The energy sector is an important part of the global economy. It provides the fuel and the energy needed for the growth into and of developed nations. As such, it’s one of the areas that come with massive investor interest.
However, investing in energy can prove to be pretty risky. Economic headwinds combined with supply-and-demand uncertainties can make it difficult to choose strong investments that are likely to grow over time.
Nonetheless, making the right moves when investing in energy stocks can be an incredibly fruitful endeavor. For example, in 1990, Exxon Mobil stock traded at around $12 per share. By January of 2020, the stock was trading at above $65 per share.
If you had invested $10,000 in Exxon Mobil in 1990, your investment would be worth more than $54,100 today. Not to mention, you would have received even more money in dividend payments, which works out to an additional 5% return per year according to Blue Harbinger Investing Research. Depending on which year in that span you’re talking about, that would have accounted for between $500 and $2,700 per year in added dividend income.
Those kinds of returns are nothing to sneeze at. So it’s not surprising to see that so many investors are looking to try their hand at investing in energy stocks.
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5 Best Energy Stocks to Buy in 2020
As with any investment made in any sector, it’s always a good idea to do your research and find what you believe to be the stocks with the highest potential to generate returns. Some energy stocks you may want to start researching are listed below.
1. Exxon Mobil Corporation (NYSE: XOM)
Exxon Mobil has had a rough start in 2020. Its stock price has seen severe declines related to demand concerns surrounding COVID-19 shutdowns and the resulting oil supply surplus. Nonetheless, these recent declines could be an opportunity to get in on strong potential gains in the future.
However, the fact that a stock is trading near its lows is never a good reason to buy it. After all, stocks trade on lows all the time just before a business enters bankruptcy, goes out of business, or announces reverse stock splits in an attempt to comply with the requirements of the exchange they’re traded on.
Although Exxon Mobil’s stock is down, many believe the company will make a run for the top in the long run thanks to its diverse clean energy portfolio.
There’s no doubt Exxon isn’t giving up its core traditional energy business any time soon. The company owns one of the largest chains of consumer gas stations, several oil refineries, and other companies that meet energy needs using traditional fuel sources. However, knowing that the world is looking for more clean energy options, the company is making massive investments in this space as well.
In fact, Exxon is one of the leaders in the world of carbon capture and storage (CCS) technology. Carbon capture technology has the potential to capture about 90% of CO2 emissions from the use of fossil fuels in energy, ultimately making energy production a much cleaner process. The captured carbon can then be used in various environmentally positive ways. According to Vox, CO2 generated from CCS technology is used in applications including the production of more sustainable concrete and algae-based feedstock.
As of July 2020, Exxon Mobil controls about a quarter of the CCS industry, making it the largest player in a section of the energy industry that’s beginning to gain real interest.
With Exxon Mobil’s position as a leader in traditional energy and the CCS corner of the clean energy space, the company is already pretty impressive. Add in the discount to its share price caused by COVID-19-related declines, and the potential for tremendous gains becomes hard to ignore.
2. FuelCell Energy, Inc. (NASDAQ: FCEL)
FuelCell Energy is a small, lesser-known company. As a penny stock, it’s the most risky investment opportunity on this list. Notwithstanding the risks, it’s also the stock that may have the largest long-run potential to generate serious gains.
FuelCell Energy is the developer of proprietary fuel-cell technology designed to deliver clean energy at efficient costs. In fact, it’s this technology that lies at the heart of the CSS technology Exxon Mobil is investing hundreds of millions of dollars in.
FuelCell Energy is a key beneficiary of these investments. It started a collaboration with Exxon Mobil several years ago, which is clearly going well. The collaboration has already contributed tens of millions of dollars to FuelCell’s balance sheet and will continue to do so in the future.
In December of 2019, FuelCell Energy announced that it expanded its relationship with Exxon Mobil with regard to the development and use of next-generation carbon capture technology. As a result, FuelCell now has access to an additional $60 million in revenue over the course of two years.
As of July 2020, the company trades with a market cap of around $600 million. So, this contract represents revenues equal to around 10% of the company’s entire value.
The magnitude of this deal is already impressive. And when you consider the fact that Exxon Mobil brought Princeton researchers into the carbon capture team, and that all members of the collaboration will benefit from the production of new technologies, it seems as though FuelCell is quickly becoming a cornerstone in the clean energy industry.
Of course, it’s important to consider the risks with penny stocks. In this case, you should be aware of the following:
- FuelCell Energy Doesn’t Generate Profits Yet. Like most penny stocks, FuelCell Energy currently operates at a loss and is projected to continue to do so for at least the next year. That means the company may have to move forward with transactions that dilute the value of shares and lead to stock declines in the future as it continues to perfect its technology and sales process.
- Penny Stocks Are Volatile. Penny stocks are known for high levels of volatility. FuelCell Energy is no different, which could present a challenge to beginner investors when it comes to entry and exit timing.
