By Tom Konrad, Ph.D., CFA

The Ten Clean Energy Stocks for 2021 model portfolio had a decent year.  With a 13.2% total return, it handily beat its clean energy income stock benchmark, the Global X Renewable Energy Producers ETF (RNRG, formerly YLCO), which fell 12.1%.  It did not, however, compare as well to the wider universe of income stocks, which had an excellent year, with its benchmark SDY up 27.2%.

The poor performance of clean energy stocks in 2021 was largely due to the bursting of a clean energy bubble which formed in the second half of 2020 fueled by speculation about and then the reality of a pro-climate Democrat in the White House.  

Although Biden and the Democrats in Congress are pushing things in the right direction (a complete and welcome reversal from Trump and the Republicans), the ability of both parties to make meaningful change is usually overestimated by investors around an election.  This led to inevitable disappointment and the deflation of the clean energy stock bubble of late 2020.

I started the year cautious about this bubble, and mostly picked stocks which had participated less in the late-2020 rally, but might still be able to benefit from the additional money sloshing around in the space.  This led to the model portfolio’s decent gains, although I was not able to overcome the headwinds.

Individual stock gains from expected refinancing at Green Plains Partners (GPP) and an unsurprising buyout of undervalued Covanta Holding (CVA) more than offset a bad call at Eneti (NETI) where I expected management to be better stewards of shareholder capital than they turned out to be.  Their relentless pursuit of expansion plans led to an ill-timed and dilutive secondary offering of shares in November.

2022 

I am not going to be publishing a Ten Clean Energy Stocks list for 2022.  Because I am launching a hedge fund with Investment Research Partners, and I will need to be investing new funds as they come into the fund, it would not be fair to hedge fund investors to share my best ideas with readers at the same time I am investing their funds.

If I were to share those picks, they would be focused on those clean energy stocks which have suffered the worst from the bursting of the bubble.  However, I would retain a cautious stance overall, because I continue to think the broad market is overvalued.  A new bear market would hurt the clean energy sector, even those stocks which fell significantly in 2021.

I will continue writing, but my stock commentary may be a bit less timely, and I will emphasize investing strategy a bit more.

If I had to be optimistic about a sector, it would be clean transportation.  The supply chain disruptions of the last two years have hurt the whole auto sector badly, and the recovery, when it eventually comes, could lead to impressive rebound in both profitability and stock prices.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio.

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 10 Clean Energy Stocks for 2021: Wrap Up appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

Monthly Performance

Returns for the Ten Clean Energy Stocks for 2021 model portfolio are shown below.  It was a good month for clean energy stocks as well as the broader stock market, with the portfolio up 4% for a 20% total return through the end of October.  Its clean energy benchmark (RNRG) was up more (8%) but is still down 6% for the year.  Its broad market benchmark (SDY) rose 5% and has caught up with the model portfolio at a 20% return year to date.

Earnings

Third quarter earnings season has started.  Below are some notes I’ve shared with my Patreon supporters over the past couple weeks:

MiX Telematics Earnings

MiX Telematics (MIXT) was down on earnings today.  I’d call it a case of decent earnings… the company continues to grow revenue and subscriptions quarter over quarter and year over year, but they are still a long way from 2019 levels.

Oil and gas customers still account for most of the shortfall, with most of the customer wins highlighted in the earnings call being transit, mostly bus fleets.  They did say that one big oil and gas customer is starting to bring some of its vehicles back into service.

Overall, the quarterly performance was decent, but investors were probably hoping for more of a bounce given the subscribers lost in 2020.  If anything, the long term outlook is improving, so the recent declines make MiX one of the few stocks in which I see value in the current market.

Green Plains Partners Earnings

The big news in Green Plains Partners’ (GPP) third quarter earnings wasn’t news at all.  The distribution increase for $0.435 quarterly which had been announced in mid-October, and the company had told us to expect the increase in August when I wrote: “I expect the board of directors to raise the dividend to between $0.40 and $0.45 next quarter.”

