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

Even as the broad market rose, the start of 2021 was brutal for clean energy stocks. The sector experienced a bubble in late 2020 and January this year as optimism grew that we finally had a President who understands the magnitude of the climate problem and has committed to do something about it. The bubble also grew from the great hope that with the presidency and slim majorities in both houses of congress, he would actually be able to get his agenda through.

That might have happened if the Senate Republicans were interested in governing and solving this country’s problems, or if the Democrats majority did not depend on a coal state Democrat like Joe Manchin, who takes regular meetings with fossil fuel lobbyists.

With climate, renewable energy, and social infrastructure stripped out of the slim bipartisan infrastructure deal, action on climate depends on getting them into a reconciliation deal which Senate democrats would pass without any Republican votes.  That means this bill would need the vote of every Senate Democrat, including Manchin and Kristen Sinema.  

This leaves a large investment in climate infrastructure between a rock and a hard place. Progressive Democrats in the House (rightly, in my opinion) are making their support for the bipartisan traditional infrastructure package recently agreed by Joe Biden and five moderate senators from each party contingent on getting a strong reconciliation bill which includes climate action.  But any such bill will have to get every Democratic vote in the Senate, which gives Manchin and other conservative Democrats a veto on any part of it.

There is still a good chance that such a reconciliation bill will pass, but January’s euphoria is rightfully gone.

Reasons for Bottom

When things are darkest, and investors are looking for reasons to be pessimistic rather than reasons to hope is the best time to buy.  Clean energy stock ETFs like PBW and RNRG seem to have found bottom in May.  Biden is still making progress on climate with executive actions despite the congressional deadlock. Local and international governments are also not sitting idle waiting on the dysfunctional US congress.  Further, economics are now on the side of renewable energy:

• In many places, it now costs less to build new solar plants than to run existing coal plants to produce electricity
• It costs less to build and operate an all-electric home than one that uses fossil fuels in most parts of the US.
• Wind, solar, electric and batteries are continue to fall in price, making these already competitive technologies the most cost-effective option in more and more situations.

On top of all that, we still may see significant spending on climate out of a reconciliation bill this fall.

Conditions feel right for clean energy stocks to resume their upward trend.  That assumes, of course, that the market as a whole remains stable.  

10 Clean Energy Stocks For 2021

Below are the first half 2021 returns for the Ten Clean Energy Stocks model portfolio.  I feel Eneti (NETI) and Valeo (FR.PA, VLEEF, VLEEY) are particularly attractive right now. 

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio, including NETI and 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 Finding a Bottom and Model Portfolio First Half Returns appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

The last three months of 2020 brought an explosion in clean energy stock prices.

Solar stocks (as measured by the Invesco Solar ETF (TAN), nearly tripled.  So did the Invesco Wilderhill Clean Energy ETF (PBW), which includes a broader spectrum of companies.  Wind stock rose 61%, and even the relatively sedate Yieldcos were up 32%.  The stars of the last half of 2020 was undoubtedly Tesla (TSLA, up 246%) and other electric vehicle stocks.

Money Flows Out of Fossil Fuels and Into Clean Energy

I believe that the cause of the current rise in stock prices is largely the fossil fuel divestment movement, which gained significant momentum in 2020.  Not only have I been hearing greater interest in divestment from individuals, but major money managers like Blackrock and the New York State Pension Fund have stated their plans to divest from fossil fuels over time.  If you have not already taken your money out of fossil fuel stocks, you are late to the game.  As I wrote in 2014, when it comes to divestment, the last one out loses.

The same goes for investing in clean energy stocks.  While not all the money taken out of fossil fuel stocks flows into clean energy stocks, some of it does.  The market capitalization of clean energy stocks is quite small compared to the amount of money flowing into the sector: Demand for shares in clean energy companies is rising faster than companies are going public or issuing new shares.

Issuing New Shares

Economics 101 tells us that when demand increases faster than supply, the price rises.  This is exactly what we have seen in clean energy stocks in the second half of 2020.  We also learned that when price rises, it induces increased supply: More clean energy companies will go public and/or issue new shares.

Rising stock prices bring more than just stock market profits, they are also significant for the companies.  Companies will refrain from raising money in secondary offerings unless they are confident that the offering will be “non-dilutive.”  A non-dilutive share offering is one in which the money will be invested in a way that increases earnings more as a percentage than the number of shares is increased.  This allows the offering to have the effect of increasing future earnings per share, despite the increase in the number of shares.

