By Tom Konrad, Ph.D., CFA

With the launch of my (green dividend income focused) hedge fund early this year, I had to take a hiatus from publishing my annual list of 10 Clean Energy Stocks that I feel will do well in the coming year.  Since my duty to clients takes precedence over readers, I could not tell people about stocks I liked before buying them for the fund.

As we complete the first half of the year, the fund is now largely invested, although I am still keeping some buying power back in anticipation that the overall market could easily fall further, leading to even better opportunities than we see today.  

Since I’m not actively buying in the fund, I am now free to share my top picks with the public.  Like everything in my hedge fund, these are all companies that, in my judgment, reduce the fossil fuel use, carbon emissions, or other pollution in the overall economy by operating and expanding their businesses.

I probably won’t be able to publish monthly updates to this list as I have in the past.  If I am actively buying any one of these stocks, I will not be writing about it, and I will not want to tip my hand by writing about the others while just omitting one or two.  But I plan to publish intermittent updates on the whole list when I can, and will do a recap in July 2023 to look at how the list did in the past year and why.

Valuation and Timing

The recent declines of the stock market are finally giving us decent valuations, better than anything we’ve seen since the short-lived market bottom in early 2020.  That’s not to say that the market will not fall further, but it’s likely that many individual stocks are currently seeing their lows. 

Whenever I see a stock I like trading at a good valuation, I buy some.  If it falls further because of a continued general market decline (as opposed to bad news at the company itself), I buy more. These ten stocks have all reached the “buy more” stage.  If the market keeps falling, I’ll soon be ready to invest everything I can, and even start using uncovered short puts to take on a bit of leverage.

10 Clean Energy Stocks for 2022-2023: The List

By Tom Konrad, Ph.D., CFA

Ten Green Stocks I expect to do well over the next year (7/1/2022 to 6/30/2023)

Prices are as of the close on 6/30/2022.  1€ = $1.0482, $1 = 7.0972 DKK = C$1.2876 

Clean Transportation Stocks

• MiX Telematics (NASD:MIXT – $8.14) – A provider of vehicle tracking and telematics to large international vehicle fleets.  The company is green because it both reduces accidents and fuel usage for its customers.
• Valeo, SA (FR.PA – €18.42 or US ADR: VLEEY or US foreign stock ticker: VLEEF) – a provider of electrified drive trains, sensors, and comfort systems for the automotive industry.
• NFI Industries (NFI.TO C$13.39 or US foreign stock ticker: NFYEF) – A leading international bus and motorcoach manufacturer selling a large and growing number of electrified vehicles.  N

Green Building Stocks

Rockwool A/S (ROCK-B.CO 1597.50 DKK and ROCK-A.CO or US foreign stock ticker: RKWBF) – a manufacturer of fire and mold resistant building insulation.

Hannon Armstrong Sustainable Infrastructure (NASD:HASI) – A financier of solar, wind, biogas, and energy efficiency installations.

Green Municipal Infrastructure Stock

Veolia (VIE.PA €23.29 or US ADR: VEOEY or US foreign stock ticker: VEOEF) – A large international developer and operator of municipal infrastructure such as water, wastewater, recycling, and environmental remediation.

Biofuel Stock

Enviva, Inc (EVA $57.22) – A vertically integrated wood pellet supplier to European and Japanese markets, where they mostly displace coal in electricity generation.

Recycling Stock

Umicore, SA (UMI.BR €33.32 or US ADR: UMICY or US foreign stock ticker: UMICF) – A vertically integrated recycler of hard-to-recycle and specialty metals used in clean energy industries such as batteries, solar, wind, and catalytic converters.

Green Electricity (Yieldcos)

Avangrid (NYSE: AGR $46.12) – one of the top producers and developers of renewable electricity in the United States.  

Atlantica Sustainable Infrastructure (NASD: AY $32.26) – an international owner and developer of renewable energy, efficient natural gas, electric transmission line and water assets.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2022/23 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 2022-2023: 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

Despite high valuations, a rampaging pandemic, and the end of the $600 weekly supplemental unemployment payments from the CARES Act, the stock market continued upward in August.

Like most ordinary people in this economy, my Ten Clean Energy Stocks model portfolio is still not feeling the recovery the way the big tech companies and the ultra wealthy are, although my real-money Green Global Equity Income Portfolio (GGEIP)  is now hitting new highs for the year.  

The difference between the model portfolio’s performance and GGEIP is mostly a result of trading: It had a large cash position at the start of the year, did a lot of buying in March, and is now moving back towards cash.  I try to keep trading in the model portfolio to a minimum, and that and the general lack of tech names has kept it from fully participating in the market’s stunning rally.

I generally try not to trade in the model portfolio for two reasons.  First, I want the strategy to be replicable by people who have only a casual interest in the stock market and tend not to adjust their portfolios more than a couple times a year.  When I do trade, it is only at the start of the month, in line with these updates.

The second reason is that market timing is very difficult to do.  To buy near the bottom, you have to take risks despite the fear that a falling market causes.  To not buy at the top, you also have to conquer fear: the fear of missing out.

The Waiting

The waiting is the hardest part

Every day you see one more card

You take it on faith, you take it to the heart

The waiting is the hardest part

— Tom Petty and The Heartbreakers.  The Waiting, Chorus.

When Tom Petty sang “The waiting is the hardest part” he was not talking about the stock market, but he could have been.  For me at least, the hardest part of stock market investing is battling that fear of missing out.  This is probably because stock market bottoms tend to be short, and the right thing to do at a bottom is to act… to buy.  I use my fear itself as a signal that it probably is a good time to buy.  I know this because if I’m feeling fear, other investors are, too, and they are acting on that fear, driving the market lower.

When the market is overvalued but still going up, the right thing for a value investor to do is to lower your exposure to the market, and wait for the market to fall and better valuations to appear.  This, as Petty said, is the hardest part.  Nothing happens in your portfolio for month after month, while the market keeps rising, and what you need to do is wait, and maybe sell a little more to lower your exposure further.

