by Tom Konrad Ph.D., CFA

Why Green Buildings are Profitable Buildings

Buildings are responsible for approximately a third of greenhouse gas emissions, so making buildings more efficient and switching them to renewable sources of energy is an essential part in addressing climate change.

Fortunately, new technologies such as cold climate heat pumps, heat pump water heaters, induction stoves, as well as the ever falling cost of renewable electricity and improvements to insulation and building envelopes often provide opportunities to improve buildings while achieving extremely attractive investment returns from the energy and maintenance savings alone.

Because of the great financial returns, building owners who recognize and implement these opportunities are likely to be at a competitive advantage to those that continue with business as usual.  They will also be better prepared when governments require building owners to reduce greenhouse gas emissions as part of their own environmental efforts.

Real Estate Investment Trusts

Stock market investors can invest in real estate through a large number of publicly traded Real Estate Investment Trusts, or REITs.  Due to their special tax status (REIT income is not taxed at the company level if at least 90% of it is distributed to investors), REITs also often have relatively high dividend yields, making them attractive to income investors.

Nearly every REIT on the stock market has a sustainability page touting its green building achievements.  Unfortunately, often this is just greenwashing: highlighting a sustainable project or touting efforts to engage with tenants on renewable energy while continuing with business as usual across the rest of the portfolio.  

But this is not true for every REIT.  There are REITs that have made strong green commitments, and have the track records to back them up.  

REIT Industry ESG Report

To help me identify some of these truly green REITs, I started with the REIT Industry ESG Report 2022 published by the REIT advocacy organization, Nareit in July.  Since Nareit is an advocacy organization, we can’t expect it to publish an industry green ranking which might upset lower-ranked REITs, but it does contain 15 case studies.  

I went through these case studies, searching for convincing action on climate change.  I eliminated the ones that focused on single buildings, or on social issues (the “S” in ESG).  Of the ones that were left, here are the ones that seemed to be committed to greening their entire property portfolios.  I’ve written some short notes on the green efforts highlighted in the case studies, and included the page number in the REIT Industry ESG Report so you can read and decide for yourselves.

• Rexford Industrial Realty (REXR, p.36)  While this REIT is short on its list of achievements, it seems to be incorporating the environment in decision making processes. 
• American Tower Corp (AMT, p.57) The REIT’s business of sharing space on communication towers has a lot of inherent sustainability.  On top of this, they have significant fossil fuel usage reduction achievements and goals.
• Federal Realty Investment Trust (FRT, p 60) I have mixed feelings about this one… It does not build on greenfields (sites which had not been previously built on- a very important step) but makes no mention of energy usage at its properties. 
• Iron Mountain (IRM, p.62) – Has a very strict hour by hour clean energy sourcing goal which will likely drive innovation, plus a company wide process of energy use analysis and reduction.
• Prologis (PLD, p.66) – company wide commitment to green certifications on all new and redevelopment projects.Uses low carbon building products, and adopts energy reducing tech and renewable energy on its buildings.

There Are More

Note that this list is far from comprehensive… it’s just the five most convincing examples highlighted in the Nareit report.  Many other green REITs exist… my personal favorite being Hannon Armstrong Sustainable Infrastructure (HASI).

Note: This post was first published on my Patreon page.  You can gain an early look at drafts of my articles and other benefits by becoming a patron.

DISCLOSURE: Long HASI. A family member owns PLD.

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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By Tom Konrad, Ph.D., CFA

Here are two more updates from last week on Patreon.  Also, I realize I neglected to publish the monthly performance chart for my 10 Clean Energy Stocks model portfolio here at the start of the month, so here it is as well:

Atlantica Sustainable Infrastructure Earnings

(published May 11th)

Atlantica Sustainable Infrastructure (AY) released its first quarter earnings announcement and financial statements on May 6th.

Atlantica is one of the higher yielding Yieldcos, 5.3% at the new quarterly dividend rate of $0.43 and a $32.50 stock price.  The dividend is safe, since most of Atlantica’s debt is fixed rate, non-recourse project debt which will be paid off before the project Power Purchase agreements expire.  

