Pattern Energy Vs. TerraForm Power: A Clean Energy Pair Trade From Goldman Sachs

The market for clean energy stocks can be extremely volatile, but new commentary from one Wall Street analyst could be used as the basis of a possible pair trade.

The Analyst

Goldman Sachs analyst Brian Lee reiterated his Buy rating and $22 price target for Pattern Energy Group Inc PEGI. Lee downgraded TerraForm Power, Inc. New TERP from Neutral to Sell and lowered its price target from $12 to $11.

The Thesis

According to Lee, Pattern Energy has an industry-leading 9 percent yield and a number of catalysts on the horizon this year. At the same time, TerraForm has more interest rate exposure than any of its peers and currently has an unattractive market valuation.

“Following the announcement of soft 4Q17 earnings, offset by the company’s first Japan dropdowns, and upside to solid 2018 CAFD guidance for 14% growth, we see PEGI on a path to recovery as execution and wind production improve in 2018,” Lee said.

Lee said potential positives, such as the financial impact of Brookfield, are already reflected in TerraForm’s valuation. However, he said the company has plenty of execution risk in the near-term and could easily underperform its peers over the next 12 months.

By buying shares of Pattern Energy and selling an equal amount of TerraForm, investors can set up a pair trade to potentially mitigate losses if the entire alternative energy space takes a hit.

Price Action

Pattern Energy stock traded lower by 1.4 percent Thursday morning, while TerraForm shares traded lower by 1.9 percent.

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