The S&P 500 is having a bounce-back year. The broader market index is up about 19% in 2023, and many stocks have rallied even more.
However, not all stocks are experiencing a bounce-back year. NextEra Energy Partners (NEP 0.74%), Brookfield Infrastructure (BIP -0.55%) (BIPC -0.06%), and Devon Energy (DVN 2.42%) have significantly underperformed the market. I expect that trend will reverse. Here’s why I believe they could trounce the market in 2024 and beyond.
An abysmal showing
NextEra Energy Partners has gotten crushed this year. Shares of the clean energy infrastructure company have lost roughly two-thirds of their value. The main weight has been the impact of rising interest rates on its ability to refinance existing funding and make new investments.
That issue caused the company to shift its strategy. It revealed plans to transition into a pure-play renewable energy producer by selling its gas pipeline assets. That would give it the cash to repay some maturing financing and make new investments.
The company recently sealed a deal to sell its Texas natural gas pipeline portfolio to Kinder Morgan for $1.8 billion in cash. The transaction will give it the cash needed to fund the buyouts of three convertible equity portfolio financings through 2025, project-related debt on the pipeline assets, and its corporate credit facility. That gives it more financial flexibility.
The company also shifted its growth strategy. It had planned primarily to rely on acquisitions from its parent, NextEra Energy, to drive its ambitious strategy of growing its dividend by 12% to 15% annually through 2026. However, given its high cost of capital due to surging interest rates and its falling stock price, it has slammed on the brakes. It now expects to increase its dividend by around 6% annually, powered primarily by internally funded growth projects like repowering existing wind farms.
The market is skeptical whether NextEra Energy Partners can maintain its dividend, let alone continue increasing the payout. However, if its strategy works, shares could rebound sharply in the coming year. Add in its roughly 15%-yielding dividend, and it could produce a very powerful total return from here.
Growth on sale
Brookfield Infrastructure has lost more than a quarter of its value from its peak this year. That sell-off has come even though the company is having another strong year. It expects to grow its funds from operations (FFO) by 10% in 2023 to around $3 per share. With its share price down to around $30 a piece, it trades at about 10 times FFO. That’s dirt cheap, considering the S&P 500 fetches more than 19 times earnings.
This year’s growth isn’t an aberration. The global infrastructure operator has grown its earnings at an 11% compound annual rate over the past decade and expects that trend to continue. It anticipates FFO will grow by more than 12% annually over the next three years. That will give it the fuel to increase its roughly 5%-yielding dividend by 5% to 9% per year.
Two factors power that view: capital recycling and organic growth. Brookfield has an exceptional track record of selling mature businesses and redeploying the proceeds into higher-return opportunities. It has sold $1.9 billion of assets this year, which it’s recycling into three data center deals and a leading global container leasing company.
Brookfield plans to sell another $2 billion in assets next year, giving it more capital to redeploy into high-return investments. Meanwhile, the company is delivering strong organic growth powered by inflation-linked rate increases and expansion projects. With its earnings growing at a double-digit pace, Brookfield could produce market-beating total returns even if the market doesn’t give its shares a higher valuation multiple.
Dirt cheap and doing something about it
Shares of Devon Energy have lost about a third of their value this year, fueled mainly by lower oil prices. That led the oil company to steadily reduce its oil-fueled variable dividend.
However, Devon expects its cash flow to surge 20% next year, driven primarily by reduced capital spending. The company estimates it could produce $3.2 billion in free cash flow in 2024 if oil averages $80 per barrel, which isn’t too far above the recent price. Meanwhile, there’s upside to that plan if crude oil heads higher. That gives Devon Energy a dirt cheap valuation.
The company plans to do something about its low valuation, using more of its free cash flow to buy back its beaten-down shares. Devon has about $900 million remaining on its current repurchase program, enough to retire about 3% of its outstanding shares at the recent price. Those buybacks could help boost its stock price.
Meanwhile, mergers and acquisitions are another potential catalyst for Devon Energy. There’s a wave of merger activity flowing through the oil patch. Devon could make a needle-moving deal, which could also help boost its stock price in 2024 and beyond. For example, the company’s 2020 merger of equals with WPX Energy has created $12 billion in value for shareholders since the transaction, more than double the initial value of the combined company following the deal.
Poised to recover
NextEra Energy Partners, Brookfield Infrastructure, and Devon Energy have underperformed the market by a wide margin this year. I predict those downward trends will reverse over the coming year and that all three will trounce the market. Because of that, they look like compelling investment opportunities right now.
Matthew DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, Kinder Morgan, NextEra Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Kinder Morgan and NextEra Energy. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.