Fuel Up With These 3 Energy Stocks
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The energy sector has underperformed the broader market in 2012, returning only 2.35% to shareholders while the S&P500 has appreciated 14.57%. In fact, so far this year the energy sector has only outperformed the basic material sector, which has lost 6.54% of its value since January. Finding a winner in one of the worst performing sectors is not an easy task, but this article will talk about some energy companies that have high upside potential.
Arch Coal (NYSE: ACI)
Arch Coal is the second largest coal company in the U.S., behind only Peabody Energy (NYSE: BTU), and has had a hard 2012. The combination of poor demand for coal in the U.S. and the push for cleaner energy worldwide has caused Arch Coal’s stock price to drop 51.27%, and Peabody’s to fall 27.39% year-to-date. Arch Cole reported a $0.14 loss halfway through 2012, compared to a profit of $0.38 in the same period last year. Expenses continue to grow faster than revenues, and analysts don’t expect Arch Coal to have a profitable year.
Although the American and European economies have seen better days, in the next few years Arch Coal may have the opportunity to export to the growing Asian economy, which remains largely healthy. Arch Coal is cheap, trading at only 0.3 times its sales, 0.5 times its book value, and it has an EV/EBITDA of 6.69. Peabody trades at 0.79 times its sales, 1.12 times its book value, and has an EV/EBITDA of 6.00. Arch Coal’s low valuation combined with its strong worldwide footprint make the company an acquisition target. An international company looking to gain North American exposure may have Arch Coal in their sites.
Sempra Energy (NYSE: SRE)
Sempra Energy is a holding company that distributes natural gas and electricity to most of Southern California, roughly 20 million customers. The holding company was created by the merger of San Diego Gas & Electric and Southern California Gas. Sempra has benefited from the drop in gas prices and through its strong diversification in other energy sources and its international growth, the company has returned 17.55% to its shareholders year-to-date. These catalysts make Sempra one of the most interesting utility stocks to buy right now.
From a valuation standpoint, Sempra is cheaper than Pacific Gas and Electric (NYSE: PCG) on a P/E basis and slightly more expensive on EV/EBITDA basis. Sempra is trading at 17.48 times its earnings and has an EV/EBITDA of 9.91, while PG&E is trading at 23.45 times earnings and has an EV/EBITDA of 8.07. During the second quarter this year, Sempra reached its 52-week high at $72.32, which may be why a lot of hedge fund managers decided to sell their positions and take the profit. After raising their dividends by 25%, Sempra has a 3.74% dividend yield and is a good option for income-oriented investors.
First Solar (NASDAQ: FSLR)
Many investors hear the words solar power and think, although it’s a great idea that helps our environment, the technology lacks profitability and is too reliant on government support. While those assumptions carry a lot of truth, they are overlooking the past and potential growth in the solar power industry. From 2006 to 2012, the U.S. market for solar power grew from $1.2 billion to $6.4 billion. In 2011, the U.S. had 214,157 photovoltaic (PV) systems installed, more than twice the total at the end of 2009.
First Solar is the largest U.S. manufacturer of PV thin-film cells, the most widely used solar technology. Over the course of 2011, overcapacity pushed PV prices down more than 50%, causing many PV companies to fail. Poor profitability is driving consolidation, and now over half of global cell and module production is controlled by 10 firms. Pricing pressures from substitute energies and lack of certainty for government grants has pushed First Solar’s stock price down 36.73% year-to-date.
Looking at the valuation, First Solar is trading at 0.63 times its sales, 0.58 times its book value, and has an EV/EBITDA of 3.08. There’s a high upside potential for the largest U.S. PV maker, which has changed its business model to focus on the new market of large-scale power plants. By shifting its attention away from the traditional rooftop applications, the company now has a greater potential with less international competition. Investing in First Solar is a high-risk, high-reward scenario.
Know What You Own
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This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.