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JPMorgan Says ‘Rent to Own’ 3 High-Yielding Clean Energy Yieldcos

For many reasons, one asset class that has taken an absolute beating this year has been the alternative energy stocks, and right in line with top solar stocks have been the yieldcos. A new research report from JPMorgan takes an interesting angle on what investors can do with three of the top yieldcos that have been absolutely eviscerated.

The JPMorgan analysts suggest that the sell-off gives investors a unique opportunity for investors to buy the stocks for a year or two and earn between 7% to 14% annual returns. While they note that investors should have more than enough opportunity to exit the trades, there is a chance for some upside if the companies post organic growth, and even bigger upside of the equity capital markets re-pen and offer the capital to finance projects.

All three stocks are currently rated Overweight at JPMorgan.

8point3 Energy Partners

This had a recent initial public offering that sputtered out of the gate and may be offering investors an outstanding opportunity and entry point. 8point3 Energy Partners L.P. (NASDAQ: CAFD) is a limited partnership formed by First Solar and SunPower to own and operate a portfolio of selected solar energy generation assets. While initial Wall Street reaction was less than enthusiastic, some analysts believe that there could be solid upside to the value of First Solar’s stake in 8Point3 Energy. The cost of capital benefits from the launch of the limited partnership is likely to add value to First Solar’s fully developed project backlog, with the monetization of the photovoltaic plants.

Initially analysts liked the deal and they think that the company differentiates itself from other yieldcos with an outstanding portfolio of high-quality operating assets with strong creditworthy off-takers in the U.S. utility scale market. Many also believe that the company has strong growth visibility for more than three years and a solid business model that doesn’t depend on acquisitions. They also cite the strong backing from First Solar and SunPower as another good reason for investors to buy shares.

The company has a very lean balance sheet, with no project level debt, and a very lean operating expense structure that they feel offers investors increased downside protection for the future. Some analysts point to a conservative cash available for distribution (CAFD) calculation approach, and a back-end loaded incentive distribution rights structure that they feel will result in low dilution to current unit holders.

The current 8point3 Energy Partners distribution was calculated by JPMorgan to currently be 6.9%. The JPMorgan price target is $24, and the Thomson/First Call consensus price is $22.63. The shares closed trading most recently at $13.39.

TerraForma Global

TerraForma Global Inc. (NASDAQ: GLBL) owns and operates renewable energy generation assets worldwide. It generates electricity through solar, wind and hydro-electric projects with a total combined capacity of 987.8 megawatts. The company serves utility, commercial, industrial and governmental customers. The company was founded in 2014 and is as a subsidiary of SunEdison.

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Analysts point out that TerraForma Global is for now an emerging markets play and, given the size of the company’s global target markets and their renewable obligations, it is unlikely to see any lack of growth projects. In addition, currency, interest rate and regulatory risks are unlikely to surface for the next 12 to 24 months. Like all the outfits, if the equity capital markets warm back up to offerings, the landscape could quickly change for the company.

JPMorgan calculates the distribution at be at a whopping 13.5%. The price target is $17, and the consensus target is a tiny $8. Shares closed Thursday at $8.94.

TerraForm Power

This company may be just the right stock for investors that like the sector but want more conservative route. TerraForm Power Inc. (NASDAQ: TERP) owns and operates solar and wind generation assets serving utility, commercial and residential customers. Its portfolio consists of solar projects located in the United States, Canada, the United Kingdom and Chile, with total nameplate capacity of 887.1 megawatts. Formerly known as SunEdison Yieldco, the company changed its name last year and is perhaps one of the highest profile companies operating as a yieldco. Some Wall Street analysts see distributions rising to 5.65% by 2017.

The JPMorgan team feels that the combination of dividends and a growth-oriented company in the renewable energy field makes good sense for the short term. The company’s relationship with the sponsor SunEdison is a positive because of its large development pipeline and incentive to grow TerraForm’s portfolio, which is composed of projects with long-term contracts in place, solid counterparties with high investment grade credit ratings, very diversified assets (including solar and wind projects) and low asset ages.

TerraForm investors are paid a 6.01% distribution. The JPMorgan price target is a whopping $41, and the consensus target is $35.44. Shares closed Thursday at $22.01.

The JPMorgan idea is solid: Buy the beaten down shares, own them for a couple of years for the distributions and hope you see a little capital appreciation tossed in. And who knows, in those couple of years the entire market attitude could swing them back into favor.

By Lee Jackson