By Tom Konrad, Ph.D., CFA

On Friday February 2nd, Brookfield Renewable (BEP and BEPC) reported earnings.  Judging by the immediate stock market reaction, many investors did not like the results.  Quarterly earnings actually beat expectations, but for Yieldcos like Brookfield, cash flow numbers and revenue (which can be more indicative of the company’s ability to pay and raise dividends) can be more important.  These fell short.

The company attributes the cash flow shortfall to its own clients delaying payments at the end of December, in order to make their own financial statements look better, and it expects the shortfall to reverse in the first quarter.

Beyond cash flow, I found the earnings report to be all good (if not particularly unexpected) news.  As one of the preeminent renewable energy infrastructure investors in the world, Brookfield’s access to capital is allowing the company to go on something of a spending spree, buying up cheap assets and companies as many of its rivals have to pull back.

Overall, I feel the pullback after the earnings call is a buying opportunity, and sold some short puts on BEPC this morning (February 5th.)

Why buy BEPC rather than BEP?

Unlike the nearly equivalent share classes of Clearway Energy (CWEN-A and CWEN, discussed here.), rival Yieldco Brookfield Renewable Energy has two share classes with significant differences: Brookfield Renewable Energy Partners (BEP) and Brookfield Renewable Energy Corporation (BEPC).

The company was originally organized as a limited partnership with all equity issued as partnership units (BEP).  In 2020, the company created Brookfield Renewable Energy Corporation (BEPC) through a combination of legal and financial wizardry in order to appeal to investors who prefer to get all their investment income from a brokerage’s 1099 form rather than the individual K-1s received by BEP limited partners.

This makes BEPC more appealing than BEP to many investors, so it is unsurprising the BEPC tends to trade at a larger premium to BEP than CWEN trades relative to CWEN-A.

As I write on Feb 5th, BEPC is trading at $26.10, compared to $24.55 for BEP, or a 6.3% premium.  I generally buy BEPC when the premium is under 10%, and BEP if the premium is higher than that.

Here’s a chart of the prices of the two shares and the BEPC price premium over time.  The data is from Yahoo! Finance on 2/5/2024.  

You’ll note that when BEPC was first launched in 2020, the C-shares temporarily traded at a slight discount (negative premium) to BEPC, and shot up to a bubbly 30%+ at the end of 2020 into early 2021.  The premium hit 25% in November 2020, and later got as high as 40%. At 25%, I thought BEPC’s premium was too high.  That was the only other time I’ve written about the premium publicly.  I thought it was far too low when it was below 5% for most of 2022, but I didn’t get around to writing about it.

Now that BEPC shares are a little more seasoned and we’re mostly done with the stock market disruptions of the covid pandemic, I doubt future swings in the premium will be nearly as dramatic, but it still make sense to pay attention to the price premium when you are deciding to trade BEP or BEPC.  

DISCLOSURE: As of 2/5/24, Tom Konrad and accounts he manages own the following securities mentioned in this article: CWEN-A, BEP, BEPC.  He does not expect to sell any of them in the next three weeks, and may buy more of CWEN-A or BEPC.  He might buy BEP if the BEPC premium over BEP increases to over 10%.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

The post The Brookfield Renewable Energy Corporation Premium appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

A reader of my recent article on Yieldcos asked which share class of Clearway Energy was the better to buy for tax purposes: Class A shares (CWEN-A) or Class C Shares (CWEN).

For tax purposes, they are identical.  They pay the same dividend, and it is treated the same no matter which share class you buy.  The reason many large investors often trade CWEN rather than CWEN-A is because it is more liquid.  As I write on Jan 23rd, Yahoo! Finance puts the 3 month average share volume for CWEN at 1,372,714, while the corresponding number for CWEN-A is 412,958.  When you are trading tens of thousands of shares, this can make a big difference.  For you (presumably) and me, not so much.  I actually like illiquidity, since I usually trade using limit orders, and let people who want to trade a lot of shares come to me, rather than chasing the current market price.

Because large investors prefer CWEN, it usually trades at a small premium to CWEN-A, even though the dividends are the same, and a single share of CWEN-A represents 100 times more votes when it comes to proxy ballots.  This is only a big deal when there are rumors of a possible buyout or similar corporate action, but at such times the price premium CWEN usually enjoys is likely to become a discount, as investors who care how the vote turns out focus on buying votes instead of liquidity.

As you can see from the above chart, CWEN usually trades at around a 5% premium to CWEN-A, meaning you have to pay about 5% more for a class C (CWEN) share, even though you get more votes and the dividend is the same (so the percent dividend yield a.k.a. dividend for every $100 invested higher.)

Recently, the CWEN premium has been rising, and is around 7.5%.  I’ve always bought CWEN-A. Now, if anything, CWEN-A is an even clearer way to buy Clearway.

Maybe I Was Wrong?

