One of the likely early favorites for hot stock for 2021 is NextEra Energy (NYSE:NEE). The company has been operating as one of the largest utility stocks in the United States. However, as its name suggests, NextEra is not just about the present state of utilities. It also has an eye to the future. And it’s the future of NEE stock that has investors excited.
For years, NEE stock fit into investors’ portfolios in the same way a Duke Energy (NYSE:DUK) would. That is, it pays a reliable dividend and doesn’t get volatile. It’s predictable.
But NextEra has always had its eye on being more than just your Steady Eddie utility stock. In fact, the company recently approached Duke with a takeover offer that would result in a merger of two utilities that would be worth over $60 billion.
Duke has said no to the overture (for now), but it sounds as if NextEra may make another run at the company. That certainly bears watching but growing its core utility business is not the reason I would be investing in NEE stock.
Renewable Is the Future, But the Future Is Not Here
It’s a given that renewable energy becoming a crucial part of our nation’s public policy over the next four years. Still, I was looking for a reason to recommend NextEra Energy aside from stating the following:
NextEra Energy is the world’s largest producer of wind and solar energy. With Joe Biden as the next president, renewable energy stocks will have a champion. And if A plus B equals C. Then “C” would be NEE stock skyrocketing.
And I found it in the form of a Bloomberg article that led me to Wright’s Law. I was familiar with Moore’s Law in the world of semiconductors. And, as it turns out, Wright’s Law posits something similar. Wright’s Law is a theory of industrial production based on airplane manufacturers. Wright found that every time capacity doubled, the cost declined by a similar amount.
A Spending Spree That Should Pay Off
The takeaway of this for renewable energy stocks is that it pays to be bold. In the case of NextEra Energy, the company has made shrewd investments in wind and solar farms. In fact, the company’s renewable energy “pipeline” spans about half of the United States.
And it plans to double that capacity. If (and more likely) when it does, the company will be generating enough renewable energy to power about 10% of the country. But once it does, according to Wright’s Law, the next 10% will come with less expense.
This ability to continue to grow while reducing the amount of debt it takes on will be key. Because there is a suggestion that NEE stock is overvalued. The stock’s price-earnings ratio is nearly 37, which is nearly triple its 20-year historical average of 14. And for those that look at metrics like discounted cash flow, NEE stock shows some concern that is expressed in the company’s healthy appetite for debt.
The Story Gets Better For NEE Stock
A recent article by my colleague Larry Ramer sparked my interest in NEE stock as well. Ramer reminds us that a Biden administration will be less hostile to China. Part of that will play out in the removal of tariffs. And that means a lower cost of solar panels.
So, we have a company that’s already one of the largest builders of a renewable energy infrastructure that will face lower production costs due to Wright’s Law and an assist from more favorable tariff policies.
Remember that NextEra Is a Traditional Utility As Well
Another InvestorPlace writer, David Moadel recently remarked that NextEra’s growth ambitions make it similar to Amazon (NASDAQ:AMZN). Even if you don’t buy that narrative, you can still believe that NextEra is likely starting to behave less like a “reliable” utility stock and more like a growth stock.
However even with that said, NextEra is already large. And investors shouldn’t forget that NextEra is composed of three companies. For obvious reasons, the business unit garnering most of investors’ attention is NextEra Energy Resources, its clean energy unit.
But it also owns Florida Power & Light Company, which is the largest rate-regulated utility in the United States. And it owns Gulf Power Company, which also services the Florida market. Both of those business units recently posted year-over-year growth on the top and bottom lines.
All of this means that there are a lot of reasons to invest in NEE stock right now. And as of this writing, the stock appears to be getting ready for a new leg up.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