In addition to paying down debt, the company has also been investing in new projects, most recently a 49% stake in a 596 MW collection of 4 wind projects in Illinois, Texas, Oregon and Minnesota.  This has been financed by a well-timed issue of new equity in December, while the stock was trading at elevated levels with most other clean energy companies.  

The stock decline since then is getting me interested, and I have started selling out of the money cash-covered put to add to my current position.

Hannon Armstrong Selling Off Today- I’m Buying

(published May 12th)

This is going to be brief, but I wanted to give subscribers a heads-up.  Hannon Armstrong (HASI) is a unique REIT financing in renewable energy and energy efficiency.  Its investments typically are relatively senior (that is, they take losses last), making them safer than the typical equity investments of your average Yieldco.

Given the exposure to energy efficiency (a very difficult clean energy asset class to invest in), and the safety of its investments, HASI deserves to be in every clean energy income portfolio.  For the last few years, however, it has been selling at a large premium to the Yieldcos, so I’ve been slowly whittling down my stake.

The sell-off today (seemingly on inflation fears) looks like a great opportunity to buy some of that back (or, in my case, sell cash covered puts.)

Clearway Class A (CWEN-A) and Atlantica (AY) are also starting to look attractive.

DISCLOSURE: Long HASI, AY, 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.

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by Tom Konrad, Ph.D. CFA

Two more earnings notes I shared with my Patreon followers on February 18th.

Covanta Holdings (CVA)

Leading waste-to-energy firm Covanta Holdings (CVA) announced 2020 earnings today.  There will be a conference call tomorrow morning, but here is my high-level impression:

The company managed well through Covid and ended the year within it’s original pre-covid guidance.  Metals and energy prices, as well as increased maintenance capital expenditures were a drag on results, but  prices are improving and capital expenditures will fall in 2021.

The company is conducting a strategic review which will likely result in the sale of some underperforming assets.  I expect any money raised this way will go to pay down debt, as will retained cash flow from its dividend reduction last year.  

As I wrote in April 2020, while covid was the excuse for the dividend reduction, the underlying reason was that the company’s debt and dividend were too high. That opinion has not changed, so readers should not expect to see a dividend increase as a result of the ongoing strategic review, which management expects to conclude by the middle of the year.  

Rather, I expect the dividend to be maintained at its current level while the company strengthens its balance sheet and invests in growth projects.  This should be  good for the company’s long term prospects, but I don’t expect anything spectacular to happen to the share price in the short to medium term.

Hannon Armstrong (HASI)

Sustainable infrastructure financier Hannon Armstrong (HASI) was down on earnings today.    I did not see anything bad in the earnings report, so I think the cause is just that the stock is overvalued, and the new guidance of 7-10% annual earnings growth does not justify its current lofty valuation.

Maybe the stock will decline far enough that I want to buy it again… not likely without a major market decline, which is probably not something I should “hope” for, but it would definitely be a silver lining.

Love the company, hate the price.

DISCLOSURE: Long CVA, HASI

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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by Tom Konrad, Ph.D., CFA

Market Decline

Last week I warned “The risks in today’s stock market outweigh the possibility of future potential gains.”  Looks like we’re seeing those risks manifest in short order.  The last couple days’ decline have me looking at a few stocks to start adding to my positions again, especially MiX Telematics (MIXT) discussed on June 2nd and Green Plain Partners (GPP), discussed below.

Note that this pullback could easily be very early days of a much larger market decline.  We might even see the market fall far enough to test the March lows… any of my buying now is just small amounts, with most of my buying power held in reserve.  As I wrote last month, I balance the level of my buying or selling against my confidence in the valuations of the stocks in question and my predictions of market trends.  Right now I think we’re starting to see some good values in a few stocks again, but I think it’s likely that we will see much better valuations in the weeks or months to come, so I am mostly holding on to my cash and waiting for better values to be created by continued declines.

On the other hand, there’s also a chance that we’ll see an immediate rebound in the next week, which is why I’m doing a little buying now.