I started this article by saying that there was no difference between CWEN and CWEN-A for tax purposes.  But now I’m thinking that the CWEN premium is more likely to narrow than widen in the medium term, so there is one difference: You’re likely to make more money buying CWEN-A than CWEN, and making money leads to a higher tax bill.

So if taxes are all you care about, you should buy CWEN.  Those of us who care more about making money should buy CWEN-A.

DISCLOSURE: As of 1/23/2024, Tom Konrad and funds he manages own the following securities mentioned in this article: CWEN-A. In the next two weeks, he may buy more or CWEN-A, and might sell some CWEN short as an arbitrage trade, especially if the premium over CWEN-A increases.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

The post The Clear Way to Buy Clearway appeared first on Alternative Energy Stocks.

By Tom Konrad Ph.D., CFA

Despite a run-up in the fourth quarter of 2023, it has been a long time since valuations of clean energy stocks have been this cheap.  Perhaps it is worries about hostility towards clean energy under a new Trump administration, or disappointment at the slow implementation of the Inflation Reduction Act.  Whatever the cause, prices are low, and many clean energy stocks are likely to  produce good returns even if the political climate turns further against them.

This is especially true for companies that are less dependent on favorable policy or subsidies.  For instance, Yieldcos, high yield companies that own and develop clean energy assets like solar and wind farms get most of their profits from things which are already built.  New subsidies, like those included in the Inflation Reduction Act, almost exclusively target new facilities.  Because of this, changes in subsidies and interest rates will affect a Yieldco’s growth prospects, but will have limited effect on its short term earning potential.  

Yieldcos such as Brookfield Renewable Energy (BEP and BEPC), Atlantica Yield (AY), Clearway (CWEN and CWEN-A), and Nextera Energy Partners (NEP) fell as much as 50% in 2023.  At current prices, I love them all.  Collectively, these four names account for a fifth of the portfolio.  My current favorite is Nextera Energy Partners, which I have historically felt was consistently relatively overvalued because investors have had faith in its strong sponsor, Nexterea (NEE).  That valuation did not survive the effects when persistently high interest rates led NEP to sharply cut its dividend growth targets last September.

Among the Yieldcos, NEP got the least benefit of the strong rally in the fourth quarter, and it is still trading at a price that gives it an 11% dividend yield.  That high a yield would normally signal that investors are expecting a dividend cut.  I think such a cut is unlikely.  First, NEP’s liquidity and cash flow ratios are in line with other Yieldcos, and if management felt that a dividend cut might be necessary in the near future, they would have done it when they were already disappointing investors by slashing their dividend growth plans.  Instead, I expect NEP’s dividend growth to stall for several years.  But at 11%, who needs growth?  

Another likely scenario would be for NEE to buy back the outstanding shares of NEP to improve its own cash flow ratios.  This is far from unprecedented – Transalta (TA) did exactly that last year by buying back the outstanding shares of TransAlta Renewables (Toronto: RNW).  NEE, like TA, would buy NEP at a 10-20% premium to current prices.  NEP has significant convertible debt financing, much of which will need to be refinanced in 2026.  If NEP has trouble refinancing this convertible debt, I expect the most likely scenario will be a buyback by it parent, NEP.   I’d prefer to collect an 11% dividend for several years to come, but a small short term gain is not something to scoff at.

DISCLOSURE: As of 1/15/2024, Tom Konrad and funds he manages own the following securities mentioned in this article: Brookfield Renewable Energy, Atlantica Yield, Clearway, Nextera Energy Partners. He expects to add to (but not sell) some of these positions in January 2024.  This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

The post Yieldco Valuations Look Attractive appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

This is a roundup of first quarter earnings notes shared with my Patreon supporters over the last week. If there is any theme, it’s that low interest rates and increased interest in green investments is lowering Yieldcos’ cost of capital to the benefit of stock investors.

Avangrid Earnings

Avangrid’s (AGR) Q1 earnings report showed solid progress.  Key items of note were:

• Increased outlook for full year 2021 Adjusted EPS a little over 5% 
• Key environmental approval for 800 MW offshore wind farm Vineyard Wind. Expected to begin construction later this year, with expected completion in 2024.  Avangrid is a leader in US offshore wind development, with over 4,000 MW already in the pipeline (including Vineyard) and plans to bid on more.
• The company’s Networks (electricity transmission and distribution) division is also performing strongly, and they are well placed to benefit from Biden’s plans to streamline long range transmission planning and open up existing rights of way to new transmission projects.  Transmission upgrades are essential to transitioning to a renewable electricity based grid, and Biden is the first president to take significant action on it.  It’s a little recognized clean energy investment theme, so it’s still possible to purchase stakes in key players like AGR at reasonable prices.
• The purchase of PNM Resources (PNM) looks likely to close near the end of the year.  I have mixed feelings about this one because PNM has a fair amount of coal generation, but on balance it’s probably a good thing because Avangrid will close coal plants faster than PNM would have as a stand alone, and the purchase will bolster its Networks business making it much more of a national player.  

