I met VegTech Invest CEO, Elysabeth Alfano at the 2023 ESG for Impact Conference, where she made a strong case for investing in food and agricultural systems innovation as a method for reducing greenhouse gas emissions and other environmental harms.  I wanted to learn more about the specific innovative companies she thinks are worth investing in, and so I interviewed her and VegTech Invest Chief Investment Officer, Dr. Sasha Goodman about these themes.  The interview follows. 

 Tom Konrad Ph.D., CFA –

Editor

 Q: Thanks for taking the time to speak with me.  To begin with, can you tell us what VegTech is and why investors might want to invest in the theme.

 Ms. Alfano: VegTech is the innovation that is driving the transformation of sustainable food systems, moving away from inefficient and unsustainable animal proteins and replacing them with nutritious alternatives that are significantly less damaging and, at scale, less costly.  Given the problem-solving nature of these innovations, this theme reflects an anticipated megatrend in which all consumers adopt – to varying degrees – proteins that are more nutritious, more prolific, take less time, require fewer inputs and create less damage.

This represents a significant opportunity to make money with this trend, as well as potentially bring down the carbon footprint of one’s portfolio by investing in this theme.

Q: What percentage of world GHG emissions come from the food system and what is the potential for reducing these emissions by 2030 and by 2050?

 Ms. Alfano: Conservative estimates state that 16.5% of the world GHG emissions come from animals as food.  More significantly, 32% of the world’s global methane emissions come from grazing and growing crops to feed animals.  Life cycle analysis shows the delta of impact for a plant-based burger is 99% less water, 93% less land, 90% fewer greenhouse gas emissions emitted and 46% less energy used.

Impact by 2030 and 2050 will depend on how much capital is driven (through the public markets, but also governments) to VegTech innovations.    According to the Boston Consulting Group, investing in VegTech/Alternative Proteins is 3x-40x more impactful at reducing GHG emissions than investing in alt energy, electric vehicles or alternative building materials.  This is primarily because the CapEx needed to build out the VegTech infrastructure is much lower than the other sectors, so adoption and impact can happen faster.

Q: What are the current options for public market investors to access this theme?

 Our research shows that there is only one option for this theme in the public markets: EATV ETF (NYSEArca:EATV).

 Q: I note that EATV is an actively managed ETF.  Why did you choose an active as opposed to a passive, more index-based approach?

 Ms. Alfano: Markets are dynamic and this sector is dynamic, with anticipated IPOs for novel technology companies. Therefore, we thought it best to have the option to make decisions without restraint. Still, the ETF trades quarterly and, thus, is mindful and disciplined regarding turnover.

Lastly, it is rare to see an ETF led by industry sector experts, but both Stanford educated Dr. Sasha Goodman, Portfolio Manager of EATV, and Elysabeth Alfano, CEO of VegTech Invest, are food systems transformation experts who understand and are involved in the nuances of the shifting global food supply system, as well as being venture and private investors.

Q: How do you decide if a company that’s involved in the food system belongs in the VegTech theme? How many companies are currently in your investing universe?

Dr. Goodman: We continually scan the landscape for plant-based companies, starting with a pool of over 100 potential candidates, as listed in the VegTech non-tracking index EATVi. Companies are selected based on rigorous quantitative and qualitative analysis, including in-depth revenue research. We sample around 50 products per company, aligning them with revenue segments to ensure they meet our prospectus criteria, ultimately choosing those best positioned to leverage market trends in sustainable food systems transformation. These are companies that are innovating for efficiencies and disruption and fit into our categories, which notably include business-to-business players, such as flavor technology and ingredients producers and synthetic biology specialists, in addition to the plant-based consumer goods.

Q: How has the ETF performed in comparison to EATVi?

 As of 10/31/23, the actively managed and non-tracking ETF, EATV, surpassed the EATVi index across the 1, 3, 6, and 9 month cumulative periods, and the 1 year average annualized periods.

Q: What technologies or methods for transforming agriculture are you most excited about?