The three updates on the individual stocks in the model portfolio which I wrote for my Patreon supporters earlier this week:

Green Plains Partners (GPP) Secures Financing

Disclosure: Long positions all the stocks mentioned.

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: Updates on GPP, HASI, CVA appeared first on Alternative Energy Stocks.

With the market’s rapid rebound from March lows and the Nasdaq Composite stock index closing higher than it was at the end of last year, many of us are probably asking ourselves:

Did I miss my chance to buy at the lows? 

or:

Will I ever make up for my losses?

These questions point to dangerous emotions for stock market investors.  Fear of missing out often leads to investment mistakes.  This is why investment advisors always tell their clients that they are better off not looking at their portfolios in a downturn.

A big loss makes some people want to sell everything, for fear of losing more.  Others make increasingly risky bets in order to try to win back what they have lost. Both tactics are likely to be wrong-headed for the simple reason that they are motivated by information that has nothing to do with the market’s future trend: namely, an investor’s personal experience.  As Kai Ryssdal puts it, “The market doesn’t care if you live or die.”

What the market cares about is companies’ future prospects, and investors’ future willingness to buy stocks.  Your personal past investing experience is irrelevant, except as a pointer to other investors’ past experience, and the mistakes they might be likely to make.  How much money you have to invest matters, but how much you had at the start of the year is irrelevant.

Almost all of us have losses since the start of the year, and we all wish those losses were smaller.  Since we’re not emotionless Vulcans, we need tricks to ensure that our very real emotions don’t cloud our judgement.

Here are a few of mine:

A little at a time: When making any investment decision, I don’t go all in.  When I first think a stock is a good buy, I buy a little.  If the stock shoots up immediately, I at least have some… it’s much easier to deal with the regret that I should have bought more than if I had considered buying and not bought any at all.  My April 10th call on Ebay (EBAY) is a prime example.   If the stock goes down, I can buy more at a better price, assuming my opinion about the stock has not been changed by events.  I do the same with selling, slowly lowering my allocation to a stock as it rises.

I didn’t go all in on Ebay in April, and of course I would be happier if I had, considering it is up over 35 percent in a month.  But if Ebay had continued to fall, I would have had the opportunity to buy more at an even better price… by taking things a little at a time, I guaranteed that my moves would not be perfect, but also that I had something to be happy about.

Know the whys for your decisions. If I research a stock and decide not to buy, or choose not to research a stock at all, I am very clear with myself as to why. I never buy stocks that I consider to be the flavor of the moment, or stocks that are not environmentally responsible enough for my taste.  Batteries are driving demand for lithium and cobalt, which is potentially good news for many mining companies. But I don’t invest in the sector because it usually entails significant environmental damage, even when it is done with care.  Mining may be necessary to bring about the clean energy transition, but necessity does not mean it has to be part of my portfolio.  And I’m OK with that.  If I hear about a lithium mining stock, and I later find out that it just increased five-fold, I have no regret that I did not buy.  If I had bought, I would have had to compromise my principles, and I would have spent valuable research time looking in to a company that I had mixed feelings about owning.  Better to spend that same research time (and potential capital) on companies which do not require that I make moral compromises.

Blogging also helps with this.  It gives me a written record of the reasons behind both my successes and failures.  Being able to go back and review those mistakes in black and white is a valuable tool to help learn from them.

Change your framing. If I find myself obsessing on recent losses or gains, it can helpful to look at the same numbers with a wide frame.  Last month, I wrote about how looking at returns since the start of 2019 or year over year was helpful to keep the losses so far this year in perspective.  Looking at the last month’s gain, or even focusing on individual stocks can help alleviate the feeling that everything always goes badly.

The same is true for success.  If everything seems to be going your way, it can be helpful to remind yourself of past losses, or the one stock in your portfolio that is down.  Investors are only as good as our next decision, and if we let our emotions tell us that we will always win or always lose no matter what we do, we will stop making good decisions.

Today’s market

How does this apply to today’s market, where many of us likely feel as if we missed an opportunity to buy at the March lows, and may be worrying that we’ll never “make back” our recent losses?