Although Avangrid’s share price increased significantly after it got shareholder approval for the PNM merger, it remains reasonably priced compared to most Yieldcos.

Brookfield Renewable Partners Earnings Highlights

I originally put Brookfield Renewable Partners (BEP) shares in the 10 Clean Energy Stocks for 2021 portfolio because I thought its ability to raise capital by selling its turbocharged Brookfield Renewable Corp. (BEPC) share class would give the stock a boost if the ongoing clean energy stock bubble continued a few more months.

Two things undermined that thesis- the clean energy stock bubble popped sooner than I expected, and while its parent Brookfield Capital Management (BAM) did take advantage of the huge premium BEPC shares commanded at the time, the company itself did not issue any new BEPC shares so it was not able to get the influx of cheap capital I had hoped for.

Now that the stock is down 15 percent since the start of the year, I’m beginning to get interested again, and am beginning to sell out of the money cash covered puts on BEP to replace the BEPC shares I was selling at the end of last year during the height of the bubble.

To be clear, I don’t think BEP is cheap enough to be a strong buy yet, but it’s an important company to keep in the portfolio as a core long term holding.

A couple of the reasons I think of BEP as a core holding came up in the earnings call:

• They sold some of their older, de-risked assets at a 15% compounded annual return based on their initial cost.  This is just one example of Brookfield’s excellent value discipline.  Their strong balance sheet and long experience in renewable infrastructure let them stay on the right side of the investment cycle: When capital is flowing into the sector, they have assets to sell.  When capital is scarce, they can swoop in and buy assets at big discounts (as they did with Terraform Power in 2019.)
• They made their first investment in offshore wind.  Like Avangrid (AGR), they have the scale and financial strength to participate in this up and coming renewable sector where only the largest and strongest financial players will be able to participate, given the gigantic scale of most offshore wind projects.

In short, the first quarter earnings showed the ability to generate profits by operating their extremely stable assets well, selling assets after they have seen great appreciation, and by investing in new sectors like offshore wind where they are one of only a few players with the size and experience to operate successfully.  Given the limited number of developers who can compete in offshore wind, I expect the returns for those developers who can participate will be higher than solar and onshore wind where smaller players have a chance of being competitive.

Clearway Gets Green Bond Boost

While it’s not in the 10 Clean Energy Stocks list this year, Clearway Energy (CWEN, CWEN-A) was from 2016 to 2018, when it was NRG Yield, so I suspect it is still in many readers’ portfolios (as it is in mine.)

I thought it was interesting just how significant a boost the company got by refinancing… replacing $600 million of senior notes at 5.75% with a new green bond at 3.75% while extending the maturity from 2025 to 2031.  The lower interest payments alone allowed it to boost its outlook for cash available for distribution to shareholders by 5 cents a share annually.

Clearway is not alone; most Yieldcos have been refinancing and raising new debt in the current low interest rate environment, and the newly maturing market for green bonds.  The evidence is strong for a “Greenium:” a green premium allowing green bonds to trade at higher prices (and lower interest rates) than conventional bonds that do not support green projects. 

This bodes well for hopes for massive new investments in green infrastructure including wind and solar. Since these projects can be financed at lower interest rates due to the greenium, there will be more well financed developers willing to build them.

Green Plains Partners Earnings

Green Plains Partners (GPP) made significant progress reducing its debt burden in the first quarter.   In an agreement with lenders reached last year, substantially all its free cash flow beyond the current $0.12 dividend is going to pay down debt until the debt burden is paid off.  This quarter, that included cash from the sale of one of the partnership’s ethanol plants.

Without additional asset sales, GPP will be debt free in the second half of 2022, and free to redirect cash flows to paying the dividend and making new investments.  Before it cut its dividend last year, it was paying $0.475 a quarter.  This was using all of GPP’s free cash flow,  so if dividends are increased it will be to some lower level.  I would expect a new dividend in the $0.25 to $0.30 range, but with some prospects for dividend growth given the retained capital for investment.

At the current stock price of $12, that would be a substantial yield in the 8 to 10 percent range.  This is in line with most MLPs, so I consider GPP to be approaching fair value at this point and am beginning to take profits and trim my holdings so it’s no longer an outsized part of my portfolio.

DISCLOSURE: Long AGR, BEP, BEPC, CWEN-A, GPP

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Q1 Earnings Roundup: Yieldcos (AGR, BEP, CWEN, GPP) appeared first on Alternative Energy Stocks.

Tom Konrad, Ph.D., CFA

A reader asked:

Read your recent article on Pattern Energy (PEGI). Great summary and thoughts.

Would like to ask your view on TERP potential takeover by BEP (via shares swap) and whether you reckon the recent run-up on TERP is too excessive?