The stock jumped anyway, and now trades around $15.  Given its current 11.2% yield, I think a modest ($1 to $2) further increase over the coming months is likely. 

Enviva Earnings

Note: Enviva is not in the current 10 Clean Energy Stocks list, but made an appearance in 2019 and I thought the news was notable enough to make it worth writing about.

I had two major take-aways from wood pellet MLP  Enviva’s (EVA) 3rd quarter earnings.  

First, the previously announced simplification transaction where the partnership has bought out and absorbed its general partner and is converting to a corporate structure should be great for the stock price.

The company is guiding for $3.62 of total dividend payments in 2022.  After the shift to a corporate structure, EVA should start trading with a yield more in line with its Yieldco peers, around 3 to 5 percent.  So we can expect a share price a year from now to be in the $72 to $120 range.  With the current share price at $68, I’m fairly bullish.

The other take-away is that the company is moving into new markets with the announcement of a long term wood pellet supply contract to a European producer of aviation biofuel.  This is important because its largest current market, which is selling to power producers who burn the pellets in converted coal power plants has long term limitations.   

First, using wood pellets to generate electricity is not the highest use for a a renewable fuel source which is easy to transport and store.  These are two advantages notably lacking in the leading renewable energy sources, electricity from solar and wind.  Given the size and weight of batteries needed, it is very difficult to electrify long distance aviation.  As we transition the world away from fossil fuels, we need to find renewable energy sources for every application.  Sustainable aviation fuel is one where solar and wind will find it difficult to compete, so this is a good long term market for Enviva’s biomass.

Other applications which will be difficult to serve with electricity from solar and wind are industrial processes such as steel and cement production, and the 10 to 20 percent of electricity which needs to be served by long term seasonal storage to meet demand that cannot be easily served with wind and solar.  Enviva is also exploring contracts with industrial customers looking to decarbonize.  

This new contract demonstrates that Enviva has scalable prospects for participating the sustainable energy economy for the long term, even when its current role as a bridge fuel to make use of the existing infrastructure in converted coal plants comes to an end.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio and 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.

The post 10 Clean Energy Stocks for 2021: November. Notes on MIXT, GPP, EVA appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

Second quarter earnings season is in full swing.  Below are a couple updates and the monthly performance chart that I recently shared with my Patreon supporters.

Green Plains Partners Earnings and Future Dividend

(published August 2nd)

Ethanol Master Limited Partnership Green Plains Partners (GPP) declared second quarter earnings today.  The main news remains the long anticipated debt refinancing and new dividend guidance going forward.

At the end of the first quarter, I predicted that, after debt refinancing, GPP would increase its quarterly dividend to something in the $0.25 to $0.30 range.  

The new guidance is for the partnership to target a distribution coverage ratio of 1.1x over any 12 month period, a bit lower than I anticipated, allowing a higher level of distributions.  I expected lower dividends and higher coverage ratio which would allow a higher margin for error and room for future dividend increases.

With the current $0.12 dividend, the coverage ratio over the last twelve months was 4.01x.  If the dividend is raised to reduce that to the target 1.1x, we would get a quarterly dividend of $0.437.  Given the new guidance, I expect the board of directors to raise the dividend to between $0.40 and $0.45 next quarter.   $0.48 was the quarterly dividend before the covid pandemic.

Valuation

At a $0.40 quarterly / $1.60 annual dividend, the anticipated yield at the current stock price of $13 is 12.3%.  This leaves significant room for further price increases before and when the dividend increase is announced.

I’m shifting my stance back from “Hold” to a short term “Buy” on this one.

Covanta Earnings and Buyout

(Published August 3rd)

Covanta Holding (CVA) announced second quarter earnings on July 28th, and investors yawned.  With the buyout agreement by EQT Infrastructure (announced July 14th in place, Covanta’s future and current earnings are very unlikely to have any impact on investors’ returns.

