Renewable energy stocks: which ones are worth a buy?

Renewable energy stocks are the words on every savvy investors lips. But how do we know which ones are worth our capital? James Reynolds talks about three companies and if they should be avoided or not.

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Windmills for electric power production.

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I think renewable energy stocks are vital for any forward-thinking investor. The world must adapt rapidly to the climate crisis and investors are in the perfect place to benefit from this change. But which companies are worth buying for my portfolio, and are there any that I should avoid?

ITM Power (LSE: ITM)

ITM power is a UK-based manufacturer that produces hydrogen electrolysis machines. Hydrogen is a clean burning gas which some have touted as a better replacement for gasoline. ITM Power’s electrolysis machines are unique in that they are modular, transportable, and designed to work in conjunction with wind or solar farms to produce ‘green’ hydrogen. This contrasts sharply with BP and Shell’s ‘Blue’ hydrogen which is made by reforming methane, a process which releases carbon dioxide into the atmosphere.

ITM has been growing its business in recent months. It raised £250m this year to help fund the construction of two new factories, and had seen a 46% rise in its projected revenues over the next year followed by 31% over the next three years. However, it has seen a lot of share price volatility and diluted those shares to raise that £250m. As someone who believes in the future of hydrogen, I will be adding it to my portfolio. But it is a risky choice.

Plug Power (NASDAQ: PLUG)

At the other end of the hydrogen spectrum sits Plug Power. Plug produces the fuel cells needed to convert hydrogen into electricity. Hydrogen fuel cells themselves are not that complex although they can be expensive, and demand has historically been very low. Plug has been on the renewable energy scene for a very long time, first going public all the way back in 1999. The real question is though, is now the time for Plug to really shine?

Well…maybe?

It has seen incredible growth in revenues recently, averaging 30% over the last five years and 76% in just 2021 alone. It has also undertaken massive partnerships in France and South Korea to help expand their hydrogen fuel needs, and opened a new gigafactory in New York just this month. But Plug, like ITM, is yet to be profitable. The cost of revenue far exceeds the revenue actually attained and (according to the Wall Street Journal) the company is at least $700m in debt. Its growth over recent years is astounding and if renwable hydrogen really takes off then Plug has a chance. But that much debt with such low revenue and no profits makes this too risky for me.

Greencoat UK wind (LSE: UKW)

Greencoat is a much simpler choice for me than Plug or ITM. The investment firm owns or partially owns 40 wind farms across Britain and is expanding its holdings to offshore sites. Its net profit margin over the last five years has been 77% and while the amount of debt has increased, it has shrunk as a percentage of the company’s market cap.

Greencoat UK could be in for a tough year as energy firms struggle to stay afloat. But its reliance on an inconsistent resource means market resilience is baked into the business model. On top of that, electricity produced by renewable sources is already cheaper than that of coal or gas power plants. I believe that the soaring costs of fossil fuels will continue to increase the appeal of firms like Greencoat, and I’ll be adding it to my portfolio shortly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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