Tom Konrad, Ph.D., CFA

A reader asked:

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

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

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

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

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

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

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

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

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

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

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

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

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

by Tom Konrad Ph.D., CFA

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

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

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

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

Scenario Analysis

Let’s consider the options:

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

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

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

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

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

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

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

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

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

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

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

Individual Stocks

Last month I warned,

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

by Tom Konrad Ph.D., CFA

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

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

Individual Stocks

Analyst Downgrades, Sudden Stock Moves

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

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

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

Buyout

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

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

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

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

Conclusion

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

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

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

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

by Tom Konrad Ph.D., CFA

So far, my worries about stock market valuation and political turmoil have not turned into the stock market downturn I’ve been warning readers to prepare for. In fact, September has been a particularly sunny month for both clean energy stocks and the stock market in general.My broad income stock benchmark SDY was up 3.9% and the energy income stock benchmark YLCO rose 2.7% for the month, more than reversing August’s declines. My 10 Clean Energy Stocks model portfolio accelerated upward by 5.3%, as did my real-money managed strategy, the Green Global Equity Income Portfolio(GGEIP), which added 3.8% to August gains.

I’ve been cautioning readers to take a more defensive stance towards the market all year. As I said last month, and as this month proves, that does not mean that the stock market’s rise is over. It means that I believe the risks of a stock market decline outweigh the potential gains of staying fully invested.

To show readers what that looks like, consider the following graph comparing the monthly returns of my real-money strategy, GGEIP, with the returns of the full-invested 10 Clean Energy Stocks Model Portfolio.

As you can see, GGEIP has lagged the 10 for 2019 model portfolio every month so far this year except one: May- the only down month. In the up months, GGEIP was gaining about nine-tenths as much as the model portfolio early in they year, while it has been gaining about three-quarters as much as the model portfolio in recent months. This is because I have been following my own advice, and lowering GGEIP’s overall market exposure as the year progresses. The benefit can be seen in May: GGEIP lost only half as much as the model portfolio.

In short, GGEIP has roughly half the exposure to a market decline as the fully-invested model portfolio, but has still participated in 87% (33.7% vs 38.6%) of the total gains this year. I have achieved this asymmetric risk/reward exposure through a combination techniques:

• By selling more of my biggest winners, which have the less potential upside left and re-allocating to cash and stocks that have risen less.
• Increasing my overall cash allocation.
• Selling covered calls.
• Reducing my sales of cash-covered puts as I allow older positions to expire.

While many readers may be uncomfortable with option strategies, reducing exposure to stocks that have risen sharply and allocating the proceeds to cash and better-valued stocks is a strategy that is accessible to any investor. Each outsized monthly gain (like the 3-4% market return we saw in September) increases valuations and makes the potential decline in a bear market that much greater.

Stock market overvaluation is a lot like the continued crimes in the Trump White House. It can go on longer than any rational observer could possibly expect, but when the reckoning comes, it will likely be both swift and severe. Investors would be wise not to use taxpayer funds to pressure foreign governments into doing any political favors or otherwise using the powers of government for personal gain. Metaphorically speaking, of course.

1. Individual Stocks

The biggest mover in September was French auto parts supplier Valeo (FR.PA). The increase was likely mostly due to a general rebound in automotive stocks and the fact that Valeo is generally very sensitive to overall market movements. Although I think Valeo is one of the few relative bargains I’m aware of in the stock market today, I’ve been keeping a relatively low allocation to it in GGEIP because of its strong sensitivity to stock market moves.

Other notable movers were Terraform Power (TERP) and Brookfield Renewable Energy Partners (BEP). Both of these Brookfield Asset Management (BAM) sponsored Yieldcos are starting to look expensive to me, especially Terraform. Terraform management seems to agree, and took the opportunity to raise $251 million in a secondary offering of common stock at $16.84 a share on October 4^th. The fact that Terraform can once again raise stock market capital at an attractive price is good news for its future growth in earnings per share, but the new stock will depress its price, at least temporarily.

There has been no news regarding the rumors discussed last month that Pattern Energy Group (PEGI) might be bought by BAM an merged with Terraform, but if Terraform were preparing for such a merger, the company would have probably delayed its secondary offering in order to keep its stock price up and consummate the merger at a more attractive valuation. For this reason, I think it is unlikely that the rumors are going to amount to anything.