Ms. Alfano: We are most excited about both fermentation and cultivated meat.  Cultivated meat, growing meat from cells, is still 6-8 years away from scaling, so I will discuss fermentation here.   We have been fermenting foods for hundreds of years: kimchi, vegetables, tea, bread, and beer are a few examples.  It makes good sense that we would now ferment proteins.

Companies like Gingko Bioworks (NYSE: DNA) engages in partnerships and collaborations where they provide their services and expertise to help other companies develop and produce bio-based products. This is often done through the use of Ginkgo’s platform.  Lamb Weston is selling potatoes to be fermented as protein.  AB inBev, the largest fermenter in the world, is now fermenting proteins through its company BioBrew.  It is exciting to see a company of such size and expertise, now focusing its attention on feeding a growing population quality proteins, without damaging the planet.

Q: Under what circumstances is controlled environment agriculture (greenhouses, etc.) better for the environment than field agriculture, and when is it worse?

Dr. Goodman: Controlled environment agriculture (CEA), like greenhouses, is generally more eco-friendly than traditional agriculture. When positioned near urban areas, CEAs reduce transportation emissions, offer fresher product that can last longer and minimize food waste. Their enclosed nature safeguard waterways by limiting pesticide and fertilizer runoff, and operate with 70-95% less water use, also utilizing rainwater collection. Modern CEAs optimize natural light, use energy from biogas, and CO2 from industrial sources, enhancing sustainability. Linking CEAs to renewable energy sources such as wind, solar, or geothermal eliminates dependence on non-renewable energy.

Q: EATV’s full holdings are available for review here: https://eatv.vegtechinvest.com/full-holdings.  Please describe how your top 3 holdings are helping reduce the environmental impact of the food system.

Dr. Goodman: VitaCoco’s (NASD:COCO) specialization in coconuts puts them in a good position in the Plant-based Innovation food supply chain. They currently offer coconut water, coconut milk, and coconut oil. Their coconut milk is a dairy alternative that lasts around 12 months on the shelf, and is less likely to spoil and therefore reduces food waste. Both their coconut water and milk are shelf-stable. Notably, their ability to produce coconut oil positions them well in the supply chain, as it is a popular ingredient in plant-based meat recipes. Coconut oil is currently a primary fat source in many plant-based meats due to its semi-solid state at room temperature, which makes it a better substitute for solid animal fat than other plant oils.  Further, VitaCoco is also committed to eco-conscious initiatives, investing in recycling infrastructure and promoting regenerative agriculture.

Celsius (NASD:CELH) offers plant-based energy drinks made with natural ingredients like green tea extract and ginger. Their products, packaged in recyclable aluminum cans, align with sustainable practices, emphasizing a long shelf life and the use of recyclable materials.

e.l.f. Beauty (NYSE:ELF), while not food-related, focusing on carbon reduction and ethical practices. Material companies like this comprising about 20% of the fund portfolio.

Q: I found a few of your holdings surprising, since I had not previously associated them with food system innovation.  Can you tell me how you believe DOLE and TESLA are helping make our food system more sustainable?

Ms. Alfano: Dole (NYSE:DOLE) is the OG of non-dairy ice cream, if you will, with the Dolewhip product.  But much more on the cutting edge is that Dole is upcycling is pineapple skins to produce alternative leathers.  Ultimately, if we are making less beef, we are making less leather.  And given the environmental footprint of a tannery, that’s a good thing.

Alternative materials act as a follow-on hedge with alternative proteins if you will, per the above.  It is for this reason that EATV focuses around 80% on food and 20% on materials. Not only does this give the fund diversification, but also capitalizes on the innovations that are occurring around replacing environmentally damaging animal products from supply chains.

Enter Tesla (NASD: TSLA).  Tesla was the first car manufacturer to mandate only having alternative leather in its vehicles. This prompted Mercedes and BMW to have around 50% alternative leather for their cars.  Automobile leather is second only to shoe leather for its large-scale production, so it is meaningful to have car companies move away from leather per Tesla’s initiative.

Q: One company I immediately expected to see were companies focused on plant-based food products like Beyond Meat (NASD: BYND and SunOpta (NASD:STKL), but I was surprised to note that these names each account for less than 1% of your portfolio, when your top holding (Vita Coco/COCO) is almost 10%.  Why do you have such low allocations to such obvious VegTech names?