There’s also not much research worth doing.  When I look at the stocks in my universe, I generally like the companies, but valuations are high, and when I know the overall valuation of a company is high, there is no reason to familiarize myself with the details of its strategy.  Researching a company in detail just makes it harder to avoid becoming attached.  You can get caught up in the story, but the only thing you learn is whether the stock is trading at twice its value, or at 2.2 times.  Either way, the right thing to do is wait, and time spent drinking the Kool-Aid just makes this harder.

Individual Stocks

Since I’m trying not to spend too much time caught up in the stories of individual stocks, I also don’t have much to say about most of them.  

Last month, I wrote about selling most of my NFI Group (NFYEF, NFI.TO) position.  The timing of that sell could have been better, since the stock has climbed since then, but it does not change my opinion: I’m still worried about the long term prospects of its main customers: municipal transit operators and (especially) intercity coach services.  The stock rise since last month just gives readers a better opportunity to sell.

I also wrote briefly about  Veolia Environnement SA’s (VEOEF, VEOEY, VIE.PA) offer to buy  Suez SA (SEV.PA) for my Patreon supporters on August 31st.

The deal is a revival of a failed bid from eight years ago.  The former deal floundered on French antitrust concerns and worries about job losses, but seems to have a chance this time because French investment fund Meridiam has agreed to buy Suez’s French water business.

The deal would involve Veolia first buying Engie’s (ENGI.PA) 29.9% stake for 15.50 euro per share, followed by an offer to buy the publicly held stock at the same price.  This is an approximate 25% premium on the price before the deal was announced, but still below Suez’s February high of approximately 16 euro.

The deal is far from a sure thing, but should be good for Veolia if it goes though… size is a big advantage in its businesses of water and waste management, and Veolia seems not to be paying too much of a premium.

I’m not in a rush to buy more Veolia, but if the deal goes through, the company will be one of the more attractive prospects to buy in a real stock market downturn.

Is This The Bottom?

The stock market declines in the first week of September may have readers wondering if the possible pullback of the market I’ve been worrying about is already here.  

It may be starting, but if it is the pullback I’m worried about, it’s far from done.  I look for two things when calling market bottoms: good valuations, and investor capitulation.  I described this in detail when I discussed the Yieldco bubble and bust in 2015.

As of the second week of September, we’re not even close.   On valuations, the stock market has simply retraced a couple weeks of gains, bringing the indexes back to their levels of mid-August, when they were still overvalued.  And as for capitulation, I have not even begun to see signs of widespread fear among investors.  Greed (and the fear of missing out) remain the dominant emotions.  

The waiting won’t be over until more investors are asking themselves, “How much farther is the market going to fall?” rather than “Is this my opportunity to buy?” 

Until then, keep Tom Petty and the Heartbreakers Stockbrokers in your playlist.

Disclosure: Long positions all the stocks in the model portfolio, although 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: The Waiting appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Earnings Season Continues

Below are three more updates on second quarter earnings which I’ve been sharing with my Patreon supporters.  If you’d like to support my writing and see those thoughts in a more timely manner, consider becoming a patron. becoming a patron.

For everyone else, I’m reprinting those thoughts below.

Disclosure: Long NFYEF, CVA, GPP, GPRE.

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 Earnings Roundup: Covanta, NFI Group, Green Plains Partners appeared first on Alternative Energy Stocks.

A secular shift in the transportation paradigm?

by Tom Konrad, Ph.D., CFA

I’m continually surprised at the strength and length of the stock market recovery in the face of a worsening pandemic in the US.

The stock market may not be the economy, but it’s not totally divorced from the economy either.  Perhaps the Senate’s unwillingness to even talk about another aid package and the subsequent failure to pass one until after the benefits in the initial CARES act expire will trigger the market reversal I’ve been expecting at least since late April.  Or it won’t.  I have a long track record of being too early on my calls for market corrections, but this is getting ridiculous.

In any case, the long rally has given me ample opportunity to take gains in winners and losses in companies likely to take permanent damage from the pandemic.  I’ve also been selling covered calls and otherwise positioning the Green Global Equity Income Portfolio, which I manage, for a renewed market downturn.

For the 10 Clean Energy Stocks model portfolio, no change.  This is simply because I try to minimize trading in the model portfolio; I want it to be a strategy that a small investor who only looks at her portfolio a couple times a year can emulate.  In the past, that has sometimes helped and sometimes hurt.  This year, it has hurt.  2020 has been a great year to be a trader, with the wild market gyrations.  I expect those gyrations to continue, and the model portfolio will stand pat.

If we do see a sharp market decline in the next couple of months, I will probably change that.  In that case, I will cash out the gains on the cash covered put positions, and use the money freed up to invest in whatever bargains a renewed market decline creates.

Earnings Season Begins

Over the last couple weeks, I have been sharing my thoughts on various company’s second quarter earnings with my Patreon supporters.  If you’d like to support my writing and see those thoughts in a more timely manner, consider becoming a patron. becoming a patron.

For everyone else, I’m reprinting those thoughts below.

Conclusion

Taken together, these three stock updates flesh out a theme I see emerging from the coronavirus pandemic: I expect social distancing to be with us, at least in part, permanently.

Few people are talking about the long term effects of the pandemic… the usual conversation I hear is along the lines of “when this is over and things go back to normal.”  That is a nice thought, and we all hope for it, but hope is not generally a wise investment strategy.

Even if/when we have a vaccine, it could easily be like the flu vaccine: able to slow the spread, but not completely effective.  Successful investors anticipate the likely future, not the future they want to see.

If some level of social distancing becomes a permanent feature of our society, this will permanently harm collective transportation, like New Flyer’s buses and airlines.  It will help companies which allow us to do our jobs remotely (like MiX’s telematics software) or through sensors and automation (Valeo.)

