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2 Top Stocks to Buy in 2022 Now That Oil and Gas Is Hot and Renewable Energy Is Cold

The U.S. stock market hasn't had the best start to 2022. Just three weeks into the year, and the S&P 500 is down close to 8% and the Nasdaq is down 12%. However, the energy sector, which is comprised mostly of oil and gas stocks, remains up over 12% for the year.

Pipeline giant Kinder Morgan (NYSE: KMI) and integrated solar solution provider SolarEdge Technologies (NASDAQ: SEDG) are two completely different businesses that are both worth buying now. Here's why.

Image source: Getty Images.

A top-tier income and value stock

Kinder Morgan is the U.S. leader in natural gas pipeline infrastructure. It is also a major player in oil and CO2 energy transportation and storage.

With its business tied to long-term contracts, Kinder Morgan doesn't benefit from higher oil and gas prices -- or suffer from lower ones -- as much as other players in the industry. Instead, it generates fairly stable free cash flow that it has been using to grow its dividend, make selective investments, buy back shares, and pay off debt.

In December, Kinder Morgan forecasted its full-year 2022 results before it even reported full-year 2021 earnings. Aside from a strong balance sheet, higher net income, and higher earnings before interest, taxes, depreciation, and amortization (EBITDA), Kinder Morgan is also raising its dividend to $1.11 per share per year, giving it a dividend yield of 6.4%.

Instead of chasing upstream oil and gas companies at higher valuations, Kinder Morgan's forward price-to-earnings ratio of 15.7 and high dividend yield make it my top dividend stock to buy for 2022.

SolarEdge is a bright spot in a struggling industry

SolarEdge may not pay a dividend like Kinder Morgan. But it does have a few key similarities that could make it a nice stock to buy on sale.

For starters, SolarEdge is free cash flow positive, generates positive net income, and has more cash, deposits, and investments on its balance sheet than debt. Unlike growth companies that lack profits and depend on debt to operate and invest in their future, SolarEdge is self-reliant, giving it a critical cushion in today's rising interest rate and high inflation business climate.

What's more, SolarEdge's business is doing incredibly well, even as the solar industry as a whole is challenged by stalling investment. In fact, SolarEdge recorded record-high quarterly revenue in Q3 2021. And despite higher costs to produce its products, SolarEdge continues to sport a 30% or higher gross margin.

Considering the strength of its underlying business and the fact that its stock price is down 40% in two months, SolarEdge is a great buy now for investors that believe SolarEdge will be able to grow revenue and earnings at a sustained rate so that it can grow into its valuation. Even after its share price decline, SolarEdge stock is still trading at 84 times earnings and has a price-to-sales ratio of 7, indicating that it is still an expensive stock relative to its current performance.

A balanced approach to investing in the energy sector

Equal parts of Kinder Morgan and SolarEdge Technologies would give investors exposure to oil and gas and solar. The basket would also have a 3.2% dividend yield and plenty of growth opportunities thanks to SolarEdge. Buying industry leaders remains the best choice for investors looking to lean into the red-hot oil and gas market while also snatching up bargains in renewable energy.

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*Stock Advisor returns as of January 10, 2022

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Kinder Morgan. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has a disclosure policy.


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