First of all, if you feel you didn’t buy enough at the bottom, you were already following the “a little at a time” rule above.  You also didn’t miss out on the opportunity altogether.  The stock market was a very scary place in late March. Change your perspective and congratulate yourself on having the courage to buy anything at all in the face of that fear.

For my own part, I cautiously added three cash covered puts to the 10 Clean Energy Stocks model portfolio, Ebay (EBAY), Hannon Armstrong (HASI) and Covanta (CVA).  Although all three are showing gains, the model portfolio is now significantly trailing its benchmarks.  If only I’d been less conservative and used the same money to buy the same stocks rather than sell cash covered puts, it would have done much to bridge the gap.

“If only” is a dangerous game for a stock market investor.  The market doesn’t care if I live or die, and EBAY at $41 is a much less attractive stock than it was at $30 a month ago.  Better to turn my attention to looking for the next bargain, than to worry about not buying enough of the last one.

The market as a whole is up much more than I ever expected a month ago.  This is in large part due to the extraordinary measures the Federal Reserve has taken to step in as a buyer of last resort in credit markets where it did not even venture during the depths of the 2008 financial crisis.

Seasoned investors say to “never fight the Fed.”  This means that when the Federal Reserve is working to support the stock market, it is a very risky move to bet that the market will fall.

The stock market has spent the last month demonstrating that it is not the economy. While the economic situation is more dire than it has ever been since the Great Depression, the market seems to be saying that the fortunes of listed stocks (especially the largest Nasdaq stocks like Apple (AAPL), Alphabet (GOOG) and Amazon (AMZN)) are bright.

That’s probably true for the Internet stocks that help us socially distance.  But the prospects for the rest of the economy are far less certain.

Given the lack of adequate safety precautions and testing, the parts of the country that are now opening up will soon be seeing rapid increases in conronavirus cases, and people travelling between states will make it even more difficult for the states that are being more cautious to open up when they are ready to do so.

Until we have a vaccine or a very effective treatment for the coronavirus, the US economy is going to be limping along as social distancing adds costs to all economic activity, and periodic outbreaks cause new stay at home orders.  Meanwhile, most people with savings will find them seriously depleted, and an increasingly small slice of the population will have the money to do any form of discretionary spending.  State and local governments will find themselves running up against balanced budget requirements and start laying off staff into a job market with the highest unemployment rate seen since the Great Depression.

While stock market investors should not be fighting the Fed, the economy is certainly doing so.  The Fed will do everything it can (and it has shown that it can do a lot) to prevent the economy from collapsing, but will it create new economic activity to replace the jobs that have disappeared?  I doubt it.

I expect that we are in the beginning of a multi-year recession.  “Depression” is a term that does not have an agreed upon definition among economists, but many colloquial definitions will apply to the current downturn.

The Fed has the ability to print money and prop up the entire stock market even through a depression.  I doubt that it will choose to do so.  Although many of the stocks you would like to buy will never go back to their March lows, others will not ignore economic reality forever.   They will fall.

When they do, we will again have buying opportunities.  Buy some when you think you see an opportunity.

If your stock bounces back up, you will regret not having bought more, but that regret is not as bad as going all-in on a stock that just keeps falling and falling.

Disclosure: Long HASI, EBAY, CVA.

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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by Tom Konrad, Ph.D., CFA

Of the few survivors of the dot com bust, Ebay (EBAY) is a perennial also-ran.  It owned the market for consumer-to-consumer (C2C) transactions in 2000, but has since repeatedly lost market share.  Nevertheless, the company remains a profitable business that enables the sustainable reuse of easy to ship items while returning cash to investors.

Note: My supporters on Patreon got an early look at this article.  Want to support my work and get previews of my writing?  Join them here.

The Competition for Sellers

In the early 2000s, Ebay lost sellers to Amazon’s (AMZN) marketplace, which had the advantage of getting listings in front of a larger group of buyers, and has since added more services for sellers, such as delivery services through Amazon’s impressive logistics arm.  More recently, specialist competitors like Etsy (ETSY) for crafts , and PoshMark for fashion have attracted younger users who prefer an app-based interface.