Disclosure: Long positions all the stocks in the model portfolio, although 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: July Update on Valeo MiX, and NFI appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Market Outlook

The continuing market rebound in the face of a worsening epidemic in the US (outside of the initially hardest hit states) widespread protests against lack of police accountability, and a President who thinks the right response to mostly peaceful protests is to call in the military continues to befuddle me.

The risks in today’s stock market outweigh the possibility of future potential gains.  Although I was buying aggressively in March, I’ve shifted back to a more cautious stance, and am mostly starting to sell covered calls on my positions with the greatest gains.  I generally prefer international names to domestic ones at this point given the worsening situation in the US, but mostly I’m just waiting and preparing for the market to fall again.

Below are three updates on the individual stocks in the model portfolio which I wrote for my Patreon supporters in the last week:

Red Eléctrica (REE.MC, RDEIF, RDEIY)

Spanish electric transmission utility Red Eléctrica reported first quarter results on April 29th.  At that point, it did not anticipate significant short term impact from the pandemic on its financial results.  It has yet to assess any long term effects.

The company is in a strong financial position, with approximately 3 billion euros of cash on hand and available credit, with less than 2 billion euros in debt maturing through the end of 2020.  Shareholders approved an annual dividend of EUR 1.0519, EUR 0.2727 of which was distributed to shareholders in January and EUR 0.7792 to be distributed on July 1st.

Profit was down approximately 9% from the first quarter in 2019 largely due to higher interest and depreciation due to recent acquisitions, without which revenue would have fallen about 8%.  The decline in profitability was anticipated and largely due to an adverse regulatory change which reduced Red Eléctrica’s operations and maintenance revenues.  Since this decrease in profitability of operations was anticipated, so it did not lead to a decline in the share price… the share price decline from the change in regulation took place in 2019.

This change will continue to affect  Red Eléctrica’s profits for the rest of the year, possibly somewhat offset by recent acquisitions, but because of this we should expect distributions in 2021 (which will be based on 2020 profits) to be down a little from this year’s.  But even with a slightly lowered distribution, we can still expect a 5.5% to 6% yield based on the current 18 euro share price.

REE remains a solid income stock and relative safe haven in what I anticipate to be a period of continued volatility.

Ebay (EBAY): Timing Was Everything

Ebay Inc. (EBAY), reported strong volume growth and raised their second quarter guidance today (June 6th).  Readers of my April 10th article on the stock may have been surprised by the size and speed of the turnaround, but not that it happened.

In the month and a half since I added an EBAY put option to the Ten Clean Energy Stocks model portfolio, my only regret on this call has been not to buy the stock outright.  If you missed the narrow window after my call (when EBAY briefly traded below $30) and the subsequent launch into orbit today, and are wrestling with that regret, take a moment to re-read last month’s article “Woulda, Coulda, Shoulda” which I was motivated to write based on my own regret at not just buying the stock instead of selling puts at the time.

Now that the market is recognizing the potential of Ebay in the era of social distancing, I’m no longer a buyer.  The stock could continue to have a momentum-fueled run, but, as a value investor, I will be looking for the next ridiculously cheap stock, and maintaining my short put positions (strike prices ranging from $26 to $35) until they expire.  They look unlikely to be assigned at this point.

NFI Group: Vaccine, Please

Leading Bus manufacturer NFI Group, Inc. (NFI.TO, NFYEF) announced earnings at the start of May.  The headline was a $51 million write-down of its 2015 investment in the MCI motor coach business.

While NFI’s main business is transit buses, where it sells to transit authorities which have a multi-year sales cycle and long lead times, its motor coach (long distance bus) customers are private operators who are much more sensitive to current ridership.  The pandemic has caused ridership for both transit agencies and intercity coaches to fall precipitously.  While transit operators have already received some federal support in this crisis, coach operators will probably receive less than the similarly-impacted airline industry.

Even with reopening, I expect that coach ridership will remain down until we have a vaccine for Covid-19, and we will likely see at least one additional write-down of the value of MCI from New Flyer.

Aside from MCI, however, first quarter results were strong, with a year-over-year increase in deliveries, a strong order book from transit agencies, and New Flyer beginning a phased restart of production on a facility-by-facility basis.  The company is in a relatively strong financial position, and is conserving cash through hiring freezes, the suspension of executive bonuses, and delays in planned capital expenditures.

With past and planned stimulus from governments around the world likely to boost transit agency spending, New Flyer’s transit bus business seems likely to do well in the medium term.

For the longer term, New Flyer’s transit and motor coach customers will both need widespread vaccination of the population for ridership to return to normal.  I don’t expect that before mid-2021.  New Flyer investors should expect a bumpy road ahead for at least another year.  As the stock continues to recover, I am looking for an inviting looking stop where I might disembark.

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 May Update: Red Eléctrica, Ebay, NFI Group appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

This monthly update for my Ten Clean Energy Stocks model portfolio is in two parts.  I published my thoughts on the current market turmoil on March 2nd.  You can find them here.  I’m not even going to get into the Fed slashing interest rates like they were a furniture warehouse going out of business on March 3rd except to say that apparently they are more afraid of the effects of covid-19 on the economy than they are of appearing to panic.

You can see overall performance for January and February in the following chart.  Not that it means much any more after just a couple days of rebound.

Hedges

As planned in a down market, the two positions intended to hedge the portfolio have been performing well.  The Put on SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has risen in value along with the precipitous decline in XOP.  Gains on this and Pattern managed to offset half of the declines of the other positions in the portfolio.

Pattern Energy Group (PEGI) shot up above $28 when hedge fund Water Island Capital called on shareholders to vote against the planned merger arguing that Pattern would be worth more as a stand-alone company.  I delved into the details here, and told readers I thought it was a safer bet to just sell for $28 a share.  The stock market implosion since has undermined Water Island’s case that investors should put their trust in the market rather than in the cash in hand offered by the Canada Pension Plan Investment Board.  After selling on the way up, I bought back in on February 28th when Pattern briefly fell below $27, which once again made PEGI look like a good place to park some cash.

