By Tom Konrad, Ph.D., CFA

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

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

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

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

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

2022 

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

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

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

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

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

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

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

by Tom Konrad, Ph.D., CFA

2020 ended with a massive spike in clean energy stock prices.  From the end of October, election euphoria drove Invesco WilderHill Clean Energy ETF (PBW) from $63.32 to $136 at the close on February 9th, a 114% gain in 100 days.  

Joe Biden is as strong a supporter of clean energy as Donald Trump was a supporter of big fossil fuel companies, but even with control of the presidency and both chambers of congress, there is a limit to what a president can do in a short time.  This is especially true when their top priority is (as it should be) dealing with a pandemic.

Acknowledgement of this reality seems to be setting in. as I write on March 5th, PBW is now down almost 35% from its high.  If the Dow Jones Industrial Average or S&P 500 had fallen 35%, this would be the depths of a bear market.  Clean energy stocks are generally much more volatile than the broad market, but, even so, a 35% decline should make investors sit up and take notice.

I focus on clean energy income stocks because they tend not to be subject to such wild swings.  The benchmark I use, the Global X Renewable Energy Producers ETF (RNRG – formerly YLCO) is also down significantly- 26% from its high of $20.20.

Pop! Goes the Bubble

With these large declines, it’s time to assess what’s next.  Large drops like this don’t happen without some panic among investors.  As always in a panic like this one, we need to assess:

1. Has anything fundamentally changed which would justify the declines and possibly further declines.
2. Is the panic approaching capitulation, when there is no one left to get scared and sell, or does the panic have farther to run?

Fundamentals

The biggest fundamental change is that interest rates are creeping up. This is in reaction to the expected spending in the Biden rescue package, and fears that we may see a surge of pent-up consumer spending as the vaccine allows the end of lock-down measures this summer.

These higher interest rates make stocks, especially income stocks like the ones I focus on, less attractive compared to bonds.  Higher interest rates also make it harder for companies to use debt to finance new investments, and so can reduce future earnings expectations.

While all these things are true, I expect their long term impact to be limited.  Most importantly, I do not expect interest rate increases to be large.  Interest rates have been historically low: It would take a much larger rise than I expect to bring them to a level that is not still low.  

There may also be some demand driven inflation in the summer, but I do not expect the demand or inflation surges to persist.

Similarly, the effect on future earnings from higher interest rates is also likely to be limited.  Most companies have been very active refinancing in the recent low interest rate environment, often bringing plans for future debt offerings forward.  This means that most will have the flexibility to reduce borrowing in the short to medium term if interest rates rise significantly.

Will Panic Lead To More Panic?

This is just a feeling based on having watched many market panics over the years, but I feel that the panic seems to be reaching its maximum.  I think the short term bottom will happen in the next couple weeks.  

I’m buying (actually selling slightly out of the money cash covered puts), especially clean energy infrastructure stocks like Yieldcos that I had been selling because of high valuations in December and January.  These include AY, NEP, AGR, and CWEN/A.  The amounts of each depend mostly on the size of my current positions- this is less a call about individual stock valuation and more one of market timing.

Conclusion

It’s time to bring much of that cash I’ve been telling people to keep on the sidelines for the last several months back into the game.

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 Pop Goes the Clean Energy Stock Bubble appeared first on Alternative Energy Stocks.

You can find the original list here.  I’ll be doing commentary on individual stocks as there is news.  The first of these is on MiX Telematics (MIXT) earnings, first published for my Patreon subscribers on January 28th and copied below.  A note on Scorpio Bulkers (SALT) from February first will be published here tomorrow.

MiX Earnings

MiX Telematics (MIXT) reported earnings this morning [January 28th].  The numbers showed improvement over the previous quarter, but a decline over the previous year due to the covid crisis which was exacerbated by the strengthening dollar.

The results were pretty much what I expected when I added MiX to the 10 Clean Energy Stocks for 2021 list.

In that article, I wrote:  “[C]ovid has led many businesses to take a new look at what parts of their operations can be handled online and remotely.  This should provide a lasting boost to the vehicle telematics industry in general.”

Stefan Joselowitz, Chief Executive Officer of MiX Telematics was quoted in the press release saying, “As we look ahead, we are very encouraged by the strategic conversations we are having with large fleet operators on the greater role telematics will play in their future operations. This gives us confidence MiX is well positioned to return to attractive subscription revenue growth rates once the economy normalizes.”

I take that as confirmation of my thesis.

DISCLOSURE: Long MIXT and all other 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 January Performance: 10 Clean Energy Stocks for 2021 appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Looking Back

At the end of 2019, I was worried about overvaluation.  

I wrote that my main goal for the 10 Clean Energy Stocks for 2020 list was “to find stocks which will be resilient in the event of a US bear market.”  We certainly had a bear market in 2020, although it was nothing like the kind of bear market I had been anticipating.  The bear market was precipitated by the coronavirus pandemic, rather than overvaluation.