More details have been emerging about the deal Donald Trump has been promising corn and ethanol interests to fix the damage that his EPA has caused with the “hardship” exemptions it has been passing out to oil refiners like rolls of paper towels thrown to hurricane survivors. I was skeptical of his promises last month, and while the announced goal of selling 15 billion gallons of corn ethanol and soy biodiesel is a step in the right direction, this goal would only stop doing more damage to the ethanol market, and not do anything about the damage already done. It’s also not specific about when the 15 million gallon target is likely to be achieved, and will only happen after an initial public comment period.

In short, the EPA’s actions are continuing to favor oil refiners over ethanol producers and farmers today, while Trump making promises it will stop doing harm at some unspecified future date. That date is looking increasingly likely to be after Trump is either impeached or voted out of office.

Mike Carr, Executive Director of New Energy America summed it up by saying “We’re in this situation because the President broke his promise to heartland voters, and we’ve seen the EPA break his promise each of the 31 times they’ve given away waivers to the oil industry. This Administration has proved again and again that their reflexive support for Big Oil donors and opposition to anything that would move us closer to a clean energy economy wins out over even his strongest supporters in rural America.”

The response of ethanol stocks like MLP Green Plains Partners (GPP) has been positive, but only mildly so. I continue to see Green Plains Partners as the best value (after accounting for risk) in the list of ten, but I expect the potential gains in that stock will come from the prospect of the end of the Trump presidency rather than a more favorable stance towards the biofuel industry at the expense of oil refiner’s from Trump’s EPA.

1. Conclusion

September was another great month for the model portfolio, but now is not a time to be chasing returns. Valuations are high, and political risks abound. When this market turns around, I expect it to do so surprisingly quickly and dramatically.

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: What Caution Looks Like appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

August 2019 saw economic warning signs flashing and a worsening trade war with China. Unsurprisingly, this led to weakness in most stock market indexes.

My broad income stock benchmark SDY was down 2.4% and the energy income stock benchmark YLCO fell 0.3% for the month. Most of the stocks in my 10 Clean Energy Stocks model portfolio continued to buck the trend, with the portfolio as a whole gaining 2.2% for the month. My real-money managed strategy, GGEIP, also turned in a solid 1.9% gain.

The strong performance of my portfolios probably rises from the falling interest rate environment we are in. As central banks begin to cut rates in an attempt to avert recession, investors are bidding up the prices of higher yielding securities. The small capitalization but high-yield clean energy stocks I favor are particular beneficiaries as investors find that larger capitalization, more mainstream companies and bonds no longer are producing enough income for their requirements.

While the search for yield seems to be allowing my stocks to ignore the weakening market trend, this feels like very late-cycle market action. I continue to see this as a good time to take profits, sell covered calls, and generally reduce overall market exposure.

Valuations of many of these stocks are feeling stretched, and if or when a bear market begins in earnest, it will be felt in all corners of the market. It’s been my experience during bear markets that even stocks which were relatively uncorrelated with the broad market when it was heading up tend to head down at the same time as everything else.

I’ve never been good at predicting the timing of bear markets; I’ve been far too early every time. But being too early is far better than too late. It may still be early, but taking profits, selling covered calls, and shifting to lower risk stocks are all actions that are much better to take too early than too late.

Buyout Rumors

The biggest mover in August was Pattern Energy Group (PEGI). There were news reports of rumors that the company might be bought out. One rumored buyer is Brookfield Asset Management (BAM) which is said to have proposed merging PEGI with it’s 65% owned Yieldco Terraform Power (TERP).

BAM is currently the sponsor for both TERP and Brookfield Renewable Energy Partners (BEP). I included these two Yieldcos in my 10 Clean Energy Stocks model portfolio this year because I felt they were both slightly undervalued and I consider BAM to be an excellent sponsor in that it has nearly unparalleled access to capital markets, and its values its reputation as a reliable manager of infrastructure assets. That reputation is key, because the often opaque accounting and complex corporate structures of Yieldcos allow unscrupulous Yieldco sponsors plenty of opportunities to present an overly rosy picture of a Yieldco’s cash flow and growth prospects. If BAM were to attempt to mislead investors about the prospects of its Yieldcos, the damage to its reputation when it was eventually found out would far outweigh the short term gains from temporarily inflated Yieldco stock prices.

