NEP

My 2 Highest-Upside Stock Picks for 2024

This past year has been a great one for the market in a broad sense. The S&P 500 bounced back sharply from a tough 2022, rallying by about 25%.

Unfortunately, not all stocks rode that rally, and for some, 2023 was an abysmal year. That was certainly the case for NextEra Energy Partners (NYSE: NEP) and Medical Properties Trust (NYSE: MPW), both of which lost more than half their value in the past 12 months.

But I believe 2024 will be much better for those two. In fact, they are my highest-upside stock picks for the coming year.

NextEra Energy Partners: Financing headwinds should start fading

NextEra Energy Partners has been under tremendous pressure over the past year. Previously, the renewable energy producer had been growing briskly by acquiring cash-flow-generating renewable energy assets from its parent, leading utility NextEra Energy, as well as third-party sellers. It funded those deals with cheap financing.

Among the types of funding vehicles it used were convertible equity portfolio financing (CEPF) arrangements with institutional investors. Those CEPFs have started maturing at a time when NextEra Energy Partners' cost of capital has risen due both to soaring interest rates and its slumping stock price. As a result, selling shares to redeem its CEPFs was becoming too dilutive, and it didn't have the balance sheet strength to issue debt at attractive rates to buy back those funding vehicles.

This forced NextEra Energy Partners to shift gears. It decided to sell its natural gas pipeline assets and use the proceeds to redeem its CEFPs and fund new renewable energy investments. The company also pivoted its growth strategy from acquisitions to organic investments, primarily repowering existing wind farms. These actions slowed its growth, leading management to reduce its dividend growth outlook through 2026 from a range of 12% to 15% annually to a range of 5% to 8% annually 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 Kinder Morgan for $1.8 billion in cash. That deal will enable it to pay off project-related debt, pay down its credit facility (which it used to fund the recent buyouts of $582 million worth of CEPFs), and complete the $1.1 billion of remaining buyouts of its NEP Renewables II CEPF by June 2025. The company plans to sell its remaining gas pipeline assets by 2025 to buy out the rest of its CEPFs as they mature and fund acquisitions.

Meanwhile, a major headwind for NextEra Energy Partners (rising interest rates) should lift in 2024 as the Federal Reserve is expected to start cutting them. That should make it less expensive to roll over maturing debt, which will in turn lift some of the weight off its stock price.

Medical Properties Trust: Getting healthier in 2024

Medical Properties Trust has faced a couple of major headwinds: higher interest rates and tenant-related 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 has taken several steps to address its issues. It has worked directly with troubled tenants to help them get through their financial issues. For example, it restructured its investment in Prospect Medical, exchanging a stake in that company's managed care business for some hospital properties. Medical Properties Trust has also sold several properties to repay debt. In addition, it cut its dividend by roughly 50% to retain additional cash to repay debt.

These moves have enabled the company to raise all the money needed to repay its upcoming debt maturities through 2024. Meanwhile, its cash flow has started to improve now that Prospect is making partial rental payments on the California hospitals it leases from the REIT (with full rent payments scheduled to 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 quite as expensive to refinance debt in the future. As its cost of capital declines, the REIT will be able to start growing its portfolio again by making new investments. Those catalysts could drive its stock price skyward in 2024.

High upside potential

NextEra Energy Partners and Medical Properties Trust were under a lot of pressure in 2023 due in part to higher interest rates. However, that headwind should fade in 2024. On top of that, they're both making moves to address their issues. Because of that, their shares could bounce back big time in the coming year. While they're certainly higher-risk stocks, they have significant upside potential. Add in their big-time dividends (with yields currently in the double-digit percentages), and they could produce monster total returns in 2024.

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Matthew DiLallo has positions in Kinder Morgan, Medical Properties Trust, NextEra Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Kinder Morgan and NextEra Energy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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