While I can claim to have anticipated the 2020 bear market, if not its nature, I was surprised by two other market events driving stock prices.  One was the sudden reversal of the bear market, which led to gains in most indices for the year.  The second was the rapid growth of the fossil fuel divestment movement, leading to rising interest in clean energy stocks.  

Both of these surprises helped pull the 10 Clean Energy Stocks model portfolio to a 7.8 percent total return for the year, but my defensive posture at the start of the year, my failure to anticipate the nature of the bear market, and my policy of trying to minimize trading meant that the model portfolio did not see as much upside as my clean energy income stock benchmark, the Yieldco ETF (YLCO), or the real money strategy I manage, the Green Global Equity Income Portfolio (GGEIP).  These were up 29.7 percent and 28.1 percent, respectively.

My broad market income stock benchmark did not see any benefit from the new interest in clean energy stocks, so ended the year up only 4.1 percent.

Looking Forward

With valuations even higher than they were at the start of 2020, and the economy in a continued pandemic tailspin, I would not be surprised if another bear market were to start in 2021.  I don’t think the stock market has ever seen back-to-back bear markets like this, but one vocabulary lesson of 2020 was that “unprecedented” and “unlikely” can mean radically different things.

And despite current stratospheric valuations of most clean energy stocks, I would not be surprised if the boom has a lot further to run.  Even if the rest of the stock market collapses, the rush of money out of fossil fuels and into clean energy could continue to send the sector skyward. 

It’s a market truism that, “In the short-run, the market Is a voting machine, but in the long-run, it is a weighing machine.”  Right now, the market is voting for clean energy.  The pandemic has caused many to take stock of how their actions affect the world around them.  

Just as masks help stop the spread of covid-19, people are realizing that clean energy stocks can help stop the spread of climate change.  That has started a clean energy stock boom, and stock market booms often gather a momentum of their own, with past gains leading to expectations of future gains, and new investors rushing in because of the fear of missing out.

This clean energy boom is starting to look like a bubble, but stock market bubbles can expand for years before they pop.

2021

My new 10 Clean Energy Stocks for 2021 list tries to take advantage of the boom in clean energy stocks, while also keeping a defensive posture.  Since the pandemic response has been so much worse in the United States than most of Europe, I included many European names, and tried to focus on clean energy companies that could benefit from increased spending by other clean energy companies.  I looked at stocks that could leverage their high stock prices to increase their future growth rates, while trying to diversify beyond the obvious solar, wind, and electric vehicle sectors.

Will this new list return to its historical outperformance compared to its benchmark? I have no idea.  I have trouble believing just how good my own track record is, given how often it feels like I am wrong about where the stock market is going.  

Although I find myself without any confidence in my stock market predictions for 2021, I console myself with two facts:

1. Overconfidence is a danger for investors, not a boon.
2. Some things are more important than making money in the stock market.  

We’re going to have a new President in 2021.  As long as I’m not wrong about that, I can handle being wrong about the market.

DISCLOSURE: Long positions all the stocks in the model portfolio.  

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

The post Year in Review: 10 Clean Energy Stocks for 2020 appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

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

Returning Stocks

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

New Stocks

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

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

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

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

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

Update

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

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

DISCLOSURE: Long all stocks in the list.

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

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

by Tom Konrad Ph.D., CFA

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

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

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

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

First Quarter Performance

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

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

Keeping Perspective

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

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

What’s Next?

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

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

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

How the Bear Might Play Out

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

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

Trades

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

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

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

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

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

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

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

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

Stock notes

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

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

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

The post Ten Clean Energy Stocks for 2020: Trades appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

On February 21st, I was helping an investment advisor I consult with pick stocks for a new client’s portfolio.  He lamented that there were not enough stocks at good valuations. This is one of the hardest parts of being an investment advisor: a client expects the advisor to build a portfolio of stocks which should do well, but sometimes, especially in late stage bull markets, most stocks are overvalued.  I reminded him, “The Constitution does not guarantee anyone the right to good stock picks.”  He agreed, but he still had to tell his client that the client would be better off mostly in cash, waiting for better values to appear.  I did not envy him the task.  When the client thinks your job is to pick stocks, it’s hard to convey the message that the best course is not to pick anything at all.

After a week of covid-19 fueled stock market panic, I expect he’s having a much easier time persuading his client to wait.  Now the question becomes “How much longer should we wait?”

Calling market bottoms is nearly as difficult as not buying at market peaks.  Right now, the stock market has been falling because investors understand that the covid-19 pandemic is damaging and will continue to damage the economy and company profits.  The extent of that damage remains to be seen, but the consensus seems to be that covid-19 will lead to no economic growth or even a slight decline in the world economy in 2020.  Given that stock prices are highly sensitive to current and future growth prospects, my guesstimate is that the pandemic alone could justify a 10 percent to 20 percent decline in the stock market.

