3 Energy Companies With The Highest Upside Potential

First Solar (FSLR)The energy sector has underperformed year-to-date returning only 2.35% to shareholders, while the S&P500 has appreciated 14.57%.  On a year-to-date basis, the energy sector has only outperformed the basic material sector, which lost 6.54% of its value year-to-date. Finding a winner in one of the worst performing sectors is not an easy task, but the companies talked about in this article have high upside potential.

Arch Coal Inc (NYSE:ACI)

Arch Coal is the second largest coal company, only behind Peabody Energy Corporation (NYSE:BTU), and inherently has had a hard 2012. The combination of poor demand for coal in the U.S. and the push for cleaner energy worldwide have caused Arch Coal’s stock price to drop 51.27%, and Peabody’s to drop 27.39% year-to-date.  Arch Cole reported a $0.14 loss halfway through 2012, compared to a profit of $0.38 in the 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 their product to the growing Asian economy that remains largely healthy.  Arch Coal is cheap, trading at only 0.3 times their sales, 0.5 times their book value, and they have an EV/EBITDA of 6.69. Peabody trades at 0.79 times their sales, 1.12 times their book value, and they have an EV/EBITDA of 6.00. Arch Coal’s low valuation combined with their 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 (See what hedge fund managers see in ACI).

Sempra Energy (NYSE:SRE)

Sempra Energy is a holding company that distributes natural gas and electricity to most of Southern California, or roughly 20 million customers. The holding company was derived through the merger of San Diego Gas and Electric, and Southern California Gas. Sempra has benefited from the drop in gas prices and through their strong diversification in other energy sources and their international growth, the company has returned 17.55% to their shareholders year-to-date. These catalysts make Sempra one of the sexiest utility stocks to buy right now.

From a valuation standpoint, Sempra is cheaper than PG&E Corporation (NYSE:PCG) on a P/E basis and slightly more expensive on EV/EBITDA basis. Sempra is trading at 17.48 times their 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, Sempra reached their 52-week high at $72.32, which could have been the reason hedge fund managers wanted to cash out on their positions. After raising their dividends by 25%, Sempra has a 3.74% dividend yield and is a good option for income-oriented investors.

First Solar, Inc. (NASDAQ:FSLR)

Many investors hear the words solar power and think although it’s a great idea that helps our environment, we do not live in a dream world and the technology lacks profitability and is 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 their sales, 0.58 times their book value, and they have an EV/EBITDA of 3.08. There’s a high upside potential for the largest U.S. PV maker who has changed its business model to focus on a niche market. By shifting their attention from the traditional rooftop applications to large-scale power plants, the company now has a greater potential with less international competition. Investing in First Solar is a high risk, high reward scenario.

For a look at how the hedge fund industry is viewing these stocks, continue reading here.

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