While I have no reason to distrust PEGI’s private sponsor, Pattern Development Group, it has nothing like Brookfield Asset Management’s sterling reputation or access to capital. This is one reason PEGI has been trading at a discount to other Yieldcos, and I included it in the 10 Clean Energy Stocks model portfolio because it was the most undervalued Yieldco. Although both PEGI and TERP have returned over 50% since the start of the year, TERP still trades at a premium to PEGI, and we could expect PEGI shares to gain another 10% to 15% in such a merger.

The benefit for TERP would be increased scale, which could potentially lower its cost of capital. There could also be some synergies from reducing redundant management. I’m not sure if these benefits are compelling enough to tempt BAM to go through with such a deal. In my experience, Brookfield prefers to buy companies in distress, at a significant discount to their net asset value. At $27, I’d call PEGI fairly valued, so investors should be cautious about banking on a merger going forward. Terraform Power was a much smaller and more troubled company when Brookfield bought it in 2017, but it pays to remember that that purchase took place at about $13 a share.

Ethanol Shenanigans

Donald Trump likes pleasing his oil industry donors. Sometimes that is at odds with pleasing his farm state supporters. The Trump EPA’s actions with “hardship” refinery waivers which are delivering profits to selected oil refinery owners at the cost of undercutting the ethanol market (and hence the market for corn) are sending a clear signal that his first loyalty is to his donors. His trade war with China isn’t helping his farm state voters, either.

Trump is still promising an announcement of some action that will greatly help the biofuel industry. But previous promises have amounted to nothing. With farm state voters getting restless, perhaps this time will be different. But until there is decisive action from the Trump administration or a new president in the White House, the ethanol industry is likely to remain a very difficult place to do business. Hoping for decisive action from the Trump administration does not strike me as a wise investment strategy.

Ethanol production and transportation MLP Green Plains Partners (GPP) has not escaped unscathed. It has agreements with its sponsor, Green Plains (GPRE) that guarantee minimum income, but ethanol industry conditions are also hurting GPRE, which has reacted to weak ethanol markets by diversifying away from the ethanol business.

The question GPP investors need to ask themselves is, “Will GPRE continue to honor its commitments to GPP?” I believe the answer will be “yes.” If I am right, then the current 14% yield from GPP is quite attractive, and if/when GPRE regains a more stable financial footing from a recovered ethanol market or by successful diversification, GPP investors will see significant capital gains as the partnership’s valuation returns to non-distressed levels.

Conclusion

Late 2019 remains a time for stock market investors to be cautious. Investors in the 10 Clean Energy Stocks Model Portfolio should be taking some of their handsome gains and holding them in cash as they wait for better valuations.

Of the stocks in the list, only Green Plains Partners seems attractive at this point. GPP is already cheap because of troubles in the ethanol market. Since these troubles are political in nature, a worsening overall economy could as easily help (if it spurs political action) as it could hurt. Cash also seems quite attractive right now.

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: Will Pattern Merge With Terraform? appeared first on Alternative Energy Stocks.

I missed my regular monthly update in early June because of vacation.

In hindsight, early June looks like it was a good buying opportunity. The broad market of dividend stocks (represented by my benchmark SDY) falling six percent in May, only to rebound a similar amount in June. At the time, I would have continued to advise caution: “Sell the peaks” rather than “Buy the dips.”

Particularly volatile stocks like European autoparts supplier Valeo (FR.PA) from this list would have generated even greater short term gains. But it would take more than a six percent market decline to transform this bear into a bull. As I have been writing for the last few months, I feel the risks in this market are high, and if or when they manifest, the decline will be a lot more serious than we saw in May.

Readers should take May as a warning, or a preview of what is possibly to come, and use the June bounce back to take some gains and increase their cash positions. This is precisely what I have been doing in my real-money managed strategy, GGEIP, and is (at least in part) why GGEIP fell less in May than the 10 Clean Energy Stocks model portfolio.

For May, GGEIP fell 2.2% compared to 4.5% for the model portfolio. It also gained less in June: 5.5% compared to 7.2% for the model portfolio. Although their clean energy income benchmark YLCO had a larger net gain over the two months, both the real and model portfolios remain well ahead of their benchmarks for the first half of the year.

More importantly, you can see that GGEIP is less volatile than either the Ten Clean Energy Stocks model portfolio or the benchmarks. Low volatility will be at a premium in any potential stock market decline.

