3 energy stocks and the truth behind their bargain deals

Key Points

• As the U.S. GDP expands, and the FED points to potential rate cuts coming in 2024, the compressed oil price may meet Goldman Sachs' projections higher. 
• Alternative energy stocks may call for investor funds once oil becomes 'too expensive' in the eyes of the market, and there are indicators for a coming bull run in these.
• Analysts agree there is a pending rally for these two stocks for the industry.

Now that the markets have taken a turn for the better, backed by macroeconomic conditions and a more dovish FED going into 2024, it is more important than ever for your portfolio to be loaded with cheap, high-quality businesses to boost your wealth's growth potential this year.

The economy pushed its second quarter of positive real GDP growth, and inflation is quickly getting closer to the FED's 2.0% target, making a case for rate cuts. With the VIX reaching its lowest levels since 2019, stocks feel very confident about their future direction, but backing those fallen soldiers is historically the best place to be.

Within energy stocks, some of these out-of-favor names shouldn't be this cheap; their strong profitability will place them high on value investors' lists for 2024. Firms like Brookfield Renewable Partners NYSE: BEP and Bloom Energy NYSE: BE are earning all the love they deserve from analysts, but more on that later.

Working hand in hand

Looking at the price action in the Energy Select Sector SPDR Fund NYSEARCA: XLE, namely its 2.6% rise in the past week, some investors could see this sector as preparing to pivot on increased energy demands. Oil puts itself in the crosshairs with these two firms in the renewables space.

According to Goldman Sachs NYSE: GS, the price per barrel of oil could reach as high as $100.0 shortly. This thesis makes sense when you consider that OPEC just doubled down on its production cuts strategy, and growing GDP in the U.S. will drive higher demand, which will run into an inevitable bottleneck.

You see, oil will be convenient to a bunch of industries and consumers as long as it remains cheap, considering that the price per barrel dropped from above $90.0 a barrel in September to below $70.0 in December (more than 22.0%!), oil is all the hype today.

But what happens when oil comes back up due to both supply cuts and demand increases in an expanding economy? Well, the commodity (as an energy source) becomes less attractive. This is where renewable energy firms like Brookfield and Bloom begin to shine.

According to the breadcrumbs of evidence they have left behind in recent months, it also looks like markets are taking this viewpoint as a complete given rather than a possibility. Analysts, who are usually careful to stick their necks and reputations out, have turned bullish on these names. Here's the protein of the deal:

Markets have voted

Within the alternative energy industry pocket of the economy, markets have slapped a value on the future earnings potential of the participants within the space. Using the forward price-to-earnings ratio as a way to gauge this view, the industry trades at an average 28.9x multiple today.

Before your value-investing schooling senses tingle, you are not looking for the cheapest valued names in the list because they are usually 'cheap for a reason'; what that reason is, well, you don't want to stick around to find out, do you? 

In this sense, the highest-valued names in the space will command such valuation multiples for a good reason, and it is typically in the sense of earnings growth that justifies their premium valuations.

So, while the industry is expected to grow its earnings by an average of 61.1% in the next twelve months, the top rated companies (Bloom and Brookfield) are essentially carrying the industry forward. 

Bloom stock is trading at a forward P/E of 74.6x, a 158.0% premium to the industry, and for good reason. Analysts have projected earnings to jump by 246.0% in the next twelve months, driving them to assign a price target of $20.2 a share for a 42.6% upside from today's prices!

Brookfield follows the same dynamic as one of the highest-valued stocks in the industry; its 191.5x forward P/E commands a 562.0% premium! Why, you ask? Simple, projections point to an EPS advance of 148.3% in the next twelve months to beat the industry average.

Knowing what you know now, it should be no surprise to see a price target of $31.0 per share being slapped on this stock. By the way, that's 15.6% higher than where the stock trades today.

Being careful of overstating the potential value of these stocks, analysts may not yet be reflecting the interest these names may command once oil moves higher and demand for alternative energy sources kicks in.

In either case, don't be one of the investors who wonder what could have been when watching stock charts move up.