Ms. Alfano: We allocate in the fund according to a mix of qualitative and quantitative considerations: performance, financials, potential IP moats, CapEx spends, EBITDA and revenue growth and profitability, volatility, in addition to considerations of environmental and human rights goals. The companies can’t just have great innovations. They also have to be well performing companies for larger allocations.

The markets have been tricky and that has been almost without exception for all companies, bar a few.  We believe two things are at play: small and mid-cap companies, which is around 70% of EATV, are undervalued at the moment, leaving room for a great buying opportunity.    The markets have not yet priced in the magnitude of demand and necessity for food systems transformation.   Thus, currently, EATV offers high growth companies and low growth prices.  We do believe it is a great time for buyers to get into the EATV ETF as we see food innovation coming to take center stage in the investment community on the near horizon.

 Q: Moving beyond investing for a moment, can you describe a few actions people can take in our personal lives to help make the food system more sustainable?  What is the potential for each of these actions to reduce our own carbon footprints?

 Ms. Alfano: For starters, investors can invest in the EATV ETF to potentially lower the carbon footprint of their portfolios.  EATV is determined by ACA Global’s Ethos ESG to be the only ETF to be Carbon Neutral without buying credits due to the emissions avoidance impact of the fund.  It isn’t producing large amounts of emissions, thus, doesn’t need credits to cover them up.  Perhaps this is best illustrated by the following:  Ethos ESG has found the global temperature warming potential (image attached) of EATV to be 1.18C, well below the Paris Accords recommendation.  For a reference point, the global temperature warming potential of one of the most common investments, the S&P 500 index, is 3.87C.

Beyond investing to lower the carbon footprint of one’s portfolio, Project Drawdown, the Physician’s Committee for Responsible Medicine and the Intergovernmental Panel on Climate Change (IPCC) all agree that one of the most important things one can do for the environment is to remove meat and dairy in part or in full from one’s diet.

The LinkedIn, San Francisco headquarters took its employee cafeteria two-thirds plant-based for 1 month, with meat and dairy still available, but less than usual, and the employees 1) dropped their meat consumption by 55% and 2) the company as a whole dropped its CO2 by 14,000kg.  Further they received letters of thanks from the employees who had been trying to eat better for their own health and healthcare costs but were finding it hard when fried meat and rich dairy fats were the choices they were given.  They were happy for the healthier options and the company was also happy to reduce its CO2 numbers and in the long-term, they believe, their corporate healthcare costs while improving employee productivity.

 Q: What else do you think stock market investors should know that I have neglected to ask about?

 According to OurWorldinData.org, 41% of the world’s tropical deforestation is driven my growing crops for animal feed and grazing animals.  According to the United Nations, animal agriculture is the leading cause of biodiversity loss and deforestation due to growing crops and grazing for animals who get the food instead of people.

According to the U.N., the population will grow from 8B to 9.7B by 2050, but we won’t get more land or water.  A growing middle class in Africa, India and China will increase the demand for meat without the natural resources to sustain this.

These aren’t new data points and governments around the world are deeply focused on food insecurity and the political insecurity that comes from this.  Israel, China, the Middle East, Singapore, German, Holland, Canada and the U.S. are all investing in the infrastructure and innovation, along with private investors and now, through EATV, and the public markets.    Shifting the food systems isn’t a nice option or a preference. It is a necessity and the production and adoption is expected to shift quickly according to meat industry experts at Cargill.

Synthesis Capital, based on the think tank, ReThink X, anticipates the tipping point adoption of 10% around 2035 with earlier investment opportunity and growth to be made before the tipping point.

We believe the VegTech sustainable and prolific proteins theme, as exemplified in EATV, is a very strong thesis.  Please reach out to either Stanford educated Chief Investment Officer, Dr. Sasha Goodman, or VegTech Invest CEO, Elysabeth Alfano at Info@VegTechInvest.com. For more information on the Plant-based Innovation & Climate ETF, EATV, and to view the full holdings, visit https://EATV.VegTechInvest.com.