It’s a good question, and one that Robbert Manders on Seeking Alpha did a thorough analysis of here.  For the details of the merger, I refer you to his work.

While his analysis is careful and complete, I disagree with his conclusion.  TERP shares are not trading at a significant premium to the merger value.  The reason is one that Manders touches on, but dismisses as immaterial.  He says:

There is one more factor that can sow confusion which is that the shares to be issued to TERP shareholders will be BEPC, a new corporate share class. It is created to accommodate shareholders who want to own shares of a corporation instead of a partnership. The shares will have the same economic characteristics as BEP units and they will be convertible as well. I regard this as a minor detail to the thesis.

The difference between BEP and BEPC is not a minor detail.  I discussed this new class of shares in December:

Brookfield Renewable Energy Partners announced a stock distribution and the creation of a new corporation, Brookfield Renewable Corporation (BEPC).  This will allow investors who are not able to invest in limited partnerships like BEP to also invest in the stock, which is designed to have identical distributions to BEP and will be exchangeable for BEP units.  The stock price of BEP has been climbing since the announcement in anticipation of the new demand for shares from this new potential class of buyers.

It is also important to note that while BEPC shares will be convertible into BEP partnership units, Brookfield has not said that the exchange can happen in reverse.  The convertibility of BEPC shares into BEP will thus put a floor on the BEPC premium.  Without the ability to convert partnership units into BEPC, there will be no upper limit to the premium at which BEPC shares will trade compared to BEP partnership units.

If Brookfield did not think that BEPC shares would trade at a premium, why would they have bothered to issue the new share class?

Without the ability to convert BEP units into BEPC shares, I predict BEPC will trade at a premium to BEP.  We can see a similar effect with Clearway’s two share classes: CWEN trades at more than a two percent premium to CWEN-A based solely on better liquidity.  The only economic difference between CWEN and CWEN-A is that CWEN-A shares have more voting rights than CWEN, but large investors value the additional liquidity so much that they pay more than 2% extra to give up most of their votes.

With BEPC, many large investors will be able to buy BEPC but not BEP, so the BEPC premium over BEP is likely to be higher than CWEN’s premium over CWEN-A.  I expect it to be a little more than the 4% that has Robbert Manders trumpeting an arbitrage opportunity that will turn out to be illusory, and could easily lead to him losing money.

Disclosure: Long PEGI, TERP, BEP, CWEN-A. Short TERP Calls.

The post Why is Terraform Power Trading at a Premium to the Brookfield Renewable Merger Value? appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

This morning, hedge fund Water Island Capital called on Pattern Energy (PEGI) Shareholders to vote against the merger with the Canada Pension Plan Investment Board (CPPIB).

Water Island claims the merger is undervalued compared to the recently surging prices of other Yieldcos, and that PEGI would be trading at over $30 given current valuations.  There are not a lot of other Yieldcos left, especially if we eliminate those with their own special circumstances.  These are Terraform Power (TERP) which is subject to its own buyout agreement with Brookfield Renewable Energy (BEP), and Clearway (CWEN and CWEN/A) where the PG&E (PCG) bankruptcy is still causing a little lingering uncertainty.

Of the remaining Yieldcos, NextEra Energy Partners (NEP) is up 25% since the merger was announced, Atlantica Yield (AY) is up 33%, and Brookfield Renewable (BEP) is up 50%.

PEGI’s pre-merger price was approximately $23, meaning that if it had risen as much as its peers, it would currently be trading between $28.75 and $34.50, so Water Island’s valuation is credible.

Scenario Analysis

Let’s consider the options:

1. A shareholder could sell the stock today for approximately $28.00 a share.
2. A shareholder could hold the stock and vote against the merger:
   1. If the vote fails, the voting period will likely be extended.  Subsequent extensions could last until November.  CPPIB might raise the merger price to induce more shareholders to vote for the merger
   2. If the vote succeeds, shareholders will walk away with $26.75 plus one or two dividends of $0.422 each.  $27.172 or $27.594 total.

Between 1 and 2b, selling now is clearly the better choice.  In the case of 2a, we need to consider likely changes in Yieldco valuations between now and November.  If they continue to increase, we will see an even higher valuation for PEGI, but we could have also invested the $28 we got by selling today in one of the other Yieldcos.

If Yieldco prices stay the same, we will have a return of between $1 and $7 compared to our $28/share in the next 9 months.  That’s about 14%, which is good, and fairly large compared to the risk that the merger goes through.

I chose to take the money and run.  $28 cash seems like a good deal in an uncertain market.  The decision is more because I worry about Yeildco valuations overall than my concern about the small loss if the merger does go through.  If Yeildco prices fall back to more reasonable levels, the potential gains of voting against the merger vanish.