Many sellers prefer Ebay for its lower fees compared Amazon and other competitors, and its pure customer to customer model means that it has no inventory or warehouses, and its operations are not disrupted by trying to maintain social distancing.   Other sellers list on multiple platforms, but offer better prices on Ebay because of the lower transaction fees.

This is why I believe that social distancing is an opportunity for Ebay to claw back some market share from Amazon.  The stories of third party sellers being second class citizens on Amazon’s platform have been prevalent for years, most notably Amazon using its data to directly compete with third party sellers in any category that it starts to see as particularly profitable.  Sellers can succeed quickly through access to Amazon’s legion of buyers on its Marketplace, but if they become too successful, they will likely find themselves competing with Amazon itself.

Sellers discovered another problem with their reliance on Amazon when the company decided to prioritize the delivery of “essential” items in March.  While prioritizing life saving items over toys and knick-knacks is likely a good use of Amazon’s overtaxed warehouse workers, this is small consolation to a small online seller who needs the income to buy their own essential items.  These frustrations will likely lead sellers to be less likely to trust all their eggs to Amazon’s basket.

Looking Forward

Ebay’s revenues, and number of sellers and buyers have been basically flat in recent years, and the company did not expect that to change when it issued its guidance for 2020 at the end of January.  The company did expect single digit earnings per share growth, driven mostly by share repurchases.

Those share repurchases and the new dividend were motivated by activist investors who have forced the company to start returning value to shareholders in the absence of growth.  The company now has a new CEO and two new board members nominated by the activists.  They have also led Ebay to consider the sale of some of its properties, including the very fortuitously timed sale of StubHub for $4.05 billion (approx $5/share) in February.  Further shoring up the balance sheet, Ebay followed this sale by refinancing and extending the term $1 billion of its senior unsecured debt with lower interest notes due in 2030.

Before the crisis, the expectation had been that Ebay would use its strong cash position to invest in its platform, and accelerate its stock buybacks.  The new reality means that Ebay is in a good position to be a consolidator by buying up less well prepared rivals.

Sustainability

For me, “Reduce, Reuse, Recycle” is not just an alliterative list of sustainable actions which I incorporate in my personal life, it’s also a list of investing themes I try to incorporate in my portfolio.  For reduce, I have stocks that incorporate energy efficiency like Hannon Armstrong (HASI) and Ameresco (AMRC).  For recycle, I have Umicore (UMICF, UMICY, UMI.BR), Schnitzer Steel (SCHN), and Greystone Logistics (GLGI).  The essentially anti-consumerist nature of reuse makes it a particularly difficult investing theme to participate in.

I’ve wanted to include Ebay or another C2C marketplace as the first “Reuse” stock in my portfolio for a long time, but until recently, Ebay’s valuation and lack of dividend have kept me away.  The recently initiated dividend and stock decline have changed that.  Combine that now with potential opportunities to claw back market share from Amazon and potentially purchase distressed rivals, and I’m buying.

Or at least I’m selling cash-covered puts on Ebay.  I like to think of buying a stock as a bet that it will go up, or, if it doesn’t, that the dividend will exceed any decline.  Selling a cash-covered put, or buying the stock and selling a covered call are similar strategies that I think of as bets that the stock will not fall permanently.  If the stock falls below the option strike price, the investor will own the stock at a cost below what it was trading at when the bet was made.  If the stock rises, the investor keeps the option premium and cash.

In terms of Ebay’s prospects, the company is cash rich, and its operations are unlikely to be disrupted by the pandemic.  It may even see some upside.  The loss of income for too many people in this crisis will lead some to explore new ways to earn cash.  Selling off unneeded stuff on online platforms is an easy and quick option, especially people who want to avoid in person transactions.

Trading

Good valuation, a strong balance sheet, opportunities arising from people staying at home, and overall sustainability all led me to use a cash covered Ebay put as a new position in my 10 Clean Energy Stocks model portfolio at the start of the month.