Regarding individual stocks, May started with first quarter earnings from most of the stocks in the list, but these earnings did not contain many surprises. For the most part, the companies continue to invest and progress as planned.

Given my concerns about the stock market in general, I am not actively buying anything right now. Instead I am increasing portfolio allocations to cash and bonds. In terms of valuation, I feel Green Plains Partners (GPP) is the most attractive security in the list because rising oil prices caused by our stand-off with Iran and falling grain prices caused by President Trump’s trade war with China. These should help the ethanol market recover from the damage done to it by the administrations systematic undermining of the Renewable Fuel Standard. The current depressed price of GPP stock also provides some protection from a general market decline.

Disclosure: Long PEGI, 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 Ten Clean Energy Stocks For 2019: Sell The Peaks appeared first on Alternative Energy Stocks.

In April, my 10 clean energy stocks model portfolio continued to power ahead, despite the concerns about market valuation I expressed last month.  As I said at the time “me being nervous about the market is not much of an indicator that stocks are going to fall” at least in the short term.  So I continue to trim winning positions and increase my allocation to cash as stocks advance.

Both the model portfolio and the Green Global Equity Income Portfolio (GGEIP) were up 4.5% and 3.6% respectively in April.  This was solidly ahead of their clean energy income benchmark YLCO and broad market income benchmark SDY, which were up 0.3% and 2.1% respectively.  For the year to date, both real and model portfolios remain well ahead of their benchmarks as well.

The one stock I said I was not trimming last month was Atlantica Yield, PLC (NASD:AY), which turned in a healthy 5% gain in April.  I continue to hold.  The big winner was Valeo SA (FR.PA, VLEEF), which shot up 25%. I also mentioned Valeo as one which still had an attractive valuation, but I was more cautious because Valeo is also much more volatile than the other stocks in the list.  While this parts supplier for efficient, electric and autonomous vehicles can accelerate like an EV when market is good, it can also fall off a cliff if the market turns too rapidly.

Covanta Holding (CVA) was the first stock in the model portfolio to announce first quarter earnings, covered that in more detail here.

Disclosure: Long PEGI, 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 Ten Clean Energy Stocks For 2019: April Ascent appeared first on Alternative Energy Stocks.

The first quarter of 2019 saw the market’s largest quarterly gain in a decade, and my 10 clean energy stocks model portfolio outperformed both the broad market and the clean energy income ETF I use as a benchmark (see chart above.)

Performance that strong makes me nervous, especially since the last time we saw gains like these it was the stock market rebound from the financial crisis.  In this case, while the market was down in the last quarter of 2018, it had only been enough of a decline to blow a little of the foam off the top of a market that was looking very bubbly.  The first quarter’s gains have shaken up the market’s champagne bottle all over again.

While this particular investor is happy to pop the cork in celebration, you can bet I’m taking pains to make sure the spray is not going to drench me or my portfolio.  I’ve been selling some positions for cash, selling covered calls on others, and letting cash covered short puts expire without selling new ones.  In short, I’ve been taking steps to lower my portfolio’s sensitivity to market movements in preparation for a possibly severe market decline.  I’ve returned to my more customary bearish stance after my relatively aggressive (for me) buying towards the end of 2018.

Yes, I was also bearish at the end of February, and, in fact, I’m bearish most of the time, so me being nervous about the market is not much of an indicator that stocks are going to fall.  That said, the few times I’ve been bullish (the start of 2019, early 2009, and late 2015 (for Yieldcos after the 2015 Yieldco bust), for example, have all seen strong gains.  So maybe we’re not going to see the crash I’m worrying about this year, but I’m pretty confident the risks going forward outweigh the upside of a few more percentage points gain that might come from staying fully invested.

Of the ten stocks in the model portfolio, the one large position I’m holding all of is Atlantica Yield, PLC (NASD:AY). It has failed to join its Yieldco brethren in the recent rally, and so its relatively attractive valuation provides some downside protection.  While Valeo SA (FR.PA, VLEEF) has also been flat for the year to date, that auto parts supplier is much more sensitive to economic conditions than the other stocks in the portfolio, most of which are quite defensive in nature.  I’m holding Valeo, too, but that is not a particularly large position.

Disclosure: Long PEGI, 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 Too Good To Last? Ten Clean Energy Stocks For 2019 appeared first on Alternative Energy Stocks.