The past year has been great for the broader market. THE S&P500 rebounded strongly after a difficult 2022, with an increase of around 25%.
Unfortunately, not all stocks benefited from this recovery and for some, 2023 was a catastrophic year. This was certainly the case for NextEra Energy Partners (NYSE:NEP) And Medical Properties Trust (NYSE:MPW)both of which have lost more than half their value over the past 12 months.
But I think 2024 will be much better for these two. In fact, these are my most bullish stock picks for the year ahead.
NextEra Energy Partners: Financing hurdles should start to fade
NextEra Energy Partners has been under enormous pressure over the past year. Previously, the renewable energy The producer had grown rapidly by acquiring cash-flow-generating renewable energy assets from its parent company, the major utility. NextEra Energy, as well as third-party sellers. He financed these transactions with cheap financing.
Among the types of financing vehicles used were convertible equity portfolio financing (CEPF) agreements with institutional investors. These CEPFs began to mature at a time when NextEra Energy Partners cost of capital has increased due to both rising interest rates and falling stock prices. As a result, selling shares to repurchase its CEPFs became too dilutive, and the company did not have the balance sheet strength to issue debt at attractive rates to repurchase these financing vehicles.
That forced NextEra Energy Partners to shift gears. It decided to sell its gas pipeline assets and use the proceeds to buy back its CEFPs and finance new investments in renewable energy. The company has also shifted its growth strategy from acquisitions to organic investments, primarily by strengthening existing wind farms. These actions have slowed its growth, leading management to reduce its dividend growth outlook through 2026 from a range of 12% to 15% per year to a range of 5% to 8% per year with a target of 6 %.
NextEra Energy Partners has already made solid progress on its plan. It recently agreed to sell its STX Midstream business to Children Morgane for $1.8 billion in cash. This agreement will allow it to repay project debt, repay its credit facility (which it used to finance recent CEPF buyouts worth $582 million) and finalize the $1.1 billion dollars in remaining buybacks from its NEP Renewables II CEPF by June 2025. The company plans to sell its remaining natural gas pipeline assets by 2025 to buy back the remainder of its CEPFs as they mature and fund acquisitions.
Meanwhile, a major hurdle for NextEra Energy Partners (rising interest rates) is expected to dissipate in 2024, as the Federal Reserve is expected to begin cutting them. That should make it less expensive to refinance maturing debt, which would take some of the weight off its stock price.
Medical Properties Trust: Be healthier in 2024
Medical Properties Trust has faced some major headwinds: higher interest rates and tenant issues. Rising rates are making it more expensive for the real estate investment trust (REIT) to refinance its maturing debt, while tenant issues have impacted the company’s cash flow.
THE Healthcare REIT took several steps to resolve its problems. She has worked directly with struggling tenants to help them overcome their financial problems. For example, it restructured its investment in Prospect Medical, swapping a stake in that company’s managed care business for some hospital properties. Medical Properties Trust also sold several properties to pay down debt. Additionally, it cut its dividend by around 50% to conserve additional cash to pay down debt.
These measures have enabled the company to raise all the funds needed to repay its upcoming debt maturities through 2024. At the same time, its cash flow has started to improve now that Prospect is making partial rent payments on the California hospitals that it rents from the REIT (with full rent). rent payments should resume in March).
Medical Properties Trust plans to sell additional assets in 2024 to help fund future debt maturities. Meanwhile, with interest rates likely to fall, it won’t be as expensive to refinance debt in the future. As its cost of capital declines, the REIT will be able to resume growing its portfolio by making new investments. These catalysts could push its stock price higher in 2024.
High upside potential
NextEra Energy Partners and Medical Properties Trust have been under significant pressure in 2023 due in part to rising interest rates. However, these headwinds are expected to ease in 2024. On top of that, they are both taking steps to resolve their issues. Because of this, their stocks could rebound significantly in the coming year. While these are certainly higher risk stocks, they have significant upside potential. Add to that their sizable dividends (currently yielding double digits), and they could produce monster total returns in 2024.
Should you invest $1,000 in NextEra Energy Partners right now?
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Matthew DiLallo holds positions in Kinder Morgan, Medical Properties Trust, NextEra Energy and NextEra Energy Partners. The Motley Fool holds positions and recommends Kinder Morgan and NextEra Energy. The Motley Fool has a disclosure policy.
My 2 Most Bullish Stock Picks for 2024 was originally published by The Motley Fool