The market and Ebay stock fell the following day, and have since recovered, so readers who follow the model portfolio would have had an opportunity to make the trade.  If you missed that window, I expect the market to remain volatile in both directions for months to come as investors sort out what this pandemic and the response to it mean for the economy.

It is that expected volatility that leads me to prefer cash covered puts to the direct purchase of stocks in current market conditions.  If your account does not have sufficient options permission to sell cash covered puts, purchasing the stock and selling a covered call has the exact same risk/reward profile.

If you do not have options permission at all, watching several stocks you think are good prospects and starting with a small position which you increase if the stock falls is probably the best option.  Unfortunately, that strategy is difficult for anyone who does not pay daily attention to the market.

Disclosure: Long HASI, EBAY, UMICF, SCHN.  Small long positions in AMRC and GLGI.

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 Ebay: A Sustainable Social Distancing Stock appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

Four weeks ago, I predicted that the 12% market correction we had seen would turn into a true bear market.  Bear markets are often defined as a decline of more than 20% for the major market indexes, but I find it more useful to focus on long term changes in investor sentiment.

What I did not predict was just how severe the effect of the coronovirus shutdown would be on the economy.  I thought we would need the combined of the effect of the shutdown and investors re-assessing their risk tolerance to bring us into full bear market territory.  Now, a month later, it seems clear to me that the economic effects alone are enough to justify a 20% decline.

I still believe that the current period of uncertainty will have a long term effect on investor risk tolerance.  That means that even when we have the economy functioning back at 2019 levels (which I don’t expect until 2022) the stock market will probably be trading at a lower valuation than it was in January 2020.

Readers, mark your calendars with a note to check if the S&P 500 is trading above its peak of 3,393 in January 2020.  If it goes above that, do me the favor of calling me on it… I’ll write a mea culpa, and hopefully will be able to draw some lessons that will let all of us learn from my mistakes.

First Quarter Performance

Despite a successful hedging strategy, my Ten Clean Energy Stocks for 2020 model portfolio has now lost almost 25% of its value since the start of the year.  This is better than its broad market benchmark (SDY), which is down a little over 25%, but it is well below the rather resilient performance of its clean energy income stock benchmark, the Yieldco ETF YLCO.

My real money managed portfolio, the Green Global Equity Income Portfolio (GGEIP) has done almost as well as YLCO, and is down 18% for the year to date.

Keeping Perspective

The losses all around are large, and when you are looking at a portfolio that’s down 20% to 30% year to date, it’s easy to get overwhelmed.  This interferes with good decision making.  In order to maintain my perspective, I also like to look a longer time periods.  Fortunately, 2019 was a blockbuster year for my portfolios, so zooming out a longer time period can be comforting.  Here are the returns for the portfolios and benchmarks over the last 12 months and since January 2019:

It’s a little easier to think about the next move when you think of your account as up 10% to 15% since the start of 2019 (like both clean energy income strategies and their clean energy benchmark) as opposed to thinking of it as down by one sixth to one quarter since the start of the year.

What’s Next?

Now that we have reassured ourselves that, despite the ongoing bear market, we’ve still made money by investing in clean energy income stocks since the start of 2019, it’s a little easier take the long term view going forward, rather than focusing on “making up” for recent losses.

The sharp rally we have seen in the stock market since the recent low on March 23rd is most likely driven by people who are worried about missing out on the recovery and focused on “recovering” recent losses.  I think many are rushing in too quickly.

If the stock market were only reacting to the Covid-19 shut down, the 25% decline in SDY so far this year is probably enough to compensate for the lost earnings.  But if I am correct that this downturn will cause investors to re-evaluate their overall risk tolerance, the bear market bottom is still somewhere in our future.

How the Bear Might Play Out

I expect that as investors grapple with the new reality, the market will remain volatile for months to come.  We will see multiple sharp rallies (like the one since March 23rd) and declines.  The March 23rd lows will be broken for many stocks, and likely for stock market indexes as well.  I expect the final market lows to be ten to twenty percent below most stock indexes’ current level.  When the true bull market finally begins, the  continuing high volatility will likely mask the increase.  There will be continued sharp declines, but successive bottoms will not quite reach the previous lows, and the long term rise will only be clear in retrospect.

