Mad Money

Cramer's epic Earth Day green energy plays

Cramer: Green energy sector ripe for consolidation

In honor of Earth Day, Jim Cramer thought that this would be the perfect time to take a closer look at opportunities that could be in the works for the green energy space.

In the wake of the massive decline in energy stocks over the last year, the oil patch has battled the decline with consolidations. Such was the case when Halliburton bought Baker Hughes and Royal Dutch Shell announced it would buy BG Group for $70 billion.

The huge decline in the price of oil has not only affected the oil plays, though. Cramer has also seen that the alternative energy plays, in particular the wind and solar power stocks, have been hit hard, too.

"I think this group is just as ripe for consolidation as the oil patch, if not more so," the "Mad Money" host said.

Getty Images

Regardless of the fact that the alternative energy space is independent from the oil patch, investors still correlated those together and solar stocks were slammed. This was evidenced when the Market Vectors Solar Energy ETF declined by more than 17 percent in the second half of 2014 just because the price of oil went down.

With most of the solar stocks still far off from their highs, Cramer suspects that many of them could function as attractive takeover targets.

Additionally, funding for global clean energy companies has shot up dramatically. The clean energy consulting firm Mercom Capital Group says corporate funding for the solar sector rose to $26.5 billion in 2014 from $9.6 billion in 2013.

So, while valuations in the alternative energy space remain low, the bigger players are rolling in cash.

"That tells me that the entire green energy industry is ripe for consolidation, and sure enough, we've already seen a number of deals here, but I think we're still very much in the early innings of this story," Cramer added.

Now, why the heck would funding for alternative energy companies go sky high if the alternative energy stocks were so low?

The reason is many solar companies have found creative ways to raise cash. Many publicly traded solar stocks have created a separate vehicle, called a YieldCo, to allow them to move completed solar projects to a dividend-paying subsidiary. As a result, the YieldCos can reward investors with a ton of cash.

Companies such as SunEdison and First Solar have been able to raise a large amount of capital when they spin off their YieldCos. That cash can then be used to fund ripe acquisitions in the solar industry.

So, it's no wonder that these YieldCos have created an opening for tons of merger and acquisition activity in the green energy space. In 2014, the market saw 116 M&A deals, versus the 81 deals in 2013.

Read more from Mad Money with Jim Cramer
Cramer Remix: The secret's out
Cramer basics: How to start investing
Cramer: The tax man—maximizing profits

That's why Cramer thinks it is too risky to focus on the small players right now, as they could turn out to be takeover targets. The smart way to play the alternative energy space would be to focus on the consolidators. Time and time again the acquirers have rallied after an M&A deal.

Cramer is a fan of companies that are spinning off the YieldCos, such as SunEdison and First Solar. It is clear that there is a huge transformation occurring in the alternative energy space, and in Cramer's opinion, it's not getting the attention it deserves. These under-the-radar plays often turn out to be the best!

"I think it's time to wake up and do some buying of these green energy consolidators."

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website?