I've had my eyes on Ormat, Pattern Energy, and Covanta, and now seems as good a time as any to shift those names from my watchlist to my portfolio. Shares of Ormat may seem high at the moment, but I think there's plenty of room for the stock to run, so the price tag doesn't frighten me. As for Pattern Energy and Covanta, both seem reasonably priced and the long-term trends of wind energy and EfW are two horses I'd like to hitch my wagon to.
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