All of the above are simply my best guesses.  With any prediction so complex, I will almost certainly be wrong about parts of it.  While that is what I expect, I also expect to be surprised.

Trades

Although I do not think we have reached the bottom, the incredible decline in fossil fuel stocks leads me to believe that the risks and rewards of owning the January 2022 $20 Put on XOP have changed.  For the purpose of the model portfolio, I am selling it at $12.50, netting $1,250 cash for the portfolio to reinvest.  This is the midpoint of the bid and the ask price at the close on March 31st.   As I write on April 1st, XOP is down $1.46 from last night, so readers may be able to get a little more for it.

I will also note that the buyout of Pattern Energy Group was completed in March, meaning that we did not collect the expected $0.422 dividend which would have been awarded on March 31st, but the portfolio did collect $26.75 per share in cash.  Combined with dividends from other holdings so far this year, the portfolio has $5,193 available to invest.

Given that volatility remains high, and I expect further sharp declines followed by sharp rallies, selling cash covered puts is likely to be a profitable strategy in the coming months.  So rather than selling at current market prices, I will sell using good-til-canceled limit orders.  If the market does not hit my limit prices, the portfolio will still have the cash.  If it does, we will have one or two new positions.

Here are the orders I will be using for the model portfolio:

Sell to Open 1 HASI Oct 16 2020 $20 Put, at a limit price of $4 or better.  (This will reqiure $1,600 in cash to secure the put – $2,000 minus the $400 premium.)

Sell to Open 1 EBAY Jan 15 2021 $28 Put, at a limit price of $3.60 or better.  (This will require $2,440 to secure the put.)

Sell to Open 1 CVA Sep 18 2020 $7.50 Put, at a limit price of $1 or better.  ($650 required to secure the put.)

If the limit prices above are reached, I will add the puts to the portfolio in the next monthly update.

Stock notes

I will discuss why I like Hannon Armstrong (HASI), Ebay (EBAY) and Covanta (CVA) for selling cash-covered puts at the current prices in another update over the next few days.  For now, I want to get you these trades as quickly as possible.  Stay Tuned!

Disclosure: Long CVA, GPP, GPRE, VLEEF, NFYEF, MIXT, CIG, RDEIF, VEOEF, HASI, EBAY.

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 2020: Trades appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

Sometimes it’s good to be wrong.

When I published the Ten Clean Energy Stocks For 2019 model portfolio on New Year’s Day 2019, I thought we were likely in the beginning of a bear market.  With 20/20 hindsight, that was obviously wrong.

I made the following predictions and observations:

1. “[T]he clean energy income stocks which are my focus should outperform riskier growth stocks.”  [True]
2. “[D]eep value investors will put a floor under the stock prices of these ten stocks.” [Irrelevant, and a little amusing.]
3. “I could also be wrong about the future course of this market.”  [So true!]
4. “I have a history of underestimating the optimism of investors.” [True, and even more true today]
5. “[If] the Dow [is] hitting new highs by the end of 2019 …  I expect that this model portfolio will produce gains as well, although it will likely lag the gains seen by the broad market of less conservative picks.” [Wrong again]
6. “As long as you are in the market, every now and then the stars will align, and you will make some great gains.” [True, but I did not think that alignment would come again in 2019 so soon after 2016 and 2017.]

In the end, my conservative model portfolio ended the year with a total return of 46%.  The real-money green income strategy I manage, GGEIP returned 41% despite a large cash allocation in the second half of the year.  Both compare favorably to my clean energy income benchmark, YLCO, which was up 37%, and the broad market income benchmark SDY, which gained 24%.

In short, the stars aligned in 2019.

Because almost every stock in the model portfolio went up far more than its actual business improved, I dropped most of them from the 2020 clean energy stocks model portfolio.  I still like all the companies, just not their prices.

I did not sell any of them completely in GGEIP, but I have been taking profits in and lowering my allocation to the ones with the greatest gains.

The new list is heavily international, and partly hedged.  Despite being wrong in 2019, in 2020, I’m doubling down on the thesis that there is a good chance of a bear market in the United States this year.