The current rebound in the market is an opportunity to reduce our market exposure.  As I have been saying for the last year, I think it’s a good idea to take some profits in our winners and build up a large allocation to cash.  If I am right about covid-19 being the catalyst which starts a new bear market, there will be nothing more valuable than cash to buy up newly cheap stocks at bargain prices after the bear runs its course.

Individual Stocks and Covid-19

I have not seen a lot of surprises in fourth quarter earnings so far, and the economic disruptions of the pandemic are likely to be much more significant in the short term. So rather than delve into earnings reports, I will instead take a look at how the individual companies are likely to be affected by the efforts to deal with covid-19.

Waste to Energy operator Covanta Holding (CVA) may see a boost to its revenues from the disposal of medical waste, but will probably continue to see headwinds from low prices for the scrap metal and energy it sells.

French autoparts maker Valeo SA (FR.PA, VLEEF, VLEEY) is seeing disruption of its supply chain in China, and will probably see further disruption as the virus effects the economy in Europe.  The auto industry as a whole will probably have a bad year as people drive less and delay purchases of new vehicles.  With all the bad news, the stock is down almost a third since the start of the year.  I’m buying cautiously, and will buy more if it falls more.

Ethanol MLP Green Plains Partners (GPP) and its parent Green Plains (GPRE) are going to be hurt by the decline in gasoline consumption, which will also reduce the sale of ethanol.  Pushing in the other direction is a court ruling that the EPA has improperly been granting waivers to the biofuel blending requirements of the Renewable Fuel Standard.  The EPA has until March 9th to appeal this ruling.  If the ruling holds or the EPA does not appeal, it will be applied nationwide.

So far, the Trump administration has consistently sided with the oil industry against the farm interests supporting the ethanol industry.  The oil industry and a number of the Republican senators who serve its interests in Washington are asking the EPA to appeal the ruling.  The Trump administration has to weigh the damage to farm states (whose support Trump needs for reelection in November) against the money it receives from the oil industry (which it also depends on for reelection.)  If the Trump EPA sides with Trump’s voters over Trump’s paymasters, it will be good news for these companies.  If it sides with the oil refiners, the decision will be appealed, and ethanol companies will continue to feel the pain until a higher court has a chance to rule or a Democrat sits in the White House and drops the appeal.

Both stocks are so cheap that I’m buying cautiously, but mostly GPP, which has both less downside risk and less potential upside.

Bus and motorcoach manufacturer NFI Group (NFI.TO, NFYEF) may see some supply chain disruptions, and bus ridership is almost certain to decline.  The supply chain disruptions are probably more important, because transit agencies are unlikely to cancel long planned purchases over a temporary drop in ridership.  Motorcoach customers (roughly a quarter of revenues) are more likely to reduce their buying, especially if a decline in ridership impacts their financial health.

Overall, I expect New Flyer’s business to be hurt, but not particularly badly.

MiX Telematics (MIXT) is exposed to disruption through its customers in the oil and gas and transportation industries.  I expect the damage to be temporary, so keep an eye out for buying opportunities.

Brazilian electric and water utility Companhia Energetica de Minas Gerais aka Cemig (CIG) Spanish transmission utility Red Electrica Corporacion, S.A. (REE.MC, RDEIF, RDEIY), and French water, waste, and energy management conglomerate Veolia Environnement S.A. (VIE.PA, VEOEF, VEOEY) have limited exposure to the economic disruption of the pandemic, although they do have the potential to decline in a bear market if stock valuations in general were to decline.

Conclusion

Overall, the stocks in this list with the greatest economic exposure to the disruption caused by the covid-19 pandemic are Valeo, Green Plains Partners, and MiX Telematics.  Green Plains has some potential short term upside if the Trump EPA does not appeal the recent court ruling.

For Valeo and MiX, the disruption is unlikely to damage their business in the long term, so readers should be ready to buy on any declines, but also maintain healthy cash balances for the future buying opportunities which will appear over the next year or two if I am right that the covid-19 pandemic will be the catalyst that starts a new bear market.  If you have not already done so, take some profits in your winners; long time readers will have plenty of Yieldco positions showing large gains.

Disclosure: Long PEGI, CVA, GPP, GPRE, VLEEF, NFYEF, MIXT, CIG, RDEIY, VEOEF, Puts on XOP.

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: Navigating the Storm appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

January 2020- where do I start?  A year of market-shaking news in a month.

The Brink of War

The month started off with a literal bang when Trump decided that a good way to distract the public from his impeachment trial would be to try to start a war with Iran by assassinating one of Iran’s top military leaders, Qassem Suleimani.  A week later, the world and markets heaved a collective sigh of relief when Iran decided that their honor had been satisfied with two missile strikes on US bases.  While Trump reported no casualties, Iran’s Foreign Minister Javad Zarif said Tehran “concluded proportionate measures in self-defense and waged a propaganda campaign on state run and social media that spread rumors that casualties had been widespread.”

While we should be increasingly concerned about Iran’s (and many other actors’) ability to manipulate public opinion with social media, in this case, making the Iranian people believe that their counter-attacks had damaged more than property seems to have allowed the Iranians to avoid a cycle of escalation which would have likely led to war between the US and Iran.

Divestment

Soon after, I thought the theme of this month would be fossil fuel divestment entering the mainstream. Blackrock (BLK) CEO Larry Fink’s letter admitting that “Climate [c]hange become a defining factor in companies’ long-term prospects.” is a watershed moment for the investment management industry.  There is no investment manager more mainstream than Blackrock, which tops the list of investment managers by assets under management.

While the steps that Blackrock plans to take (divesting from coal, engaging with companies on sustainability) are timid and incremental, the admission by this investment behemoth that climate change is key to companies’ long term prospects has fundamental implications far beyond the actions that Blackrock says it will take.  This is because, as a fiduciary, Blackrock’s first responsibility is to look after its clients’ interests, something the mainstream investment industry equates with investment returns.