The post EATV: An ETF for Investing in the Agricultural Transition (Interview) appeared first on Alternative Energy Stocks.

The following interview with RE Royalties (RE.V, RROYF) CEO Bernard Tan was conducted in September by AltEnergyStocks.com Editor Tom Konrad.  Links and ticker symbols were not included in his original responses, but added by AltEnergyStocks.com as a resource for readers.

Q: What exactly is a renewable energy royalty?

A renewable energy royalty is a stream of cash flows generated by a renewable energy project. When the project generates electricity and sells its electricity, we receive a percentage of the revenues from the electricity sales, otherwise known as a gross revenue royalty. We receive that gross revenue royalty, on average, for about 15 to 20 years, on the electricity produced by the renewable energy project.

Q: Are there any other renewable energy financiers who use the royalty model?

There are only a small handful of renewable energy financiers that use the royalty model. Altius Minerals (ALS.TO, ATUSF), a mining royalty company, has a small portfolio focused on wind projects.

Q: What other industries use royalties as part of their financing?  How do those royalties compare to renewable energy royalties?

Oddly enough, almost every industry has a form of royalty financing. There are some very large royalty companies in the mining sector like Franco Nevada (FNV) or Wheaton Precious Metals (WPM), or in the oil and gas sector like Prairie Sky (PSK.TO). Royalty Pharma (RPRX) and DRI Capital are very large pharmaceutical royalty companies. Even consumer services and products have royalty companies like Alaris Royalties(AD-T.TO), A&W Royalties (AW-UN.TO) and Diversified Royalties (DIV.TO).

The difference between some of the other royalties compared to renewable energy royalties is that these royalties tend to have pricing and production volatility compared to a renewable energy royalty. For instance, the price of a metal could fluctuate depending on the spot prices, an oil and gas well could be depleted due to water encroachment or a restaurant could be shut down due to the current pandemic. This would affect the price or production of the product which is being sold, and would affect the royalties being paid. For a renewable energy royalty, while there is also production variability due to changing wind patterns or less sun on any given day, that variability tends to be much smaller over the course of a year. In addition, most of the electricity being sold is usually sold at fixed contract prices, so that also avoids the pricing volatility. As one of our investors told us, as long as the sun shines, the wind blows and the water flows, those royalties will continue to be paid!

Q: Why start a company to invest in renewable energy royalties?

We recognized the opportunity to apply a well-proven royalty business model to the renewables sector, where royalty financing did not exist. We saw similar parallels to the exponential growth of royalty financing in the mining and oil and gas sectors in the mid-2000s, which established the mining royalty giants of today like Franco-Nevada and Wheaton Precious Metals.

Royalty companies present a unique investment value proposition because they embody certain characteristics which we believe investors find appealing. For instance: 

• Compared to a renewable energy producer, developer or supplier, we can maintain very low overheads; 
• We don’t need significant construction or sustaining capital to get an asset operational in order to generate cash flow; 
• We can achieve cash flow diversification much quicker; 
• Our economic interest is top-line generated as it is based on a percentage of revenues, as opposed to bottom-line; and
• We are a first mover in a large and fast growing renewable energy industry and that puts RE Royalties in a unique and enviable position to take advantage of the systemic changes in the energy industry in the coming decades.

Q: How long do the royalties you invest in last/ What is the duration of the contracts?

We typically acquire royalties that range between 15 to 20 years. This usually matches the power purchase agreements (PPAs) that underlying projects have signed to sell the renewable energy generated.

Q: How many of the wind and solar farms you have helped finance have PPAs, and what is the average term?

Currently, 82 of the 84 solar and wind projects we have financed have PPAs in place. Those projects have a generating capacity of 243MW and on a portfolio basis, an average term remaining of about 17 years.

Q: What types of renewable energy have you helped finance? What percentage of your investments are in each type?

Most of our investments have been made on wind and solar, with a portion on hydro. Our portfolio allocation is currently about 35% wind, 63% solar, and 2% hydro.