The S&P 500 has already fallen 12 percent.  If my 10% to 20% guesstimate is right, we could have already seen “enough” decline to account for the likely economic damage of the covid-19 pandemic.  Is it time to buy the dip?

I believe it is always wise to hedge one’s bets, and so I have begun to buy a few of the stocks I believe have become better values in the last week (GPP, CIG, SCHN, MIXT). Despite these small buys, my overall stance remains cautious.

The covid-19 pandemic is not happening in a vacuum.  For most of the last year, I have been warning readers that I believe that most stocks are trading at dangerously high valuations.  Until recently, stocks, and especially clean energy stocks, have continued to rise.

Understanding Market Cycles

In general, bull and bear market cycles happen because changes in investor sentiment react to and amplify the effects of business cycles.  When the economy has been good for a long time, not only are company profits high, but the memory of past declines fades for investors, making them less risk averse.  This rising confidence leads them to be willing to accept greater risk for the same potential return, allowing them to buy stocks at higher earnings multiples.  This expansion in earnings multiples allows stock prices to rise faster than earnings for an extended period, and this long term growth is what we call a bull market.

A bear market works in the opposite direction, only faster.  It’s easier to lose confidence than gain it back, so bear markets tend to be shorter and more abrupt than bull markets.  They usually start with some real-world event or catalyst that reminds investors that the economy is not all rainbows and unicorns.  It could be a series of disappointing earnings at big companies, rising interest rates, increasing mortgage defaults, or a health scare.

This catalyst is usually bad for the economy, and the stock market will decline in order to reflect companies’ lower earnings expectations.  This is a market correction, like the 12% decline we had in the last week of March.  Sometimes, that is all that happens: investors realize that the event was a temporary blip, and the long bull market resumes after a brief pause.

In other cases, the catalyst or unexpected event and market correction cause many investors to look around and question their assumptions.  Are there more risks out there that they have been ignoring?

As investors question their assumptions, they become more risk averse, and start to sell their riskiest stocks.  The stock market declines further, as earnings multiples begin to contract.  This decline makes other investors begin to question their own assumptions, and soon the market decline becomes a self fulfilling prophecy.

Covid-19: Correction, or Bear Market?

It is at that critical point between correction and bear market that we find ourselves now.  On Monday, March 2nd, more confident investors rushed in to “buy the dip” after the previous week’s big decline.  Will these optimists outnumber the other investors who are beginning to question their assumptions about risk and stock valuation?  As yet, it is too early to tell.

I do have a guess, however.  My guess is that fear will win, and we are at the beginning of a new bear market.  I think a bear market is likely for two reasons.  First, valuations are historically very high.  A good measure of this is the Shiller Cyclically Adjusted P/E Ratio (CAPE) shown in the chart below:

While the CAPE has not achieved the historic highs seen in the dot-com bubble, it is at approximately the same level it was at the start of the great depression in 1930, and well above its level at the start of the housing crisis in 2008.  From a valuation perspective, if investors do begin to question their valuation assumptions, there is plenty of room for those assumptions to fall.

The second reason I am guessing that this correction will lead to a new bear market is the apparent incompetence and unwillingness of the Trump administration to confront the growing health crisis.  I think the inaction and obfuscation at the highest levels of our government are likely to make the pandemic far worse that it would have been if our political leaders had taken it seriously.

As investors see the disease and the measures taken to combat it begin to affect their daily lives, I think it will also affect their feelings about risk in general.  The fear of catching covid-19 could easily morph into fear of stock market declines.  That fear, if it grows, will set off the viscous cycle of declining stock prices and growing risk aversion that cause bear markets.

Ten Clean Energy Stocks

But I digress.  This article was actually meant to be the monthly update of my Ten Clean Energy Stocks Model Portfolio.

As you can see from the chart, the portfolio as a whole was down slightly for the year at the end of the month (-2.7%) compared to a 2.5% decline of its clean energy income benchmark YLCO and an 11.5% decline for the broad market income benchmark, SDY.  My real money managed portfolio, GGEIP, is barely hanging on to positive territory, up 0.4% for the year to date.

With earnings coming quickly over last week and this, I have a good deal to say about the individual stocks as well as broad market conditions, but I think I will break this update into two parts in order to get the thoughts on the market situation to readers as quickly as possible.

Disclosure: Long PEGI, CVA, GPP. VLEEF, NFYEF, RAMPF, MIXT, CIG, RDEIY, VEOEF, SCHN, 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 Correction, or Bear Market? 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

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.

by Tom Konrad Ph.D., CFA

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

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

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

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

Individual Stocks

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

The post Ten Clean Energy Stocks For 2019: Marginally Hotter appeared first on Alternative Energy Stocks.