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While the stock market has surged to record highs in 2024, the energy sector has lagged behind, with many names still feeling the pressure of high inflation, lofty interest rates, and an uncertain demand environment. Now, Morgan Stanley analysts suggest it's the perfect time to buy clean energy stocks on the dip, as the brokerage firm believes the industry is poised for strong growth regardless of the November election outcome. Geopolitical tensions in the Middle East and ongoing support for renewable energy initiatives, including bipartisan backing for various tax credits, are just a few of the drivers creating a favorable backdrop for these stocks, according to the firm.

At its June meeting, OPEC extended most of its production cuts through the end of 2025, providing a floor for oil prices and bolstering the prospects for traditional energy stocks. This move also underscores the growing importance of renewable energy sources as the world transitions away from fossil fuels. Clean energy stocks, though currently undervalued, present significant upside potential - or, as Morgan Stanley phrased it, “Demand for renewables is a powerful force.”

With energy standing out as one of the market's cheapest sectors, now is an opportune time to invest in quality clean energy companies. These stocks, trading at attractive valuations, offer a compelling opportunity for both new investors and those looking to diversify their energy sector holdings.

#1. The Aes Corp

Based in Virginia, The Aes Corp (AES) is a global energy firm that develops and operates a wide range of power plants and energy projects. Specializing in renewable energy, energy storage, and modern grid technologies, AES is dedicated to providing sustainable and innovative energy solutions worldwide. The company owns several power plants to generate electricity, which is sold to customers at wholesale rates. It utilizes a diverse range of resources for electricity production, including coal, gas, hydro, wind, and solar energy. AES has a market capitalization of $12.5 billion.

The stock has underperformed over the last year, shedding nearly 15% of its value, compared to the S&P 500 Index's ($SPX) gain of 27.7% over the last 52 weeks. Higher interest rates have pressured the shares.

From a valuation perspective, AES stock currently trade at 9.28 times forward earnings and 0.97 times forward sales, significantly lower than its utility sector peers. This means that AES stock is undervalued, and investors can buy it at a reasonable price.

AES also has a good reputation for paying dividends to its shareholders. Its annualized dividend is $0.69 per share for a yield of 3.90%. The relatively low dividend payout ratio of 24.47% underscores AES's commitment to returning value to investors while maintaining financial stability.

The company announced its first-quarter earnings print in May 2024. Sales came in at $3.08 billion, a 3.9% increase from the previous quarter. Also, net income surged to $432 million, up 559%, while adjusted EPS of $0.50 beat consensus expectations for $0.32.

AES is expanding its green hydrogen production in Texas with the help of Air Products (APD). Both firms are jointly investing $4 billion to construct a large-scale green hydrogen production facility in Wilbarger County, with the initiative encompassing 1.4 gigawatts (GW) of wind and solar power generation alongside an electrolyzer designed to produce more than 200 metric tons of green hydrogen daily.

Wall Street analysts are bullish overall on AES stock. The group has assigned a consensus "moderate buy" rating to the utility player, with the mean price target of $22.86, indicating a 27.5% upside potential.

#2. First Solar

Based in Tempe, Arizona, First Solar (FSLR) is a leading solar technology company, excelling in manufacturing solar panels and providing utility-scale PV power plants. The company continues to expand its global footprint with significant projects and partnerships across various continents. This expansion includes the development of advanced solar technologies and the establishment of new manufacturing facilities to meet the growing demand for renewable energy solutions.

Valued at $24.1 billion by market cap, the solar stock faced pressure amid the Fed's rate-hike campaign. However, the company has made a solid turnaround in 2024 despite stubbornly high rates, gaining 32.6%. The stock has pulled back 25% from last month's highs, allowing investors to buy the dip.

Currently, First Solar shares are trading at an attractive 16.59 forward earnings, which is significantly cheaper than the sector median as well as its 5-year average valuation.

First Solar reported a decent Q1 this year in terms of top- and bottom-line growth. Revenue soared to $794 million, a 44.8% bump year-over-year. Similarly, EPS was reported at $2.20, easily surpassing analysts' expectations. Notably, the firm's profitability margins are also significantly higher than its historical averages.

On the Q1earnings call the company announced a total bookings backlog of 78.3 GW stretching through 2030, offering clear long-term revenue visibility. Additionally, First Solar has a total bookings opportunity of 72.8 GW. The growth outlook remains promising if even half of this potential opportunity converts into backlog. Moreover, the company is about to double its manufacturing capacity by 2026.

First Solar is projected to increase EPS by 75% this fiscal year, and 55% in 2025. In three years, the company's return on equity is expected to reach 23.6%.

Among 30 analysts covering First Solar stock, 22 have a "strong buy" rating, 1 assigns a "moderate buy," and 7 call it a "hold." The group has a mean price target of $284.15, which represents a 24.3% upside potential.

#3. NextEra Energy

Based in Florida, NextEra Energy (NEE) is a global leader and innovator in the renewable energy sector, known for its transformative impact on sustainable power solutions. Through its subsidiaries, including Florida Power & Light Company and NextEra Energy Resources, the company powers millions of homes and businesses while pioneering advancements in wind, solar, and energy storage technologies. In fact, its subsidiary, Florida Power & Light, is one of the largest utility companies in the United States. NEE's market capitalization stands at $148 billion.

NEE shares are up just 1.7% over the past 52 weeks, but in 2024, the stock has broken out by gaining 20%.

In terms of valuation, NEE shares trade at 21.17 times forward earnings and 5.34 times forward sales, which is lower than its historical average multiples.

Moreover, NEE is a dividend payer, with the annualized payout of $2.06 translating to a yield of 2.86%. With over 28 years over consistent dividend growth, the company has earned Dividend Aristocrat status, making it a solid stock pick for income-focused investors.

Given that, NEE has a long track record of earnings stability. However, it reported a decline in its top-line growth in Q1 results, due to increased operational costs and delays in project completions. While revenue of $5.73 billion came up short of consensus forecasts, the adjusted EPS of $0.91 beat analysts' expectations.

Furthermore, NEE is narrowly focusing on expanding its capacity. To this end, the company announced that it will develop up to 4.5GW of new solar generation and energy storage projects in collaboration with Entergy (ETR).

Wall Street analysts are optimistic about NEE stock, which has a "moderate buy" consensus rating with a mean price target of $77.59. This suggests a modest 6.4% upside from its current price. Of 17 analysts covering the stock, 10 call it a "strong buy," 1 has assigned a “moderate buy,” 5 suggest a hold, and 1 recommends a" strong sell."

On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.