Q: In terms of IRR, where do royalties stand in terms of cost of capital compared to other types of financing for wind and solar such as tax equity and debt?

The IRRs that we target are typically in the 12-15% range. Cost of capital for debt can range 4-7% depending on the project, location, operator and electricity buyer. Cost of equity can be significantly higher and more likely in the high teens; commensurate for the risk taken.

Q: What conditions make a renewable energy developer or owner a particularly good fit for a renewable energy royalty?

Our ideal client is a renewable energy operator who has existing projects that they don’t want to sell in order to fund their growth. One of the additional benefits of royalty financing is the flexibility of the structure. To provide some examples,

• One client sold us a royalty and utilized the proceeds to invest in their next development project allowing them to retain a much larger equity stake thru construction, and avoid dilution by the majority partner. This allowed our client to establish a higher percentage ownership and rights to the cash flow of the project.  The project is now operating.
• Another client utilized royalty financing to acquire an additional operating wind farm to add to their portfolio. They effectively utilized the future cash flow streams of the project to help fund the acquisition.
• Another client sold us a royalty on a portfolio of solar projects in order to fund the growth and development of their distributed solar business in Africa.
• A community based client entered into a royalty financing with us in order to pay down some expensive short term debt.

As you can see, there are a variety of reasons our clients enter into a royalty financing transaction with us and the key benefits include the flexibility and the non-dilutive nature of the financing.

Q: Do you have any competitors in the RE royalty space?  What barriers exist to keep someone from setting up a direct competitor tomorrow?

While we don’t have any direct competition to what we currently do, we do have indirect competition in the form of mezzanine debt. The key difference is that royalty financing tends to be much more flexible and can be tailored depending on each client’s needs.  Most mezzanine debt also has a number of one time hidden costs such as commitment fees and drawdown fees that degrade the overall economics.

While there are no barriers to entry in setting up a direct competitor, there are some unique ingredients that have to be in place. For instance, you would need an executive team that has experience in both royalty financing and also in the renewable energy sector to be able to transact with potential clients. Further, even though electricity is fundamentally a commodity, electricity markets are very regional and each jurisdiction has its own set of rules.

We do see the growth of royalty financing in the renewable energy sector and would welcome more direct competition. If you look at the mining industry as a comparable, companies like Franco Nevada and Wheaton Precious started off small, similar to where we are, in the early to mid 2000s. Once the mining industry saw the tremendous benefit royalty financing provided, these royalty companies eventually grew to the multi-billion dollar behemoths that they are today.

Q: What is currently the biggest constraint on your growth: finding new opportunities to invest, or your ability to quickly raise additional capital?

Currently, we have far more opportunities to invest in than the capital on our balance sheet. Without spending any money on business development, we see 2 to 3 new opportunities approach us each week. While not all of these deals are suitable given our investment screening, there are many which we have had to turn down mainly because they would have skewed our portfolio too much given our current portfolio size.

While capital is available, we have to ensure that the capital is also the right type of capital. As such, we are constantly monitoring new capital opportunities to ensure we can continue to grow and to also be fair and accretive to our shareholders.

Q: How quickly do you expect to grow RE Royalties’ investments over the next few years?

One of the unique aspects of the royalty financing structures utilized is that it allows for a fairly quick payback of our original investment capital. To give you an example, without raising any money, we will have approximately $11 million in capital returning to treasury due to maturity of the loan portion in our investments. The royalties will continue to pay for another 18 years, despite getting our original investment back. This structure and “returning capital” allows us to grow our investments organically by re-investing into new deals, without having to dilute our shareholders.

I believe that in the next few years, we would be able to double or triple our existing portfolio of investments.

Q: How much of this growth do you expect to come from recycled capital, and how much from new debt or equity?

We expect this growth to be funded 50% by recycled capital and 50% by our green bond raise. 

Q: Do you have a target leverage ratio for your company?  Where do you currently stand compared to this target?  Do you have any covenants that would limit your ability to increase debt financing in the future?

Our board and management team takes a fairly conservative view of leverage. We would prefer not to over-leverage and believe a 50/50 debt equity ratio is a reasonable leverage level. We have actually built this as a covenant into our recent green bond offering to ensure we remain strongly capitalized for both our shareholders and debtholders.