EQT has agreed to buy CVA for $20.25 a share, and the deal is expected to close in the 4th quarter.  This price places a substantial premium to the $15 or so at which CVA was trading before the deal was agreed, so I expect it to go through.

CVA will continue to pay its $0.08 dividend at the end of each quarter until the deal closes, meaning one more dividend payment at the end of September is likely. 

I’ve been buying Covanta shares when they fall below $20 as a substitute for cash.  Market valuations seem high to me, so I consider these shares to be a relatively safe place to park my money for a few months.  At $19.95, I can expect to earn $0.30 capital gain and a $0.08 dividend payment (1.9% total) in less than 5 months.  That’s over 4.5% on an annualized basis, a nice return compared to the cash I would otherwise be holding.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio, including CVA and 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 10 Clean Energy Stocks Updates: Green Plains Partners Refi; Covanta Buyout 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.

By Tom Konrad, Ph.D., CFA

Last month saw buying opportunities in some clean energy stocks as the bubble created from the euphoria over Biden’s election vanished as if it never happened.

Clean energy stocks have simply returned to the general upward trendline from the second and third quarter of 2020.  Rather than bursting in a market panic, this seems to have been more of a general deflation.

Some clean energy stocks seem reasonably priced, but there are no great values like we often see during the market panics which typically follow bubbles.  Without a panic, I’m not ready to buy aggressively.  Stocks in general continue to trade at fairly high valuations, and rising interest rates or some other market disruption could still trigger a sell-off.

Biden’s Infrastructure Plan

Biden’s infrastructure plan includes significant funding for clean energy. It would make tax credits refundable and extend them, and includes an offshore wind push.  It also includes significant measures to improve the long neglected electric grid, and electric vehicle charging.

Solar and wind manufacturers will benefit from the tax credit extensions, but this may not be that significant for any one company because most sell globally.  The US is a large market for solar and wind, but not so large that it’s a dominant player.  Renewable energy developers are more likely to see a significant impact.  

In the 10 Clean Energy Stocks for 2021 list, Brookfield Renewable (BEP) and Avangrid (AGR) both have significant development arms, so robust support for renewable energy may enable them to increase their growth rates.  Of the two, Avangrid is particularly well placed because it also develops offshore wind and electricity transmission and distribution networks.  Avangrid’s offshore wind development, Vineyard Wind, had been suffering delays due to roadblocks put up by the Trump administration.  Now it seems to be on the fast track.

The best Biden infrastructure pick in the list is Eneti (NETI).  As a future owner of offshore wind turbine installation vessels, a booming offshore wind industry and the long lead time for building such vessels should put it in a very good position when its first vessel is delivered in 2023.  I expect the company will exercise some of its options to buy more before then so that it will have a robust pipeline of new vessels being delivered in subsequent years.

The ethanol industry and Green Plains Partners (GPP) are also benefiting from the change of administration, with the EPA taking steps to limit Renewable Fuel Standard waivers given to oil refineries.  GPP is also benefiting from an investment by an activist hedge fund, which believes the stock is undervalued, as I noted for my Patreon supporters on March 10th.

Conclusion

The changed political climate gives reason to be hopeful about clean energy stocks, especially now that much of the air has been let out of the bubble that began with Biden’s election.  However, overall stock market valuations are still high, and rising interest rates are a drag on the income stocks I focus on.  

Cautious buying of better clean energy stock values seems warranted, but the emphasis should be on “cautious” not “buying.”  Make sure to keep significant cash in reserve.

DISCLOSURE: Long positions all the 10 Clean Energy Stocks for 2021 model portfolio.

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 Clean Energy Stock Deflation and Biden’s Infrastructure Plan appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Readers who followed my coverage of the Yieldco bubble in 2015 know the Yieldco Virtuous Cycle.  