When it comes to predicting bear markets, I sometimes feel like I’m a broken clock.

Eventually this broken clock will be right.  Until then, I’ll console myself with the unexpected fruits of being wrong.

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

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 2020 Hindsight: Ten Clean Energy Stocks For 2019 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

July 2019 was “marginally” the warmest month on record. Meanwhile, the stock market was also inching to new highs, and the real, sweltering evidence of climate change continues to let clean energy income stocks turn in a blistering performance.

While my broad income stock benchmark SDY was up 16.0% through the end of July (0.9% for the month), my clean energy income stock benchmark YLCO is up 23.4% through July (0.4% for the month,)  My 10 Clean Energy Stocks model portfolio is up 28.3% (1.3%) and my real-money managed strategy, GGEIP, is up 26.4% (1.2%) for the year through July 31st (for the month).  Like the temperatures, all of these are marginal new highs.

While I’m not pleased (or surprised) at the Earth’s continued warming, I am pleased that my worries about an overheated stock market leading to a chilling bear market have not yet been realized.  Nor am I particularly surprised that the Bear has not yet pillaged our stock market dumpster.  My worries are that the risk of a bear market is high, not that it will arrive this month or next.  But it will arrive eventually, with little warning, and right after its delay has lulled as many investors as possible into complacency.

I continue to slowly increase my cash position as I take profits on many of my stocks hitting new highs.

Individual Stocks

Second quarter earnings season has begun, and here is a quick run-down of earnings on the stocks in the model portfolio that have announced so far.

Covanta Holding Corp (NYSE:CVA) announced earnings on July 25th, and adjusted its guidance downward. Operationally, the company is on track, but weakness in the scrap metal markets and electricity markets led it to reduce its expectations for Earnings Before Interest, Depreciation, and Amortization, while maintaining cash flow guidance.

The stock briefly sold off by a dollar (allowing me to marginally increase my position by selling cash covered puts at an attractive price) before recovering partially over the following week.  Since I have no concerns about Covanta’s long term prospect, this is one stock I am not selling and may sell a few more cash covered puts if the volatility continues to the downside.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI) announced earnings on August first.  Earnings were down sharply from the first quarter because of a shift from securitization back towards keeping transactions on the balance sheet.  Balance sheet transactions boost earnings by a small amount each quarter over the life of the investment, while securitized transactions give a large, one-off boost to earnings.  The shift from securitization to balance sheet transactions was expected, and is not a cause for concern since it will lead to improved long term growth.

I expect the strong bias towards balance sheet transactions (and lower short term earnings but better long term prospects) will continue this quarter given HASI’s recent capital raises.

I am personally hoping that the sharp drop in quarterly earnings will spook some investors, and bring the stock down to a less elevated valuation.  Over the past few months, HASI has been the poster child of a stock that I’ve been taking profits on.  Since I am a great fan of the company (if not at the current price), I’m hoping for future opportunities to buy back in at a better valuation.

Valeo (Paris:FR, OTC:VLEEF) reported first half results on July 24th.  While the overall market has been tapping on the brakes, Valeo has continued to improve its market position by increasing market share.  While sales were down one percent compared to the prior year, this is far ahead of the seven percent decline in overall vehicle sales.  Reduced overhead costs resulted in a small improvement in operating margin.

With operational performance strong, volatility in the automotive market as well as European stock markets has led to continued good buying opportunities in Valeo stock.  Although I continue to increase my cash position overall, this is one stock I am watching closely and will be buying aggressively if the Bear decides to rummage around in the Paris stock market.

Conclusion

I remain very cautious about valuations and uncertainty created by the Trump administration’s trade wars.  Rate cuts in Europe and now the US have managed to keep the bottom from falling out of the US economy or stock market so far this year, but risks abound.  European stock markets are doing less well, and I am beginning to see hints of opportunities there.

I continue to hope for the best and prepare for the worst.  I continue to advise readers to do likewise.

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

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: Marginally Hotter appeared first on Alternative Energy Stocks.