If you compare us to a renewable energy operator, their debt equity ratios tend to be much higher. These companies, on average, have a 60/40 to 80/20 debt equity mix. If you compare us to a financial institution, the leverage by a financial institution is even much higher, approaching a 90/10 debt equity mix.

Q: You recently launched a green bond. Why did you choose to offer these bonds to the public rather than using more traditional bank financing?

For two primary reasons. Traditional bank financing is generally quite restrictive and/or expensive for smaller organizations like us. Further, even though we have had revenues since day 1 and positive cash flow from operations and earnings, many traditional banks struggle in understanding our business model given that as a first mover, we are “outside the box” or a “box does not exist (yet)”.

The second reason is that we have had a lot of prospective investors that wanted a fixed income product that offers a reasonable yield, and did not necessarily want the equity exposure. If you look at 5-year bonds, many corporate bonds are in the 2-4% range, and if you are buying a bank GIC, the yield is even lower at 1-2%. Our green bonds will pay a coupon of 6%, and we have structured it as senior secured, which offers a high degree of protection to the bond investor. For our shareholders, this is very accretive and beneficial because of the high IRRs that we are able to achieve in our investments.

https://www.reroyalties.com/green-bonds 

Q: Do you have a target payout ratio? 

For our shareholders, the current dividend yield is about 3%, based on a $1.40 share price. We haven’t set a target payout ratio and monitor with our Board on a quarterly basis to set our payout.

Q: What is your current payout ratio?

Our current payout ratio is approximately 1. We have been growing our revenues by about 70% year-over-year and expect this ratio to decrease over time.

Q: What else should I be asking?

Prospective investors always ask what keeps me up at night.

One of the advantages (which can also be seen as a disadvantage) is our relatively small team size. While the advantage is that we can keep cost low, the flip side risk is that there is a concentration of human capital. 

While we always joked internally about not taking the same elevator or the same plane, one of the side effects of the pandemic is that we have all been working from home and not been on a plane for quite some time!

The other nice thing about the royalty business model is that once a transaction is consummated with our clients, it goes on cruise control and the royalties will continue to pay for 15 to 20 years. So even if something does happen to our management team, shareholders and debt holders can take comfort that the royalties will continue to be paid as long as the sun shines and the wind blows.

About RE Royalties

RE Royalties Ltd. is a specialty finance company created in 2016 that creates stable long-term cash flow streams by utilizing a royalty financing model to provide loans to, and acquires revenue-based royalties from, renewable and clean energy projects and companies globally. The company’s mission is to provide innovative financing for climate change solutions. RE Royalties is a publicly traded company on the TSX Venture Exchange under the symbol “RE”, and the first to pioneer the royalty-financing model for renewable energy projects. 

Bernard Tan, Chief Executive Officer and Co-founder, RE Royalties

Bernard Tan is Founder and CEO of RE Royalties Ltd., a royalty financing company focused on providing alternative capital solutions to small to mid-size renewable energy companies. RE Royalties is building a new innovative platform to “Uber-ize” the ability for investors to invest in renewable energy projects. 

The royalty platform provides a non-dilutive financing solution for companies to develop their renewable energy portfolios while providing investors with an impact investment that offers a growing long-term yield and strong capital protection. RE Royalties’ is changing how renewable energy projects are financed and accelerating the growth of the clean energy economy. 

Bernard started his career with KPMG in the technology practice and for 10 years prior to RE Royalties, was the CFO of Hunter Dickinson Inc., a globally recognized resource private equity group based in Vancouver.

Bernard is a CPA, CA and has a BComm from UBC and an MBA from McGill. He is also a volunteer with Futurpreneur Canada, and has advised CPA Canada and the BC Securities Commission on various policy matters.