1. A Yieldco’s stock price rises
2. It issues new shares, and invests the money in renewable energy projects.  
3. Because the stock price is high, it is able to buy more project cash flow by issuing fewer shares than it has in the past.
4. Cash flow available for distribution (CAFD) per share increases, despite the increasing number of shares outstanding.
5. Yieldco management sets a target for continued rapid annual distribution growth, which can be met either by further share issuance (if the share price continues to increase), increasing the payout ratio (the percentage of CAFD used to pay dividends) or borrowing.
6. The share price rises in response to rising expectations of CAFD per share growth, allowing management to repeat the cycle.

This cycle ran from 2013 to mid-2015, when the public Yieldcos at the time got too greedy, issuing more shares than the market could absorb.  Share prices stopped rising rapidly, so Yieldcos turned to increased debt and increased payout ratios in order to meet their lofty dividend per share growth targets.  They hoped that share prices would accelerate again while their payout ratios were still below 100% and banks were still willing to finance their debt.

But the writing was on the wall… Yieldco share price growth can continue indefinitely as long as investors believe it will. But, like Tinkerbell, the Yieldco bubble popped as soon as investors stopped believing in it.  The virtuous cycle turned viscous.

By the end of 2015, many Yeildcos had fallen enough that their stocks were attractive even without assuming any dividend per share growth.  That’s not where we are now.  Although valuations feel very lofty, the past few years of fiscal discipline has led to lower payout ratios and reduced debt burdens.  Combine these with current high share prices, and conditions are right to kick off a new Yieldco virtuous cycle and boom.

A New Yieldco Boom

Most Yieldcos’ share prices have increased rapidly in the second half of 2020.  This sets the stage for a new Yieldco boom, with a new virtuous cycle of rising share prices, expectations of dividend per share growth, and new investments beginning to take off.  Given the momentum of the divestment movement, a new Yieldco boom seems likely.  If a new boom is going to happen, the best Yeildcos to buy today will be the ones with the lowest current dividend yields, because they can raise the cheapest capital in new secondary offerings and they will be able to promise the fastest dividend per share growth.

While a new Yieldco boom is likely, it is not certain.  The most likely event to derail the Yieldco growth train would be a US market crash.  Given the current high valuations and the worsening pandemic, a crash is impossible to rule out.   If this happens, the best Yieldcos to own today are the ones that have the highest yields and/or are retaining the most cash to invest in new projects and pay down debt.  These cheaper Yieldcos will also do well if a new Yieldco boom materializes, but not as well as the leaders.

Since I’m more interested in avoiding losses than going for the big win, the Yieldcos in the 10 Clean Energy Stocks for 2021 model portfolio are: Covanta Holding (CVA), Green Plains Partners (GPP), Avangrid (AGR), and Brookfield Renewable Energy Partners (BEP).  Covanta, Green Plains Partners, and Avangrid did not appreciate as much as other Yeildcos in the past six months because they are not the pure solar and wind power owners that many investors will be looking to as a replacement for fossil fuel stocks.  Covanta is a leader in Energy from Waste, Green Plains Partners is a Master Limited Partnership (MLP) that owns ethanol storage and transportation assets.

Avangrid (AGR) is not completely fossil fuel free, since it owns some natural gas utilities, which is why it has not run up with the purely renewable Yieldcos.  Nevertheless, it is a leader among electricity generators in the US, with its CO2 emissions per kWh in 2018 at 15% of the US average.  Its utility networks are 77% electric and 23% gas. 

That picture is being made somewhat worse by its planned purchase of PNM Resources.  After the PNM merger, its electricity generation also includes 22% to 32% fossil fuel (depending on if you measure by electricity capacity or production – see chart), but planned generation investments will be almost entirely renewable, while it phases out coal.  While Avangrid’s valuation remains low compared to its more renewables-focused peers, it could benefit if a Yieldco investment boom materializes.  Its existing and new renewable generation assets will become more valuable as the increased demand by Yieldcos drives up prices.  