While short term investment returns are driven by multitudes of factors, a company’s long term prospects are the most important factor determining its long term investment returns.  So Fink is saying that BlackRock has a fundamental duty to its clients to understand companies’ vulnerability and responses to climate change.

If Blackrock now invests client money in companies that later lose value due to climate change in its active portfolio, Fink’s letter will allow clients to show that it knew climate change was a “fundamental” risk.  If Blackrock cannot then show that it diligently considered climate change when making that investment, it opens itself up to significant liability.

I personally feel that the steps Blackrock has promised are far from adequate, but I believe that this statement means that Blackrock analysts, no matter what their personal views, will start taking climate risk seriously in their analyses.  I feel that way because it happened to me.  I started taking climate change seriously as an investment risk in 2005, and it quickly became the guiding theme of my entire investment practice.  I doubt that will happen to Blackrock, but I know that once you take a serious look at Climate risk, you never see the investment landscape in the same way again.

Climate change was also a focus of this year’s World Economic Forum in Davos.  This opportunity of the world’s moneyed elites to rub shoulders is another indicator of what those elites are thinking about.  Since thinking about climate change is much more common among European money managers than those in the US, it may also help to bring the Americans realize that this is not some fringe movement pushed solely by radical activists.

Now that big money seems to be beginning to take climate change seriously, it’s giving cover for smaller money managers to reverse long held positions against doing the same.  New York State comptroller Tom DiNapoli seems to have dropped his long opposition to fossil fuel divestment when he announced that the  New York State Common Retirement Fund is reviewing 27 thermal coal mining companies to determine whether they are taking steps to transition to a more sustainable business model in line with the growing low carbon economy.”

For smaller and more nimble investors, the changing investment climate is an opportunity.  Rather than spending months “reviewing” the plans of fossil fuel companies, we can take the simple step of getting out while the getting is good.  Small investors had the opportunity to get out of fossil fuel companies before their declines started in 2011 (for coal companies) and 2014 (for oil), but when large investors like Blackrock and pension funds see the climate writing on the wall and begin to sell in earnest, there will send fossil fuel stocks plummeting further.

The economy is transitioning away from fossil fuels.  How long that takes is an open question, but as the transition happens it reduces these companies’ prospects of long term earnings.  Yes, as long as current cash flows are good, these companies will be able to transition to more sustainable energy, but for me it has always seemed much simpler to transition my portfolio first, rather than waiting for the companies in it to eventually see the light and try (many unsuccessfully) to make that transition themselves.

While big money managers slowly come to that conclusion, small investors have the opportunity to move first, and sell any fossil fuel companies they still own while there are still investors willing to buy them.

Coronvirus

If coming to the brink of war and early signs that mainstream asset managers are waking up and smelling climate change in the air were not enough, investors spent the last two weeks coming to grips with the possibility of a pandemic.  The novel Coronavirus originating in China’s Wuhan province is clearly both highly infectious and often deadly.

China’s economy and world trade are already being disrupted by the efforts to stop its spread.  The longer it takes to bring the disease under control, and the farther it manages to spread before we do, the more significant the impact on world growth.  Oil prices are already falling in response to the anticipated decline in travel worldwide, and if the pandemic spreads beyond the few cases reported here so far, it will likely disrupt the economy and could easily precipitate the end of the long bull market.

Stock Market Gyrations

All the bad news has had its effect on the stock market.  My broad income stock benchmark, the SPDR S&P Dividend ETF (SDY) is down 2.9%.  Clean energy income stocks bucked the trend, quite possibly due to the growing moves towards divestment.  My clean energy income benchmark, YLCO gained 3.6% for the month, while the model portfolio is up 3.0% and the real money Green Global Equity Income Portfolio I manage is up 2.9%.

Individual Stocks

The two hedging positions in the portfolio performed well, with the January 2020 $20 Put on SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rising from $2.55 to $3.80 as XOP dropped from $23.70 to $19.16.  Pattern Energy Group’s (PEGI) buy out by the Canada Pension Plan Investment Board progressed with the company setting the date to vote on the merger for March 10th. This caused the stock to rise slightly despite being knocked back a little by the announcement of what looks to be like a nuisance class action lawsuit announced on January 28th.

The largest decliner in the portfolio was unsurprisingly Valeo SA (FR.PA, VLEEF, VLEEY), a French auto-parts maker which is very sensitive to changes in the global economic outlook.  Despite the volatility of the auto parts market, this company has been making progress and taking market share while others contract.  January’s price decline just makes it more attractive… at least as part of a portfolio which is otherwise positioned for a market downturn.

The biggest winners were NFI Group, Inc. (NFI.TO, NFYEF) (up 13%) and Veolia Environnement S.A. (VIE.PA, VEOEF, VEOEY), up 11%.  New Flyer’s move seems to be more a valuation driven rebound from a long decline in 2019 than any news-driven event. Veolia’s move continues a rise that began from lows in late 2018, but also does not seem to be related to news.  The company bought a hazardous waste business from Alcoa for $250 million at the start of the month, but a transaction that size is pocket change for a company like Veolia with $27 billion in annual revenue.

None of the other stocks in the portfolio made particularly big moves, with the exception of MiX Telematics (MIXT).  The provider of vehicle tracking and telematics services rose for most of the month, until it reported its third fiscal quarter earnings on January 30th.  One of MiX’s largest customer segments are international oil and gas companies, an industry which has been struggling to maintain profitability.  This led to many customers temporarily reducing the number of their vehicles in active service to save on costs.  One of these costs is MiX’s subscriptions.  If and when the industry turns around, these subscriptions will likely be re-activated, but MiX cut its outlook for growth in 2020 and the stock gave back all the gains it had made earlier in the month.