Learn more on RERoyalties.com  

Social Media Links

https://www.facebook.com/RERoyalties
https://twitter.com/RERoyalties
https://www.linkedin.com/company/re-royalties-ltd
https://www.instagram.com/reroyalties

DISCLOSURE: AltEnergyStocks.com and interviewer Tom Konrad were paid to conduct and publish this interview.  Neither AltEnergyStocks.com or Tom Konrad held positions in RE Royalties stock or its bonds at the time this article was published, but they may acquire such positions at a future date without notice.

The post Royalties: a Financial Innovation for Renewable Energy appeared first on Alternative Energy Stocks.

Here’s an interview https://bit.ly/3dv5ywg I did for the Bigger Than Us podcast. I’m very impressed with Raj Daniels, the interviewer… he saw patterns in my approach to investing (and life in general) that, before he drew them out of me and put them into words, I had not even recognized myself.

The post Interview on the Bigger Than Us Podcast appeared first on Alternative Energy Stocks.

Tom Konrad, Ph.D. CFA

Thursday night (Friday morning in Sinapore) CNBC Asia’s Street Signs program must have had an interview cancellation, because they needed someone to give them 3 energy stock picks in response the Trump’s “Energy Dominance” speech on last minute notice.  They sent me (and probably a bunch of other people) an email two and a half hours before air.  I did not see it until 20 minutes before the actual interview.  I warned them that I do clean energy, not fossil fuels, but apparently they had no other takers who were awake and able to give energy stock picks at 11:23pm ET on a moment’s notice.

I think they found me because I was on Capital Connection Asia in late January.  

I don’t think I was quite what the host, Martin Soong was looking for.  He improvised well by turning from the Trump clip saying “if you want to do something entirely different, you might invest in alternative energy…”

I’m still trying to get video, but here’s my memory of the interview.

MS: How is clean energy doing under Trump?
TK:  Great.  There was a little stumble after he was elected, but then the market figured out that he’s living in the 20th century while the economy has moved on to the 21st.  Clean energy has turned the corner, and is now the cheapest source of new electricity. The market is realizing that, even if Trump doesn’t.

MS: Do you have stock picks?

TK:  Atlantica Yield (ABY), Covanta Holding Co (CVA), and General Cable (BGC).  
I went on to describe why I like Atlantica – you can read about that and Covanta in my last 10 Clean Energy Stocks for 2017 update.
General Cable was a last minute add for me.  I’m very nervous about the market right now, so there are not many stocks I’m enthusiastic about.  I was tempted to mention Seaspan (SSW) Preferred shares (SSW-PRG), but they’d asked for energy stocks, not efficient transportation.  You can read about Seaspan Preferred in my recent update as well.  

My picks in January had been Pattern Energy Group (PEGI), and Hannon Armstrong (HASI.) Both have gained significantly (17% and 22%) since then, and so they’re still top holdings, but not the most likely to make further large gains in the near term.
     
I picked General Cable instead.  It’s a bit of a stretch to call it an energy stock, but at least the connection between the manufacturer of electric and communication cables and the energy sector is obvious.  Given more than 20 minutes, I might have picked something else, or just stuck with the two I’m most enthusiastic about.  

Martin Soong wanted to talk about ETFs, we did not talk about Covanta or General Cable at all.

MS: What about clean energy ETFs?  I’ve looked at six that are up about 10% for the year.

TK: ETFs are okay if you’re unwilling to pick stocks, but clean energy is such a new sector, pricing is not yet efficient, and there is a lot of room for stock pickers to get an edge.

MS: But the ETFs are up 10% for the year.  Why not just invest in those?

TK: My Green Global Equity Income Portfolio is up 17%.

MS: I have to admit, that’s good performance.

And he ended the interview.

Unfortunately, I had misstated my performance.  I don’t spend much time thinking about past performance: Future performance and how I can improve it is much more interesting.  For the record, my Green Global Equity Income Portfolio (GGEIP) was up 13.5% for the year to date…. not as good as I’d thought, but still ahead of the alternative energy ETFs he was looking at.  

Despite my mistake on my track record, I stick to my assertion that clean energy remains a stock picker’s market.  Until clean energy investing becomes main stream, there will be a lot of room for stock pickers like me to beat the indexes.  Perhaps I should have mentioned that GGEIP was  up 30.5% in 2016, although I achieved that using options and other strategies not available in clean energy ETFs, not just stock picking.