Naturally, if PEGI’s price falls back down or rises more by the time you read this, the calculations will change.  $0.50 either way can make a big difference in this risk-reward calculation.  Expect the stock to remain volatile until we know the result of the vote on March 10th, and even longer if the first vote fails.

Disclosure: Long PEGI, short PEGI calls, long BEP, AY, CWEN/A, TERP, short NEP.

The post Should Pattern Energy Shareholders Vote Against the Merger? appeared first on Alternative Energy Stocks.

Tom Konrad, Ph.D., CFA

As usual, I am putting together my Ten Clean Energy Stocks for 2020 model portfolio for publication on January 1st or 2nd next year.  As I wrote in November, expensive valuations for the US clean energy income stocks I specialize in mean that the 2020 model portfolio will contain more than the usual number of foreign stocks, and I am also planning on including a little hedging with options.

Why option strategies are now affordable

I have never included options in the model portfolio before because the commission structure did not make it cost effective for small investors to trade options.  That has now changed, with leading discount brokers dropping the fixed part of the commission, and now only charging $0.65 per contract, as I discussed in November.  Each option contract represents the right to buy or sell 100 shares of the underlying stock or ETF, and the strategies I use typically involve options priced at $0.25 to $3 per underlying share.  For a single option priced at $1, that means that the commission to enter the contract is now 0.65% of the option price ($0.65/$100) compared to the previous 5.6% ($5.60/100).  If the contract is assigned, there was previously also a stock trading commission of another $4.95 (5%) commission to consider.  This is now $0.

I generally consider commissions to be affordable if they are less than 5% of my expected return on a trade.  I typically sell options using covered call and cash covered put strategies, meaning the expected return is on the order of half the option price.  This puts the previous commissions at about 15% of the expected return for the example trade above, but the new commissions at about 1.3%.  Before, I generally only traded option contracts 10 or more at a time.

The target reader of the Ten Clean Energy Stocks model portfolio is investing $20,000 or more in the portfolio, or $2000 or more in each stock.  That’s just enough to buy 100 shares of a $20 stock and enter into a single option contract on the underlying position.

So, for the first time this year, I plan to use actual dollars and numbers of shares in keeping tack of the model portfolio, starting with $20,000.

Ill-liquid options

The option contracts on the stocks I typically cover are far from liquid, with the buy and ask prices typically as much as $0.50 (or $50 per contract) apart.  Hence, buying at the ask price or selling at the bid is generally not a good idea.  I find that a limit order placed halfway between the bid and the ask will often execute immediately.  The volume of contracts traded also has very little effect on the contract price, which instead tracks the share price and volatility of the underlying stock.

Unlike stocks, options contracts can be created out of thin air.  Because of this, the act of entering a limit order can create its own liquidity.

Covered call example

For example, I currently have a good-til-cancelled (GTC) limit order to sell CWEN/A June 19 2020 Calls with a strike price of $20 at limit price of $0.90.  The person (or hedge fund) that buys my calls will be paying $90 per contract for the right to buy 100 shares of CWEN/A (Clearway Energy Class A shares) from me at any time before June 19, 2020.

I currently own all the shares I need of CWEN/A to cover this possible option assignment.  Owning these underlying shares is what makes these contracts “covered” calls.  If you are not familiar with covered calls, you can read more about it and four other hedging strategies here.

If I sell the calls at $0.90 as planned, and the contracts are not assigned (which typically happens if CWEN/A is trading at $20 or below on June 19th), I get to keep the extra $0.90 per CWEN/A share.  If the option gets assigned, I sell the shares for a net $20.90 each (including the $0.90 option premium) plus any dividends earned before the calls are assigned.

The reason I say that a hedge fund is the most likely counter party for my options trade is that there are trading strategies using the underlying stock that allow someone who is long or short the options contract to completely arbitrage the risk inherent in the option position.  When the price I am offering the option at (in this example) becomes higher than the hedge fund’s cost of shedding the risk inherent in the option through one of these strategies, the hedge fund will take the other side of my trade.  This typically only requires a short spike in the share price because these hedge funds are using computers to constantly compare the cost of their trading strategies to the costs of options on offer.

Because these quant hedge funds will place trades to create new options contracts whenever the price is right, the effective liquidity of options contracts is much higher than it appears from the volume of actual trading.

Put another way, do not let the typical wide spreads you see between option bid and ask prices deter you from trading them.  Just decide the price at which you are willing to trade, and place a good-til-cancelled limit order at that price.

In the above example, I am willing to sell a few hundred shares of CWEN/A at $20.90, so $0.90 is the option premium I am asking in my limit order.

