3 Small Cap Energy Stocks to Watch

By Anthony Summers
Senior Research Analyst

Alternative Energy

Value. Growth. Momentum.

This is the triad of concepts that every investor should know.

Investors often treat these as separate approaches. But successful investors fit these concepts together to generate the best long-term returns.

For example, if a stock has great growth prospects and is demonstrably undervalued, there’s no doubt that the stock holds great investment potential.

But if the price doesn’t move, you won’t earn an actual return. Instead, you’ll be waiting around for the market to prove your thesis right.

That’s why knowing how to identify momentum stocks – with solid fundamentals and at reasonable valuations – is vital to investing success.

But how does one gauge momentum?

Consider one of the simplest technical analysis tools: moving averages.

A moving average is the average closing price of a stock over a certain period of time. It’s like a batting average in baseball. If a batter averaged .300 over the last 200 days and .220 over the last 50, that batter is clearly in a slump.

We can also consider broad profit trends in the market by seeing what percentage of stocks in a sector are trading above their key moving averages.

Let’s look at the 50-day moving average – a popular short-term momentum indicator.

Right now, every sector is seeing strong short-term momentum as most stocks are trading above their 50-day moving averages…

In fact, seven of the market’s 11 sectors have at least 90% of their component stocks trading above their 50-day moving averages.

That’s very strong momentum… including in the energy sector, which I also discussed last week as a great space to find undervalued growth stocks.

Now, in looking for the most promising profit trends, we’ll want to focus on sectors with big momentum and good fundamentals to back it up.

That’s exactly what we’ve started to see in the energy sector…

Last quarter, as the sector got hammered, energy stocks delivered the biggest earnings growth in the broad market – showing that the heavily discounted sector still holds a lot of growth potential for investors.

These stocks are also some of the most undervalued opportunities in the market, making them attractive to value investors.

And… we’re seeing strong momentum in some key energy stocks – especially small caps.

So let’s take a look at three small cap momentum stocks in the energy sector that investors should watch right now…

Canadian Solar (Nasdaq: CSIQ) is one of the biggest solar producers in North America.

Despite seeing shares spike more than 50% so far this year, the stock is trading cheap at a price-to-sales ratio of just 0.32.

The company recently reported that last quarter’s earnings grew 400% year over year to $67 million, in spite of revenue dipping 16%.

Given the momentum driving its shares, the market’s excited about Canadian Solar’s near-term prospects moving into warmer seasons – a boon for the solar market.

Next is China-based JinkoSolar Holding (NYSE: JKS) – the world’s biggest solar panel manufacturer.

Last quarter, it saw its earnings spike more than 1,500% to $28 million, compared with less than $2 million one year prior. It also saw a 4% jump in revenue to $984 million.

Best of all? It’s trading at a super low price-to-sales of 0.19, even as shares have gained more than 85% in 2019.

If you’re noticing a pattern, you may not be surprised by this next stock…

Enphase Energy (Nasdaq: ENPH) – another solar company – has also delivered hard-hitting gains in recent months.

For its latest quarter, it reported a slight 1.3% increase in top-line revenue and a whopping 63% spike in earnings per share.

And just like our previous examples, it’s delivered significant gains in the past couple of months – more than 50% year to date.

Enphase might not be “dirt cheap” with its price-to-sales ratio of 2.28. But compared with the renewable energy industry’s average of 3.73, it’s certainly one of the cheapest solar stocks in the market.

Clearly, renewable energy stocks are among the broad energy market’s invisible gems, driving – in part – the big momentum we’re seeing in this sector.

Good investing,

Anthony