The Fourth Stock That Could Go Bankrupt in 2024

From mutual funds to hedge funds, endowments, and private equity, one of the most popular "big money" bets has been clean energy.

The Inflation Reduction Act of 2022 turned on a multibillion-dollar spigot for anyone with money in this trend. It helped turbocharge the U.S. in its race to be the leader in clean-energy innovation.

And the legislation and follow-on investment have contributed to a "halo effect" for much of the clean-energy industry. Investors are blindly throwing money at many of these companies. They're desperate for a piece of this new green future.

Green energy doesn't just start with energy-equipment companies. It also involves companies that make clean energy itself... utilities that use hydro, solar, wind, and nuclear power.

And that's NextEra Energy's (NEE) sole priority. It has more than 34 gigawatts of clean-energy generation capacity across the U.S. Almost two-thirds of its total power generation comes from wind power alone.

All that power made NextEra a market darling... for a while. A resurgence in fossil fuels hit the company's profits over the past few years. Uniform return on assets ("ROA") dropped from 5% in 2019 to 2% in 2022.

Investors didn't care.

Thanks to their unearned zeal, NextEra has been able to issue debt at low interest rates. It has almost $13 billion in debt coming due in the next two years... with an average rate of 2.73%.

But high interest rates have made investing in clean energy – and the big initial outlays it entails – less compelling. That spells trouble for NextEra, which can't put off refinancing its debt forever. It's not going to get such favorable rates again.

The current rate on its debt due in 2028 is much higher, at 5.6%. A difference this big would bump interest expenses from $368 million to $755 million.

On $7.4 billion in pretax income, that's a direct 5% hit to profits. And that assumes investors don't take a hard look at a company with weak returns... and ask if they want to refinance that debt at all.

Our systems are ambivalent about NextEra at best. Its debt is sitting on the cusp of high-yield, while its shoddy valuations show that investors are asleep at the wheel. They're ignoring the risks this company faces in today's tougher credit environment.

Don't make their mistake.

Regards,

Joel Litman and Rob Spivey
December 4, 2023