Foreign stocks

In many cases, trading foreign stocks on the US markets is similar to trading options.  For this example, we will use Valeo SA (FR.PA, VLEEF, VLEEY.)  Note that Valeo has three ticker symbols.  FR.PA means that the company’s primary listing is in Paris (the .PA part) and it trades with the ticker “FR.”  An alternative convention for denoting the same thing would be “Paris:FR.”  Similarly, CWEN/A above could also be written NYSE:CWEN/A since the stock trades on the New York Stock Exchange.  I usually omit the “NYSE:”, “NASD:” and “OTC:” from US listings, since you do not need this information to trade the stock.

In addition to their home markets, foreign stocks may trade in the US as an American Depository Receipt, or ADR.  ADR’s can be listed on US exchanges (for example, Mix Telematics (NYSE:MIXT) or just MIXT).  More often, they trade on the over the counter market, in which case they have a five character ticker ending in “Y” like VLEEY.  ADRs are created by banks which purchase shares of the underlying stock on the foreign market, and then sell ADRs representing some number of those shares to US investors.  VLEEY represents half a share of FR.PA, while MIXT represents 25 ordinary shares of Johannesburg:MIX or MIX.SJ on the South African Johannesburg Stock Exchange.

The sponsoring banks charge a small fee for creating ADRs which is deducted from stock dividends when they are paid.

Some brokers also allow clients to directly purchase foreign stocks using a five letter ticker ending in “F” such as VLEEF. In this case, the broker either directly trades on the foreign exchange on behalf of the client, or does so through an affiliate.  Trading commissions are typically much higher for trades of the foreign stock (VLEEF) than they are for the ADR VLEEY, but trading the foreign stock directly may be more cost effective for larger trades when the investor plans to hold the stock for a long time because trading VLEEF avoids the ADR fee.  Investors may also ask that shares of the ADR be converted to foreign shares for a one-time fee.

I typically try to trade the foreign shares in large blocks rather than pay the ADR fee, but most investors will likely find that using the ADRs is more economical.

How trading foreign stocks is like trading options

As with options, the number of shares of foreign stocks or ADRs available has more to do with the liquidity of the stock on its home exchange than the number of shares which are traded in the US.  When placing an order for a relatively illiquid ADR like VLEEY (approximately 12,000 shares traded per day), it is best look at the stock chart of FR.PA in Euros (you can find it on Yahoo! Finance here, choose a limit price based on that and your own fundamental calculations, and then convert it to an ADR or foreign stock price for VLEEY or VLEEF before placing a limit order with your broker.

For example, if I decide I want to buy Valeo for €32, I would multiply by the Euro/$ exchange rate (currently €1.1181/$) and the ADR multiplier (if any) to place a limit order for VLEEF at $35.78 or VLEEY at $17.89.  Note that trades of VLEEF can happen whenever the Paris stock market is open, but trades of VLEEY will take place when the US market is open.

Conclusion

Investors should not let the apparent low liquidity for exchange traded options or foreign stocks and ADRs on US markets deter than from trading either.  As long as you are careful to use limit orders at a price at which you are happy to trade, the worst thing that can happen is that you end up not trading at all.

Disclosure: Long CWEN/A, MIXT, VLEEF.

The post Trading Options and Foreign Stocks: When Low Trading Volume Is Not Illiquid appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

2019 has become another blockbuster year for the Ten Clean Energy Stocks model portfolio and, to a lesser extent clean energy stocks and the broad stock market as well.  I’m frankly surprised to see the party continuing.  The continued spiking of the metaphorical punch bowl by the Federal Reserve with interest rate cuts certainly has a lot to do with it. I had expected those cuts to be both fewer and less effective.

Which all goes to show that it’s always a good idea to hedge one’s bets in the stock market.  At least in part because of this hedging, my real money Global Green Equity Income Portfolio GGEIP has somewhat underperformed the 10 Clean Energy Stocks model portfolio, up 38.5% and 44.5% for the year, respectively.  Both remain well ahead of their benchmarks, however, with the clean energy income stock benchmark YLCO up 29.3% and the broad income stock benchmark SDY up a still respectable 21.9%.

Will the party continue with a blowout Santa Claus rally?  Only Santa knows, but I’m going to continue with caution in case he decides to show up with a lump of coal (have you seen coal stocks recently?) instead of nicer gifts.

Individual Stocks

Last month I warned,

Hannon Armstrong HASI, Terraform Power (TERP), and Brookfield Renewable Energy Partners (BEP) are all stocks in which readers should be considering taking some profits, if they have not already.  I continue to think these three stocks are all ripe for price corrections.

Terraform saw that price correction, down 10% on a secondary offering of 14.9 million shares of stock at approximately $16.84 a share.  This is business as usual for Yieldcos, which sell shares when prices are high to finance the purchase of income producing clean energy investments.  As long as such investments can be had at prices which expand per share cash available for distribution, such secondary offerings are good for long term shareholders.  I generally consider the one or two months following a secondary offering as the best time to invest in Yieldco stocks, although Terraform’s valuation even after the recent dip is not making me rush in with any buy orders.  But it’s certainly less overvalued than last month.