It could also take advantage of the boom by selling its fossil fuel assets and becoming a truly fossil fuel free company, although management seems committed to its natural gas utilities, at least for the moment.  

Finally, Brookfield Renewable Energy Partners (BEP) is a pure clean energy Yieldco which has seen massive price appreciation over the last six months, and trades at low (2.7%) yield.  But compared to other highly priced Yieldcos, BEP has an advantage for raising money in secondary offerings.  It has a second type of share in Brookfield Renewable Energy Corporation (BEPC), which is even more highly valued than BEP.  While BEP and BEPC pay the same per-share dividend, BEPC shares ended 2020 at $58.27, a 35% premium compared to BEP which closed at $43.15.  With this price differential, Brookfield Renewable can issue new BEPC shares and use the funds to invest in clean energy projects which will benefit both share classes equally.  Alternatively, the company could sell ten million BEPC shares, buy ten million BEP units, and instantly have an extra $150 million to invest without increasing the total number of shares outstanding.  For this reason, I expect the company to issue many new BEPC shares in 2020, with the benefit accruing to both classes of share equally.  Over time, this will erode the large premium of BEPC shares over BEP units.

Hedging BEP with BEPC

The safest way to bet that the premium of BEPC over BEP will narrow would be a long-short hedge, buying BEP and selling an equal dollar amount of BEPC short.  For every 100 shares of BEP purchased (for $4315), the investor would also sell $4315/$58.27 = 74 shares of BEPC short.  This long-short hedge would only change in value if the price premium changed, but the investor would collect approximately $116 in dividend on BEP, while only paying $86 in dividends on the short BEPC shares.  Meanwhile, each 10% decrease in the premium would lead to a 10% ($431) gain, while each 10% increase in the premium would lead to a 10% loss.

Unfortunately, there are many hedge funds that follow absolute return strategies like the one I have outlined above, and their demand for BEPC shares to sell short will lead to additional fees for anyone trying to sell BEPC short. 

Another option for a partial hedge for BEP shares using BEPC would be to sell call options on BEPC.  For this, I would use the longest-dated call options available with a strike price just above the current market price.  In this case, that is the call option to buy 100 shares of BEPC at $60 at any time before June 18, 2021, or BEPC 6/18/21 $60 Call.  Selling one such contract would be a hedge against small declines of 135 shares of BEP.  While I was initially thinking I would include a hedge like this in the model portfolio, the requirement that the BEP position to be at least 135 shares (or $5800) to work means that in order to follow the model portfolio, a reader would have to invest at least $5800 in each of the 10 stocks, or $58,000 total.  Since I want this strategy to be accessible to readers with only $10,000 or so to invest, I will include BEP in the portfolio without a hedge.

Conclusion

The end of 2020 looks like it may have set the stage for a new Yieldco boom, with rapidly rising stock prices leading to new investment and rapid dividend per share growth.  If this virtuous cycle emerges, the Yieldcos to own will be the ones with the lowest yields and the highest potential for compound dividend growth.

Unfortunately, a Yeildco boom is not certain.  Higher yield Yieldcos will also benefit from a boom as investors attracted by the leaders look for diversification in the space, but they offer more safety.  If a new Yieldco boom fails to emerge or turns to a bust, more value priced Yieldcos like CVA, GPP, and AGR have less far to fall.  

Brookfield Renewable Energy Partners (BEP) is one of the Yieldcos that saw the largest rise (69%) in the second half of 2020. It has the advantage over other Yieldcos that it can raise cash through the sale of shares of the even more highly valued Brookfield Renewable Energy Corp. (BEPC) shares, which are up 126% over six months and now trade at a 35% premium to BEP.  BEP shares can not only benefit from a renewed Yieldco boom, but can also benefit from any narrowing of the BEPC/BEP share price premium, which I believe is too large to be sustainable.

DISCLOSURE: Long CVA, GPP, AGR, BEP, BEPC. Short calls on BEPC.