This sensitivity to oil stocks is one of the reasons the oil and gas exploration ETF XOP is a good hedge for the portfolio as a whole.  Other stocks in the portfolio like Green Plains Partners (GPP) also have some sensitivity to oil prices because the products they sell compete with oil products, as GPP’s ethanol displaces gasoline.

Conclusion

All in all, January was a very exciting month for stock market investors, and excitement in investing is not a good thing.  With 2020 barely begun, we have had a year’s worth of market moving events, and doubtless more to come.  Yet despite the wobbles of the broad market, the growing divestment trend seems to be keeping the clean energy relatively resilient, and this model portfolio was designed with the idea that a 2020 bear market was a distinct possibility.

It’s been a bumpy ride, but so far, so good.

Disclosure: Long PEGI, CVA, GPP. VLEEF, NFYEF, RAMPF, MIXT, CIG, RDEIY, VEOEF, Puts on XOP.

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 Divestment v Coronavirus: Ten Clean Energy Stocks for 2020 January Update appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

If it’s tough to follow a winner, 2020 is going to be an especially tough year for my Ten Clean Energy Stocks model portfolio.

I’ve been publishing lists of ten clean energy stocks that I think will do well in the year to come since 2008.  With a 46 percent total return, the 2019 list has had its best year since 2009, when it managed a 57 percent return by catching the rebound off the 2008 crash.  This year’s returns were also achieved in the context of full- to over-valuation of most of the clean energy income stocks I now specialize in.

Going International

With this as background, my main goal with the 2020 list is to find stocks which will be resilient in the event of a US bear market.  Early 2019 saw bear market fears surface when the US yield curve inverted, only to fade again when the inversion vanished.  The yield curve has inverted before every recession over the last 50 years, and there has only been one yield curve inversion which did not proceed a recession in that time.  Will we get another recession in the two years following March 2019?  It is clearly too early to say.  Investor complacency is not a predictor of a recession, but it is an ingredient of bull market peaks.

I am not at all complacent about the prospects of the US stock market, European and emerging markets have not enjoyed the same bull run the US did in 2019, so they still have some relatively good values left.  If you do not have much experience in trading foreign stocks, I’ve published some thoughts here.  The short version is: Decide how much you want to pay for the stock, and use a good-til-cancelled limit order.

The article also has some notes in what the multiple ticker symbols mean.  For the purposes of tracking performance, I will be using the stock price in the company’s home market translated into dollars at current exchange rates.

The List

Returning Stocks from 2019

Unsurprisingly, the stocks I’m keeping from last year’s list are those that that have not seen the biggest run-up.

Covanta Holding Corp. (CVA) and Valeo SA (FR.PA, VLEEF, VLEEY) have both been making progress implementing their business plans, but have not been fully rewarded by the market the way I would expect given the massive run-up in other stocks.

The thesis for retaining Green Plains Partners (GPP) remains the same as the one for including it last year: the ethanol MLP enjoys revenue guarantees from its parent, Green Plains, Inc (GPRE).  Despite the continuing pain the ethanol market caused in large part by the Trump administration’s trade war and giveaways to friends in the petroleum refining industry, these guarantees should allow GPP to maintain its healthy $1.90 annual dividend.  If Trump loses in November, I expect that the stock price to produce further gains as the market anticipates a return to business as usual and an end to the Trump EPA’s give-aways to refiners.

New Stocks for 2020

NFI Group, Inc. (NFI.TO, NFYEF) (formerly New Flyer Industries) is a leading manufacturer of transit buses and motor coaches.  New Flyer was a great 10 Clean Energy Stocks success story; it appeared on the 2012 list at $5.65, gaining 54% that year.  It returned in 2014 for a 22% total return, and in 2015 with an 80% return.  I dropped it from the 2016 list because it was starting to look overvalued.

The stock did not peak until the start of 2018, but for the last two years it has since been struggling. When the stock was last in the list, it was simply the leading manufacturer of heavy duty transit buses in North America… now it is a leading global manufacturer of both transit buses and motor coaches.  Its current problems do not seem permanent in nature.  Some arose from the recent acquisition of Alexander Dennis and a build-up of work in progress as NFI experienced some hiccups internalizing much of its parts manufacturing.

Despite many people’s unpleasant experiences with diesel buses, bus transit is an inherently clean and low emission form of transport because it is an effective way to take numerous cars off the road.  But buses are rapidly getting greener as they have some of the best economics for electrification.

Electric transit bus manufacturers like Proterra argue that an electric bus is best designed from the ground up as electric, in order to take advantage of the flexible layout possibilities that electric propulsion enables.  In contrast, NFI takes a propulsion-agnostic approach, and uses third-party drivetrains including diesel hybrids, natural gas, battery-electric, and fuel cell electric to meet its customers needs.  I see value in both approaches.  I think many of the large transit agencies that are considering heavy duty electric transit buses from both Proterra and NFI will find comfort in the new technology when it is backed by a large, traditional supplier with a large parts and service arm that they have been dealing with for years, while others will prefer a bus designed from the ground up to be electric.  From a competitive standpoint, I expect both strategies to flourish, at the expense of smaller competitors without the resources to deliver credible electrified and hybrid options.  Proterra, however, is not a public company.  NFI is, and it currently trades at an attractive price with a healthy dividend.

Like New Flyer, MiX Telematics (MIXT) is also a blast from the past.  The company provides vehicle management systems and telematics systems to fleet owners. Their systems improve safety, reduce fuel use and theft, and help with regulatory compliance.  The company’s software as a service (SaaS) platform enables it to leverage its technology platform for relatively rapid growth and high margins.  MiX is a global company based in South Africa with operations on six continents.  This global presence gives it an edge over its competitors in serving large, multinational clients, especially in transportation and resource industries.