Brookfield Renewable Energy Partners announced a stock distribution and the creation of a new corporation, Brookfield Renewable Corporation (BEPC).  This will allow investors who are not able to invest in limited partnerships like BEP to also invest in the stock, which is designed to have identical distributions to BEP and will be exchangeable for BEP units.  The stock price of BEP has been climbing since the announcement in anticipation of the new demand for shares from this new potential class of buyers.  After the split, investors should not be surprised if BEP takes advantage of its new, lofty stock price to raise cash in its own secondary offering, bringing the stock price back down from its temporarily lofty level.

Although I think the formation of BEPC will be good for existing investors, I continue to trim my holdings of BEP in anticipation for such a decline.

French autoparts maker Valeo SA (FR.PA, VLEEF) reported strong 3rd quarter sales at the end of October, and the stock has been rising since.  Sales were up 8% despite an ongoing contraction in auto sales overall.  The company’s  excellent performance is largely due to the start of production on projects including vehicle electrification, cameras, and lighting.  All-in-all, the company’s plan to leverage its R&D efforts to get its products into more new vehicle models seems to be paying off.  Barring a broad market sell-off, I would expect the stock to continue to advance.  Given the large increases in most of the stocks in this year’s list, I am going to be searching for a large number of new stocks to add to the 2020 list as I drop the ones that have climbed the most since they are no longer offer compelling valuations.  Unless it advances significantly more in December, Valeo seems likely to stay.

Another big winner was Atlantica Yield (AY).  Investors generally liked the 3rd quarter earnings report and 1 cent increase in its quarterly dividend to $0.41 at the start of November.  Revenue and Cash Available For Distribution (CAFD) continue to advance at a 6-7% rate through the company’s investment in new projects, such as the ATN Expansion 2 transmission project which it closed on during the quarter.

One thing I like about Atlantica compared to other Yieldcos is its diversification into electricity transmission and water.  Owning both of these asset classes is rare in the industry, but transmission in particular is essential to the clean energy transition, and having expertise in different asset classes means that Atlantica can look at different types of investment opportunities when traditional Yieldco assets like solar and wind are relatively expensive.  Because of its Spanish roots, Atlantica also has a more diverse geographic profile than other Yieldcos.

Conclusion

The year isn’t over, but I can confidently say that, at least as far as my stock picks go, it far exceeded my expectations.  With all the price rises, I’m going to have trouble finding ten clean energy stocks that I think are good investments at the end of December.  I’m seriously considering including one or two short positions in the portfolio, something I have done only once before, in 2008 when I include a short of First Solar (FSLR).  It was a timely choice, since First Solar fell 50% that year, helped along by the financial crisis.  Alternatively, given the new accessibility of option strategies for the small investor, perhaps I should include option hedging or positions in the portfolio.

What do readers think? Would a short, option hedging, or just sticking to long-only (with the continued caveat that readers should have a large allocation to cash or a hedging strategy) be the most useful to you in the Ten Clean Energy Stocks for 2020 model portfolio?  Let me know in the comments.

Disclosure: Long PEGI, CVA, AY, TERP, BEP, EVA, GPP. INGXF, HASI, FR.PA/VLEEF, CWEN-A. 

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks For 2019: Still Party Time appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

Although valuations and political uncertainty have me spooked, October was another strong month for the stock market in general and clean energy income stocks in particular.

While my broad income stock benchmark SDY added 1.6% for a year to date total gain of 19.6%.  My clean energy income stock benchmark YLCO did even better, 2.7% for October and 29.7% year to date.  The 10 Clean Energy Stocks model portfolio fell somewhere in between for the month (up 1.8%) but remains unchallenged for the year to date (40.7%).   My real-money managed strategy, GGEIP, lagged as I reduce market exposure in what I consider an increasingly risky market (as discussed last month).  GGEIP was up 1.0% for the month, and 35.0% year to date.

Individual Stocks

Analyst Downgrades, Sudden Stock Moves

The most notable stock move of the month was Covanta Holding Corp’s (NYSE:CVA) 16% decline.  This started on October 22nd, when Raymond James warned that the company’s earnings would be impacted by the weak commodity market.  The analysts like the company’s long term prospects, but reduced their rating from “Strong Buy” to “Market Perform” based on expected near term weakness.  Sure enough, the company reported weakness in commodity prices in its third quarter earnings.  After earnings, BMO cut its price target from $19 to $18, and UBS cut its from $17 to $15.50.

With the stock trading below $15, I see this as one of the few buying opportunities in the stock market today, and added to my exposure by selling cash covered puts with strike prices of $12.50 and $15.  I think the large sell-off is symptomatic of increasing investor nervousness.  We also saw a similar sell-off in Yieldco Clearway (CWEN, CWEN-A) based on analyst downgrades.