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 The Yieldco Virtuous Cycle appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

An annual tradition, here is my Ten Clean Energy Stocks for 2021, which is also the new model portfolio for the year, with equal dollar values of each stock using closing prices on 12/29/2020.   

Returning Stocks

• Mix Telematics (MIXT)
• Green Plains Partners (GPP)
• Covanta Holding (CVA)
• Red Electrica (REE.MC, RDEIF, RDEIY)
• Valeo, SA (FR.PA, VLEEF, VLEEY)
• Veolia (VIE.PA, VEOEF, VEOEY)

New Stocks

• Scorpio Bulkers, Inc. (SALT) – Dry bulk shipper converting to offshore wind construction.  Thanks to Thad Curtz for bringing my attention to this one.
• Brookfield Renewable Energy Partners (BEP) – A leading clean energy Yieldco with significant hydropower assets.
• Umicore, SA (UMI.BR, UMICF, UMICY) – Leading recycler of batteries and specialty metals.
• Avangrid (AGR) – Owner of renewable generation and utilities.

As I track this model portfolio over the year, I will continue using the Global X YieldCo & Renewable Energy Income ETF (YLCO) as a clean energy benchmark and the SPDR S&P Dividend ETF (SDY) as a broad market benchmark, while throwing in the performance of my real money managed portfolio, the Green Global Equity Income Portfolio (GGEIP) for good measure.  The chart below shows preliminary numbers for 2020.

As I discussed last week, this was another difficult year to find clean energy stocks that I think are good values.  It’s a great thing for the planet that the fossil fuel divestment movement seems to be driving up the prices of clean energy stocks, but it makes life harder for value investors like me.

Given the high valuations, I think it’s important to keep some cash on the sidelines, but my track record on calling market tops is abysmal, so I never get totally out of the market.  

I’ll be following up this list with a series of articles looking at the individual holdings in depth over the next week.  My Patreon supporters can read drafts of the first two here and here.

Update

You can now read all the articles looking at these stocks in more depth through the links below:

• Valeo, Veolia, Umicore, and Scorpio
• Covanta, Green Plains Partners, Avangrid, and Brookfield Renewable Energy Partners
• MiX Telematics and Red Eléctrica

DISCLOSURE: Long all stocks in the list.

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 2021: The List appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

The stock market took off in November, fueled by very positive covid-19 vaccine news, and possibly also the prospect of a little competence and sanity in the White House.  While both of these are unambiguously positive for the economy, I think investors are seeing the future through rose colored glasses.

What a Biden Victory Means for the Economy

A Biden victory is good news in that we will finally have someone in the White House who will work to reduce the infection rate in the pandemic, rather than vacillating between wishful thinking and actively spurring it on by denigrating mask wearing and organizing mass rallies seemingly designed to spread the disease.  

A Biden victory is also good news because it means we will have someone in the White House who will be actively working to get a pandemic relief bill through Congress.  Chances of that bill being large enough to tackle the problem depend on Democrats winning both of the Senate run-off races in Georgia.  If the Republicans keep either of those seats, McConnell will continue to control the Senate, and McConnell has said he wants a $500Bn relief bill–far too small to deal with the damage being caused by the out-of-control pandemic, and the lockdowns states are being forced to impose in response.  Polls for both races are within the margin of error, with the Republican leading slightly in one and the other being a dead heat.  Even if we assume that voters will focus on control of the Senate and not split their votes, Democratic chances of controlling the Senate are likely below 50%.  Since the Dems need to wind both races, significant vote-splitting will ensure McConnell remains in charge.

What the Vaccine News Means For the Economy

The big news on the vaccine front in November was not that the first vaccines will likely start being administered before the end of December (while the timing was uncertain, getting the first doses in December seemed likely.)  The fact that the early results show that three of the prospective vaccines are remarkably effective at preventing infections is both a surprise and significant reason for optimism.