As a company’s stock price rises, more potential investments become non-dilutive, and investments that are already non-dilutive become even more attractive. The company’s private competitors will also benefit.  They will find it easier to raise money from investors who use the valuations of publicly listed firms to determine what the firm is worth.  

If clean energy stock prices stay at their current level for a few months, we will see increasing numbers of companies going public through IPOs and Special Purpose Acquisition Companies (SPACs).  We will also see more established companies raising money through secondary offerings.

The Gold Rush

As I learned when I took California History in elementary school, the most reliable way to make money in the state’s 1849 gold rush was to sell picks and shovels to aspiring gold miners.  Three of the stocks in my Ten Clean Energy Stocks for 2021 model portfolio are metaphorical picks and shovel suppliers to clean energy industries.

If Tesla’s stock price rise is any guide, there will be significant new investment flowing into manufacturing electric vehicles.  Autoparts manufacturer Valeo, SA (FR.PA, VLEEF, VLEEY) specializes in vehicle electrification, autonomous driving, and comfort systems, so it’s clearly well positioned to help automakers focus more on Tesla’s specialties: Electric and autonomous driving.

Global water, energy, and waste management giant Veolia (VIE.PA, VEOEF, VEOEY) is also firmly in the picks and shovels business, although their clients are more often large multinational companies and municipalities rather than clean energy firms.  Yet Veolia is a potential beneficiary from the boom in clean energy stocks.  They own and develop clean energy and recycling projects which could potentially be sold when acquisitive clean energy companies start bidding up the prices of clean energy projects.  They also have access to valuable urban real estate at their municipal utilities where they could develop solar and wind projects for sale to clean energy firms with money to spend.

Umicore, SA (UMI.BR, UMICF, UMICY) is also well positioned for the boom in electric vehicles.  It produces cathode materials for lithium-ion batteries, and is a battery recycler.  The electric vehicle boom is currently constrained by the supply of lithium-ion batteries and the supply of specialty metals (lithium, manganese, cobalt and nickel) that go into their manufacture.  The mining of many of these materials often takes place under exploitative and environmentally harmful conditions in poor countries.  Although still a small portion of the battery materials market, Umicore’s recycled materials can claim a price premium based on battery manufacturer commitments to ethically sourced raw materials.  Although still in their infancy, recycled content mandates like the one Europe recently passed will also play a role.

Finally, dry bulk shipping firm Scorpio Bulkers, Inc. (SALT) is repositioning itself to sell picks and shovels to the burgeoning offshore wind industry.  Dry bulk shippers carry bulk unpackaged cargoes like ore, grains, coal, and metals.  Scorpio is selling its dry bulk shipping fleet and using the proceeds to buy offshore wind turbine installation vessels.  In addition, it is applying to change its name to better reflect its future business.  

While SALT’s first wind turbine installation vessel is unlikely to be delivered until 2023, I believe that the rebranding will allow the company to attract part of the flood of cash pouring into the clean energy space.  

It is also value priced. The company had 11.5 million shares outstanding, $1,429 million in assets, and $675 million in liabilities at the end of September 2020.  It expects to write down the market value of its vessels by between $475 million and $500 million to reflect their true market value.  That market value is also the price at which they are currently being sold.  It has made nine announcements of ship sales since mid-November.  Since the sales are ongoing, we can expect its write-down estimates to be reasonably accurate.  After the sale of its vessels, its main assets will be easy-to-value cash and contracts to buy wind turbine installation vessels.  After subtracting liabilities, Scorpio will be worth approximately $254 million to $279 million, or $22 to $24 per share.  The stock is currently trading in the $17 to $18 range.

Conclusion

Unless it suddenly reverses, the recent run-up in clean energy stock prices is likely to lead to a real-world investment boom in clean energy.  While undoubtedly necessary to accelerate the world’s transition away from fossil fuels, not all such investments will be profitable, especially when they amount to buying other clean energy companies at also inflated prices.

During an investment boom, the companies selling tools and supplies to the investors are often more profitable than the investments themselves.  That’s what I hope for Valeo, Umicore, and Scorpio Bulkers (under a new name that highlights its new business) in 2021.

DISCLOSURE: Long VLEEF, UMICF, SALT, VEOEF

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 Four Picks and Shovels Stocks appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

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

Returning Stocks

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

New Stocks

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

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

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

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

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

Update

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

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

DISCLOSURE: Long all stocks in the list.

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

The post Ten Clean Energy Stocks for 2021: The List appeared first on Alternative Energy Stocks.