It feels to me that investors are looking for an excuse to sell, causing the market to overreact to analyst downgrades.  Regular followers of this blog, in contrast, will likely have already trimmed their holdings as the stocks rose, and so should remain unphazed by these sudden swings in sentiment.  If you have not been trimming your holdings in your biggest winners, you probably should be. Hannon Armstrong HASI, Terraform Power (TERP), and Brookfield Renewable Energy Partners (BEP) are all stocks in which readers should be considering taking some profits, if they have not already.  I continue to think these three stocks are all ripe for price corrections.

Buyout

One stock with significant gains where I am not currently taking profits is Pattern Energy Group (PEGI) because a cash buyout announced on November 4th for $26.75 removes most of the market risk from this stock.  Two  months ago, I dismissed the rumors that Terraform Power would be the buyer, but the rumors that the company was in talks for a buyout were well-founded.  The buyers ended up being the Canada Pension Plan Investment Board (CPPIB), which is also negotiating to purchase Pattern Development.

The price of the buyout was below the stock market price at the time of the announcement, but approximately 15% above the price PEGI had been trading at prior to the buyout rumors, which began to circulate in early August.  Because the buyout price was below the market price at the time of announcement, a number of shareholder class action lawsuits were immediately filed.  Investors should not be alarmed at the number of suits; class action lawyers are simply jockeying to be first, because typically most such class actions will be consolidated into one and the lawyers who were first to file generally get to take the lead and collect the lion’s share of the fees.

PEGI and CPPIB need to convince both the judge and shareholders that the buyout price was justified.  They need shareholders in order to win shareholder approval for the merger.  In order to make this case, it is not out of the question CPPIB may increase the buyout price slightly in order to bolster their argument.  But I don’t think that readers should expect this.  As I wrote in August, “At $27, I’d call PEGI fairly valued, so investors should be cautious about banking on a merger going forward.”

Even without a price increase, the merger dramatically lowers the market risk of PEGI stock.  With two expected dividends of $0.4222 before the expected close of the deal, shareholders can expect to receive a total of $27.59 over the next six to eight months.  As I write, the share price is $27.33, which would amount to a 1% gain over that time.  This is not a great interest rate, but it is better than cash, and holders do get the chance of an upward revision to the buyout price.

Conclusion

I continue to remain cautious.  Readers should take some gains in their biggest winners and be prepared for more of their stocks to fall suddenly and dramatically in response to even mild analyst downgrades and short term bad news.  A sharp market correction or bear market could start at any time… or the bull may continue to limp along.  I continue to believe the downside risks outweigh the possible gains of betting that the bull still has much life left in him.

Disclosure: Long PEGI, CVA, AY, TERP, BEP, EVA, GPP. INGXF, HASI, FR.PA/VLEEF, CWEN-A. 

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks For 2019: Pattern Buyout, Analyst Downgrades appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

Almost every major index fell in 2018.  My Ten Clean Energy Stocks model portfolio and the Green Global Equity Income Portfolio (GGEIP), the real-money portfolio that I manage were not exceptions.  Still, I’m satisfied with their performance: the model portfolio lost only 1.3 percent for the year, while GGEIP was down 2.6 percent.  That’s well ahead of most indexes, including my benchmarks YLCO (down 7.8 percent) and SDY (down 4.1%.)  These benchmarks are intended to reflect the performance of clean energy dividend stocks and general of dividend stocks, respectively.  Non-income oriented indexes such as the S&P 500 performed similarly to SDY.

Short Term Predictions

While my full year performance was satisfactory, my short term predictions from the start of December fared less well.  I said:

I continue to be very concerned about stock market valuation, and expect the correction that started last summer to continue in 2019.  However, I expect December may continue the market rebound we saw in November, so I see the coming month as one in which to opportunistically take profits and increase allocations to cash in anticipation of better buying opportunities in 2019.

That predicted continued December rally was a rout, with the model portfolio down 7.0 percent, GGEIP down 2.6 percent, YLCO down 3.6 percent, and SDY down 8.5 percent.  Ouch.  My single stock pick for the month, Green Plains Partners(GPP), performed relatively well, however, actually gaining 0.4 percent while all the other stocks in the model portfolio fell.

Ten Clean Energy Stocks for 2019

Readers looking for my current picks should consider the most recent list, which was published on January first. Updates on individual stocks can be found there as well.

10 for 2018 Performance

Five Year Performance

Over the last 5 years, the Ten Clean Energy Stocks model portfolio has outperformed its clean energy benchmark every year.  Over 5 years, $1000 invested in Ten Clean Energy Stocks would have become $1646, while $1000 invested in the benchmark would have fallen to $699.  $1000 invested in SDY would have become $1509 (although I was not using SDY as a benchmark for the whole period.)

Disclosure: Long SSW, CVA, CWEN A and C, AY, PEGI, TERP, BEP, GPP, HIFR, EVA.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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