While the likely high efficacy of these vaccines is excellent news, there is still a long way between vaccine trial results and getting enough of the population vaccinated to stop the spread of the virus.  The main reason I do not invest in technology startup companies is because so many things can go wrong between promising lab results and selling a product to the mass market.  I see the producing and distribution of these vaccines as an  analogous situation.  We will be attempting to vaccinate the majority of the population faster than it has ever been done before.  

We also lack long term studies of the effects of these vaccines.  How long are they effective? We know that there are cases of people who have had the virus getting it again, leading us to believe that natural immunity is not permanent. Vaccine-induced immunity will likely also fade over time.  Even if a vaccine is 95% effective for the first month, how effective will it be six months or a year later?  

Production and distribution snafus, are possible as well, and we still need to persuade a majority of the population that they should get the vaccine.

President Trump claims that we will be able to get most of the population vaccinated by June 2021.  Given the source, we can comfortably assume that this is a wildly optimistic, if not impossible goal to achieve.  So even if everything goes right with the vaccine, the earliest we can expect to be able to relax social distancing measures will be the second half of 2021, and the economic damage will continue to be done at least until that happens.  

2021 Outlook

In short, my 2021 outlook remains grim, and the good vaccine news plus Biden victory which have led to the November rally do not seem to justify a 15%-ish rise in an already overvalued market.  I will continue to approach the market with extreme caution until I see actual economic recovery, or a large market decline leading to much better stock valuations.

Model Portfolio

Despite my caution, the 10 Clean Energy Stocks for 2020 model portfolio did well in November.

The model portfolio has finally broken even for the year, in line with its broad market income stock benchmark, SDY.  However, compared to its clean energy income stock benchmark (YLCO, up 18%) and my real money Green Global Equity Income Portfolio (GGEIP, up 20%), the performance continues to be disappointing.  You can find my thoughts on why it might be lagging in my September update.

Individual Stocks

All stocks seem expensive to me right now, and I generally prefer to move to the sidelines than play the relative valuation game in an overvalued market.  In general, I like the companies in the portfolio, but am not buying and am taking some profits or selling calls on the larger positions.  

I published a few earnings highlights for my supporters on Patreon in late October and early November.  They are a little out of date now, but I’ve changed the permissions so that everyone can read them at these links:

• Mix Telematics (MIXT): https://www.patreon.com/posts/43288860
• Covanta Holding (CVA): https://www.patreon.com/posts/43302522
• Valeo (FR.PA, VLEEF, VLEEY): https://www.patreon.com/posts/43453098
• Green Plains Partners (GPP): https://www.patreon.com/posts/43782924
• NFI Group (NFI.TO, NFYEF): https://www.patreon.com/posts/43791404

Note that I have become significantly less pessimistic about NFI Group since I wrote the note above because the vaccines seem likely to be more effective than I was assuming in early November.

I also published a note about Brookfield Renewable (BEP, BEPC): https://www.patreon.com/posts/43707068, which is not currently in the portfolio, but has often been in the past.  

Conclusion

I’m still waiting for a downturn before I’m ready to start buying.  Yes, the election and vaccine news are good for the economy, but the stock market never seemed to reflect just how bad the economy is likely to get before the recent news, and it still does not.  

I continue slowly taking more profits as my stocks rise by selling covered calls or portions of my positions.

DISCLOSURE: Long positions all the stocks in the model portfolio with the exception of NFYEF is now a very small position.  

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 10 Clean Energy Stocks for 2020: Rose Colored Covid appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

After a couple down market days, all the limit orders I listed on Monday have executed.

Here is the current portfolio:

Coming Up:

Third quarter earnings season is starting… I plan to write short notes on earnings as they come out for my Patreon supporters, which will be compiled into longer articles on AltEnergyStocks.com a few days later.

Also, I’m doing a talk on how to divest from fossil fuels with the founder of divestor.org this coming Monday at 8:30 pm ET for the Climate and Health subgroup of Citizens Climate Lobby  It’s open to the public, so follow the link if you are interested.