MiX first entered the list in 2014 at $12.17.  I was too optimistic about its valuation at the time, and it was the biggest loser of the year, falling 45%.  There were nothing wrong with the company’s fundamentals, however, and I kept it in the list in 2015, when it fell another 32%. In 2016 I doubled down and it gained 51%, followed by a 110% gain in 2017, closing the year $12.76 plus a few dividends.  I dropped it from the list in 2018 because I felt the valuation was reasonable, but not as attractive as many other opportunities that year.  I sold most of my holdings in the mid teens (which I mentioned here) as the stock rose further in 2018.  MIXT eventually made it as high as $20, before falling back to near where it was at the end of 2017 two years later.  Overall, that would not have been that great a run except that when stocks I like fall, I tend to buy more.

Today. MIXT stands near where it was in late 2019, with the difference being that it has been growing its subscriber base at a little more than ten percent annually.  Subscription revenue has been growing even faster as MiX adds more products and features to its offerings.  There is plenty of room for this growth to continue as well; only 19% commercial vehicles have a telematics solution.

Brazilian utility Companhia Energetica de Minas Gerais, a.k.a Cemig (CIG) is a relatively conservative pick in a very volatile stock market.  It is the third largest electricity generation utility and has the largest transmission and distribution utility in Brazil.  In terms of sustainability, the company’s generation assets are almost all hydroelectric, with a few relatively new wind farms and one fossil plant.  It also has a gas distribution utility in its home province of Minas Gerais.

From the perspective of risk, the biggest risk of investing in Cemig is investing in Brazil itself.  The current (Bolsonaro) administration is business friendly… Cemig shares saw a sharp spike in late 2018 when the current president was elected. Bolsonaro is not environmentally friendly, however, and I generally avoid holding stocks which put my financial interests at odds with my ideals.  In this case, I am hoping that Bolsonaro loses the next election in 2022, so I would not plan to hold Cemig more than a couple years.

Red Eléctrica Corporación, S.A. (REE.MC, RDEIF, RDEIY) is the electric transmission utility for Spain.  It also owns some transmission assets in Portugal and Latin America, as well as some telecom assets.  Long distance transmission and the integration of electric grids over large areas is an essential part of all plans to transition to high percentages of renewable electricity.  Red Electrica sees sustainability and renewables integration as key parts of its mission, and has been making large investments in interconnections with France and Spain’s outlying islands.

As a regulated utility, the company is included in the portfolio as a relatively low risk pick that pays a healthy dividend.

Veolia Environnement S.A. (VIE.PA, VEOEF, VEOEY) is a France-based global company operating in the water, waste, and energy management.  Although I generally prefer to invest in more focused companies, an investment in Veolia gives access to a number of interesting clean energy technologies which are not available as pure-plays.  One of the most interesting to me is the production of biogas and other useful products from sewage.

Building energy management also has great potential to cost effectively reduce waste, energy use, and greenhouse gas emissions.  The problem is that most companies do not have the in-house expertise to achieve its full potential.  Veolia has the scale and expertise to solve this problem at practically any scale.  They can also bring their expertise to bear to reduce energy use by understanding and influencing the behavior of building occupants through communication and education.

Hedging and Pseudo-cash

In line with my goal of protecting the model portfolio against a possible market downturn, I settled on using Puts on SPDR S&P Oil & Gas Exploration & Production ETF (XOP) as a hedge.  In particular, my model $20,000 portfolio will include one XOP January 2022 $20 Put contract.  That put gives us the right to sell 100 shares of XOP for $20 each at any time before January 21, 2022.  As of the close of trading on December 31st, these puts were trading for $253.  A single contract gives control of $2,000 worth of XOP, which should make this holding about as volatile as the other positions in the portfolio.

While I plan to use the January 2022 $20 Put for tracking purposes, really any put with a strike price between $20 and $25 expiring in January of 2021 or 2022 will do the trick.  Puts that have higher strike prices will cost more but have a higher chance of paying off, which puts that expire in 2021 will cost less but not act as a hedge for as long.  Shorting XOP and selling XOP calls are also valid hedging options, but keep in mind that both these strategies can potentially produce unlimited losses, far greater than the size of the initial investment.  I generally avoid these strategies for this reason, but the losses can be manageable if the hedge is a very small portion of your portfolio.  I currently have sold naked calls on Nextera Energy Partners (NEP) as a hedge against my many large Yieldco holdings.  I am currently losing money on this hedge because all Yieldcos have been going up for the past few months, but my gains on other Yieldcos far outweigh the losses on NEP calls because the hedge is tiny compared to the other Yieldco holdings.

The oil and gas E&P sector has had several bad years, and I was a little hesitant to choose an effective short position in a sector which has had such a bad run.  However, stocks in declining industries don’t necessarily have a bottom.   A quick look at the long term chart for the VanEck Vectors Coal ETF (KOL) will show you that.  I would have considered KOL for this hedge if not for the fact that KOL only has options contracts going out 6 months, and so using KOL should have required options trading in the middle of the year.

The reasons I think XOP might continue to go down are

• Stranded asset risk
• Political risk
• Divestment risk
• Legal liability from past deception about climate change

Stranded asset risk is the risk that past investments to develop fossil fuel reserves will never see a payoff.  The world simply cannot burn all the oil and gas that companies count among their “proven” reserves, and avoid catastrophic global warming.  I’m not confident that we will avoid that, but I do know that the more fossil fuels we use, the more catastrophic the outcome will be.  Since climate-change fueled natural disasters are becoming a commonplace occurrence, I see governments and individuals around the world starting to take swifter action to deal with the problem.  This takes the form of political risk when governments decide to regulate emissions, increase fuel economy standards, regulate oil drilling, and remove existing subsidies.  But it can also arise when individuals worried about climate change take steps like driving less by taking actions like combining trips, using mass transit, and walking and biking more, and ridesharing.  As well as by shifting to electric vehicles.

Divestment risk is simply the risk that as more individuals and institutions adopt policies of not investing in fossil fuel companies, the stock prices will fall simply because of a lack of buyers.  As I wrote in September 2014, in divesting, the last one out loses.  Anyone who read that article back then could have sold XOP for over $70 a share, as opposed to $23 today.  But there are still more people who can sell.