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

For the last few monthly updates, I’ve been focusing on the big picture, and have neglected to say anything about many of the 10 Clean Energy Stocks for 2020  since I looked at how the pandemic would likely affect each stock in March.

This month, I’m trying to rectify the oversight, and have been posting updates on individual stocks for my Patreon supporters since Friday.  Below is a collection of the updates I’ve published so far.  I am to keep posting one a day until I’ve gotten to all of them, after which I plan to publish another collection of updates on AltEnergyStocks.com for everyone.

In addition, here is the overall performance of the portfolio compared to its benchmarks so far this year:

In addition, here is a detailed view of the model portfolio showing the individual positions:

The relatively poor performance of the model portfolio so far this year is mostly due to my attempt to limit trading.  I do that because I want small investors who only look at the market a few times a year to be able to follow along.  Most years, I do no trading at all in the model portfolio, and its performance has seldom suffered for it.  This year I limited trading to two trades at the start of April.

The performance has also been hurt by the fact that I did not expect the strong rebound from March lows.  I still believe it could be short lived… we shall see.

Stock Updates

May 29th: Valeo (FR.PA, VLEEF) and France’s Stimulus Plan

Last week, French President Macron visited one of Valeo’s plants to announce a EURO 8 billion stimulus package for France’s car industry, and congratulate the auto parts supplier on how it has managed the lockdown and is preceding towards reopening.

The plan includes a large financial backstop for French carmaker Renault, support for the production and purchase of electric and hybrid vehicles, an attempt to “relocalize” auto manufacturing in France, and a scrapping program to get older, more polluting vehicles off the road.

The attempts to relocalize auto manufacturing and subsidies for EVs and hybrids are all likely to help Valeo, which was already a competitive player in the global auto parts industry, with a focus on vehicle electrification, safety, and automation.

May 30th: Cemig (CIG): It’s All About Brazil

Brazillian utility Companhia Energetica de Minas Gerais (CIG), aka Cemig’s horrible performance so far this year has largely been about its home country Brazil.  If you were wondering if anyone could manage the coronavirus pandemic worse than Donald Trump, the answer is “Yes.”  Brazil’s president, Jair Bolsanaro, has been actively undermining local officials who take steps to try to slow the spread of the virus, has fired one health minister, lost another one over a clash about chloroquine as a treatment for the disease, and has most recently appointed a military general with no experience in public health to take their place.

With a raging epidemic second only to that in the US (as I write on May 29th, Brazil has roughly a quarter the number of cases and deaths from COVID-19 as the United States in a country with roughly three fifths the population.  Unlike the US, where the initial outbreaks in New York, California, and Washington state have been brought mostly under control, known cases in Brazil are still doubling every two weeks.

It’s possible that the number of cases in Brazil already exceeds that in the US, but that the number is masked by a lack of testing.

On the business side, Cemig’s electricity sales have fallen significantly less (2%) than most US utilities, and they are taking numerous measures to conserve cash (including an annual dividend cut to 0.5 BRL /share or about $0.094, down from $0.11 in 2019.)

As bad as things are in Brazil, I think Cemig is doing what it needs to weather the storm… even if the storm gets worse.  While it does seem likely that the situation in Brazil will get worse before it gets better, I am holding because I don’t like to sell when most investors are running scared, unless the problems are likely to be fatal for the company.  As an essential utility, I expect Cemig will survive and return to health, so I continue to hold despite the uncertainty.

June 1st: Thoughts on Veolia (VIE.PA/VEOEF/VEOEY)

International water, waste, recycling, and environmental utility and service firm Veolia is well positioned to weather the impacts of the coronavirus.  Most of its services are considered essential in the countries in which it operates, and it is also well positioned to benefit from Europe’s green-oriented stimulus plan.

While the short term effects of the pandemic are likely to include increased costs for employee safety and delayed payments from its utility customers,  I expect the long term effects of the coronavirus  on its business to be positive as much of the world sees all the more reason to value cleaner air and water.

Veolia reduced its annual dividend (paid in May) to 0.50  Euro from 1 Euro in previous years to conserve cash during the crisis, but is on solid financial footing overall.  It’s oversubscribed  700 million euro 8 year  bond offering in April demonstrated its ability to easily obtain financing even during the crisis.

Overall, Veolia seems reasonably valued at the current price of 20.75 Euro / $23.

More on the way

I post updates for the remaining stocks (CVA, HASI, EBAY, NFYEF, GPP, RDEIF) in the next week or so… or you can see them on a daily basis by joining my Patreon supporters.

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 Part 1 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

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

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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