Disclosure: Long positions all the stocks in the model portfolio with the exception of NFYEF.  

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 10 Clean Energy Stocks for 2020: Updated Model Portfolio appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Two of the cash covered puts in the 10 Clean Energy Stocks for 2020 model portfolio have now expired, and I am left with a difficult decision as to what to replace them with.

As I discussed last month, I feel the market is overvalued given the economic impact of the pandemic and little prospect of fiscal stimulus before January.  Yes, the market is not the whole economy, and large tech firms and high income workers and the wealthy are doing great while people on the bottom half of the income ladder are being crushed.  With the pandemic worsening just as we head into the colder months, it’s going to be a hard winter.  

This is no time to be buying stocks.  Rather, we should be squirreling away our cash and waiting for a significant market decline, possibly even a crash before we invest.

Making matters even more difficult, the model portfolio has significantly underperformed this year, a good 16% below both its clean energy income benchmark, YLCO, and my real money managed portfolio, GGEIP, both of which are now up slightly for the year.

The model portfolio (at -13%) looks less bad in comparison to its broad market benchmark, SDY, but as of the end of September, it was still below that even in the relative performance game.

Behavioral psychology tells us that most people hate to lose even more than they like to win, and I am no different.  When I find myself in a situation like this where I am “behind”, I have a strong temptation to make a risky move as long as it has a chance to pay off big and let me “catch up.”

Fortunately, I know behavioral psychology, and while I am tempted to take undue risks, I don’t have to give in to temptation.  One such bet I considered was purchasing put options on a market index.  After all, I believe the market is overvalued, and options can easily return many times the initial investment when they pay off.  Unfortunately, the market’s overvaluation does not guarantee a near-term market correction.  

A common market aphorism (sometimes attributed to Keynes and other times to Shilling) is that the market can stay irrational longer than you can stay solvent.  No matter what the origin, it’s good to keep in mind whenever we are tempted to bet on market rationality.  It is also why I do not ever totally get out of the market and into cash, even at times like these when I am very concerned about valuations and potential market shocks.

So, the goal of these selections is to maintain a defensive posture while avoiding the temptation of making any big bets to try to make up for previous losses by year end.  When considered against the portfolio’s longer term track record, it’s worth noting that 2020 is likely to be the first year the model portfolio falls behind its benchmark since 2013.

Picks

Between accumulated dividends, and the cash freed up by the expiration of the puts on Hannon Armstrong (HASI) and Covanta (CVA), the portfolio had $3,533 in available cash.  On valuation, I continue to like Covanta, Green Plains Partners, and MiX Telematics (MIXT).  In general, I would prefer to sell out-of-the-money cash puts because of the protection they give against a small decline in the stock market compared to buying the stock outright.

Only Covanta has exchange traded options available, and I will attempt to sell two March 2021 $7.50 puts using a good-til-canceled limit order of $0.70.  If executed, the puts will sell for $140 and $1500 cash will be needed to cover the potential assignment of 200 shares of CVA at $7.50.  

This will leave $2173 to invest, which I will split between a good-til-canceled limit order to buy 120 shares of MIXT at $8.60 or better and 131 shares of GPP at $7.83 or better.  

These prices are all a little below the market, so I will only count the trades towards the model portfolio if the stocks or option actually trade at or better than these prices starting on Monday 10/19.

Final Thoughts

I was tempted to leave the portfolio holding most of the cash, but I generally try to keep it mostly invested.  If you use the 10 Clean Energy Stocks model portfolio as a guide for your own trades, keeping a decent allocation to cash is probably a good idea right now.

Disclosure: Long positions all the stocks in the model portfolio with the exception of NFYEF is now a very small position.  My supporters on Patreon got an early look at this article on October 18th.

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 10 Clean Energy Stocks for 2020: Spooked in October, but Trading Anyway appeared first on Alternative Energy Stocks.