- Fuel-Cell Technology Is Highly Speculative. Fuel-cell technology is relatively new. While the concept has been proven and the technology is in use today, FuelCell Energy is by no means the go-to source for clean energy. Investing in the company is a bet that not only will carbon capture technology become a major part of the clean energy industry, but that FuelCell Energy will be one of the leaders of this subsector.
If you’re willing to take on the unique risks that come with FuelCell Energy, the stock represents a high-risk, high-reward opportunity to get in on the ground floor of what may become a multibillion-dollar industry. Not to mention the wide swings in value in the short term make great trading opportunities for the investor with strong technical analysis skills.
3. Chevron Corporate (NYSE: CVX)
Chevron is another household name in the energy industry. Best known for its massive chain of gas stations, the company is among the top in the energy space, ranking with the likes of Exxon Mobil.
As with Exxon, Chevron shows no intention to give up the company’s oil-related energy business. However, when it comes to future energy consumption demand, the company is preparing for the world of clean energy in a big way.
So far, Chevron has invested millions of dollars into several key areas of clean energy, including:
- Biofuels. Chevron is an important player in the biofuels game. Not only does the company create biofuels from its own feedstocks, but it also partners with several biofuel technology companies, service providers, and producers as it looks to corner this subsector of the energy industry. The company even has an agreement with waste disposal company Waste Management to refine the trash it collects to create biofuels to run trash pickup service vehicles.
- Solar. Chevron is in the process of evaluating solar technologies at three different sites in California. Its research has led to the company signing a 20-year potential term power purchase agreement with SunPower, a leader in solar solutions, to power Chevron’s Lost Hills Oil Field.
- Wind. Chevron’s involvement in wind energy is impressive, to say the least. The company commissioned what is now known as the Casper Wind Farm in 2009. Today, the 16.5-megawatt facility generates enough power to provide energy to 13,000 homes in the United States.
- Geothermal. Finally, Chevron entered into a joint venture involving a 49-megawatt geothermal facility in California. The facility produces enough energy to power about 40,000 homes.
With the company’s solid foundation as a traditional energy play and its aggressive expansion into the clean energy space, Chevron stock is one worth considering.
4. NextEra Energy Inc (NYSE: NEE)
NextEra Energy may not be a household name, but it powers more households than any other publicly traded utility company in the world. The company owns names like Florida Power and Light and Gulf Power Company, providing electricity to 5.5 million and 428,000 customers respectively. These are just two of the company’s several utility provider subsidiaries that serve customers from big cities to rural towns.
According to CSIMarket, NextEra controls about 11% of the United States utility market. There’s a strong chance you or one of your friends, family members, or acquaintances buys their energy from NextEra Energy.
NextEra Energy has also stayed far ahead of its competitors when it comes to the clean energy trend. Due to the company’s early adoption and massive investments in clean energy, it’s currently the largest generator of solar and wind energy in the world.
Impressively, NextEra Energy is among the 10 largest energy companies in the world. It is the only company on that list that isn’t involved in the traditional oil and gas industry — yet another source of validation that the company is doing incredibly valuable work.
Finally, NextEra Energy is one of few energy companies that are shielded from COVID-19 headwinds. As a utility company without reliance on oil, it has a unique advantage. As consumers stay home during and after lockdowns for their safety, they are consuming more power. In fact, NextEra Energy’s management has made multiple statements suggesting that if the company doesn’t produce earnings at the high end of its guidance, it will be upset.
While management is confident, investors are taking the wait-and-see approach, with shares trading on losses year to date. However, if the results of the next earnings report are as positive as management expects them to be, the stock could fly.
Either way, in the long run, NextEra Energy stock is likely to continue doing what it does best: producing strong revenue, earnings, and gains for investors.
5. Cheniere Energy, Inc. (NYSE: LNG)
Cheniere Energy is a pure-play stock focused on the liquefaction of natural gas. Liquefying natural gas makes the shipment of this energy source possible. However, there are not many strong sources of natural gas around the world. As such, global shipping demand is only increasing.
Studies have shown that energy produced through natural gas results in fewer harmful emissions than the burning of coal. So, as the world looks for cleaner energy solutions, natural gas is becoming a hot commodity.
Most countries around the world need to import their natural gas from the United States and other countries that produce it. This creates a competitive advantage for Cheniere Energy because the company’s pure play is to liquefy natural gas from U.S. producers to prepare it for shipment.
This makes Cheniere Energy an important part of the supply chain in a corner of the energy sector with growing demand, and it just so happens to be located in the nation that leads all others in natural gas production.
With steadily growing revenue, earnings consistently beating analyst expectations, and increasing demand for its service, Cheniere Energy’s stock is poised for growth.
Investing in the energy space can be risky, especially as the energy industry goes through a clean-energy overhaul. Nonetheless, making the right moves in the space can lead to strong gains.
When investing in the energy sector, it’s important to consider the shift from traditional power to renewable, environmentally friendly energy that’s taking place. The companies with the most potential are those that have a proven track record of growth and are consistently working to transition to low-cost energy alternatives.
Do you invest in the energy sector? What are your favorite energy stocks?
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers Team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.