Legal liability arises from big oil companies long term deception about climate change.  Right now there are a large number of state lawsuits alleging that big oil companies knew about the risks of climate change but deceived the public and investors about the risks.  None of these lawsuits has a giant chance of succeeding, but it only takes one.  If a single such lawsuit succeeds, it will open the floodgates to every state and municipality which has seen some negative effect of climate change to file additional lawsuits.  I don’t know when (or even if) it will happen, but Big Oil could be on the verge of its “Big Tobacco” moment.

The reason I chose to use puts is because shorting is always risky.  Even with all the risks above, there could still be a short term oil price spike in 2020 which sends all oil stocks gushing upward.  Buy buying a single put, we are limiting the risk to the option premium.

Yieldco Pattern Energy Group (PEGI) is currently in the process of being bought out by the Canada Pension Plan Investment Board for $26.75 per share.  The transaction is expected to close before June 30, 2020, and the company will continue to pay its quarterly dividend of $0.422 per share until it closes.  I’m including Pattern in this list mainly because I think of it as a good place to park cash for 4-6 months as insurance against a market downturn.

Compared to a bank CD, there is a small risk that the transaction will not go through, in which case the stock might fall 10% or so in the short term.  The upside is that readers who buy at or below the $26.75 will collect a $0.422 (1.57%) dividend for holding the stock for 4-6 months, approximately double the return available from comparable CDs.  There is further upside from the chance that the buyout is delayed until after June 30 and holders collect a second $0.422 dividend.  This is also unlikely, but considerably more probable than the merger falling through.

I suggest readers who do not still own Pattern from 2019 and previous years buy PEGI using limit orders at the buyout price ($26.75) or better.  If the price rises and your trade does not execute, just keep the money in cash.  I will have a new stock pick to replace PEGI after the deal is complete.

For the purposes of tracking the portfolio, I will be considering the $2000 which I would have allocated to PEGI to be held as cash unless or until the stock trades at $26.75 or below in 2020.  Excess cash from the $2000 position allocated to XOP will also be allocated to PEGI if it trades at or below $26.75 in 2020.  All of this money will be allocated to one or two new or existing positions chosen after the PEGI sale completes.

Bonus Pick

Polaris Infrastructure Inc. (PIF.TO, RAMPF) is a tiny geothermal and run-of-river hydropower Yieldco build around the assets of Ram Power.  Long time readers may recall Ram Power as a bonus “speculative” pick from the 2014 list.  Like most speculations, that particular gamble did not pay off, and the company went into bankruptcy after repeated drilling failed to stabilize electricity production at its main geothermal asset, San Jacinto-Tizate in Nicaragua even after extensive additional drilling.  Unable to meet its debt obligations with the lower-than-expected electricity revenues, the bondholders ended up owning the company, and they re-listed it without its former heavy debt burden and a healthy dividend in 2015.

In early December, I had hoped to include Polaris in the list, but the stock price ran up over 10% in the last two weeks of the year.   While its yield is very attractive compared to other Yieldcos, its small size and continued need for additional drilling at San Jacinto-Tizate to offset natural production declines make me cautious about buying this company at anything but rock-bottom prices.  Nevertheless, it is one to watch, and if the price falls back in 2020, it’s a leading candidate to replace PEGI when the buyout is complete.

Portfolio

For the first time this year, I plan to track the model portfolio based on an initial $20,000 investment, using actual share numbers and cash.  In the past, I have assumed that dividends would be re-invested in each position; this year I will track them as cash and only re-invest if I see an attractive opportunity.

I will track foreign stocks using their stock prices in their home markets with values translated into US dollars at current exchange rates using the five letter foreign stock ticker.  Readers should note that stock price quotes for these tickers are often stale, and so they will likely vary slightly from my calculated prices.  Readers who are using ADRs rather than foreign stocks in their own portfolios should use 2 shares of VLEEY and RDEIY in place of one share of VLEEF or RDEIF because of the ADR multipliers.  In contrast shares of VEOEY and VEOEF have equal value.  See my recent article on trading foreign stocks and options for more details.

I will track the price of the XOP Put option using the midpoint of the bid and the ask at market close rather than the most trade, which could be hours or even days old and so may not reflect recent price movements in the underlying ETF, XOP.

As I have for the last few years, I will continue to use Global X YieldCo & Renewable Energy Income ETF (YLCO) as a clean energy benchmark and SPDR S&P Dividend ETF (SDY) as a broad market benchmark.

Conclusion

Looking forward to 2020, the only thing I am sure of is that I have no idea what is going to happen to the stock market.  I have been preparing for a large market correction for more than half of 2019, and the US stock market has continued to advance unstoppably.  Valuations seem extremely stretched, the political climate could not be more volatile, and the Federal Reserve has indicated that they do not intend to keep lowering interest rates.  With this backdrop, it should not take much to send the stock market into a tailspin.

On the other hand, my friend Jan Schalkwijk, CFA of JPS Global Investments (an advertiser on this website) recently reminded me that most bull markets end in euphoria, when there is no one left to get excited about the stock market.  That is hardly the situation today and I am hardly the only voice of caution among stock market pundits.

I also have a track record of being too early… I often get out of bull markets long before they peak and start buying declining stocks long before they bottom.  So I’m far from confident that the bear I expect will appear soon, or even in 2020.  But when it comes to bear markets, it’s better to get out too soon than too late.

Ten Clean Energy Stocks for 2020 is probably the most diversified and defensive model portfolio in the series since I started it in 2008.  Yet with my worries about the coming year, I will not be surprised if the portfolio ends 2020 lower than it begins the year.  Let’s hope that does not happen, but if it does, the model portfolio should decline much less than its benchmarks, especially the ever-volatile YLCO.

Disclosure: Long PEGI, CVA, GPP. VLEEF, NFYEF, RAMPF, MIXT, CIG, RDEIY, RAMPF, VEOEF, Puts on XOP, short NEP.

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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