DISCLOSURE: Tom Konrad has long positions in ABY, CVA, BGC, PEGI, HASI, and SSW-PRG, and own puts on SSW (an effective short position.)

The post Stock Picks for US Energy Dominance appeared first on Alternative Energy Stocks.

by Susan Kraemer

As unrealistic expectations of dividend growth are scaled back, yieldcos are now on a more sustainable path.

Weaknesses in the US yieldco model came into sharp relief this summer as share prices fell along with oil and gas stocks. This was in part due to investor confusion about energy stocks but also in response to a flaw in US yieldco expectations.

Manager of the Green Global Equity Income Portfolio and AltEnergyStocks.com editor Tom Konrad Ph.D., CFA had warned of the looming potential for exactly this kind of market correction in a conversation a year ago. He was worried that investors imagined that yieldcos could keep raising their dividends “forever.”

In July of 2014, Konrad voiced this concern: “I think investors think that the party will never end, but at some point we’re going to reach this place where yieldcos can’t raise their dividends. They have sowed the seeds of their own demise. I think most investors do not understand exactly what’s going on.”

Now, he said: “There has been a kind of an emperor-is-wearing-no-clothes moment. Investors were assuming that dividend growth would continue forever but that was predicated upon infinite stock price rises. I think it will certainly make people more cautious about investing in yieldcos.”

“What yieldcos need to be is boring”

Until recently, yieldcos were benefiting from a virtuous cycle of rising stocks, share issuance at high prices, rapid dividend growth and more share-price rises.

“People are greedy and the people who were setting up yieldcos were catering to that,” Konrad said. “The stocks were overpriced. That has corrected.”

The fall happened when too many yieldcos issued too much stock at once and the market was not able to absorb it. This led to falling expectations for dividend growth, leading to stock-price falls.

To fix the yieldco model, both investors and management just need to stop focusing on dividend growth, according to Konrad.

“What yieldcos need to be is boring,” he said. “You don’t want a stock price that goes up and down crazily, you don’t want a dividend getting raised really quickly because they are selling lots of stock.”

“A more rational growth rate for dividends would be 2% to 5%”

Konrad believes yieldcos could do worse than imitate certificates of deposit (CDs) at US banks, which offer interest rates well under 1%. Investing in a yieldco would offer a better return than simply leaving money in a CD, and be a little riskier as bank deposits are government guaranteed.

But even yieldco dividend rates of 3% to 7% are much more attractive than CD interest rates at a fraction of a percent, and it is unrealistic to expect yieldcos to grow at 10% or more annually. “A more rational growth rate for dividends would be 2% to 5%, or even 0%,” said Konrad.

“You basically just want a stock that you can buy like buying a piece of a community solar farm.”

Konrad does not think a lot of changes have to be made to the yieldco model, because they are already happening now with the market correction. Now that investors have a more rational expectation of lower dividend growth, share prices for yieldcos are falling.

But that doesn’t mean the dividends themselves are going down. The value of a yieldco doesn’t change because its stock price has changed. The value of a yieldco is simply its ability to pay dividends, and what that dividend rate is.

Dividends are not affected by the stock prices, and are still expected to rise, just more gradually, assuming that more stable solar assets with power-purchase agreements continue to be added, which is a reasonable assumption.

It seems that in their haste to leverage these very solid assets, solar firms overreached.

Currently the dividend yield, or dividend as a percentage of the share of stock, is increasing, because the more the share price falls, the higher the dividend yield goes.

The fundamentals are sound. And solar farms with guaranteed 25-year power contracts in place have been likened to toll roads in terms of the stability and security of the income they generate.

Since a yieldco holds only these already-generating assets, with guaranteed revenue streams, a yieldco is arguably a more secure and safe investment than the companies that built the assets. After all, there are no 25-year contracts that guarantee the income of project development companies.

It seems that in their haste to leverage these very solid assets, solar firms overreached. For the solar industry, a high share price in a yieldco provided cheap capital. Yieldcos set dividends to start low so that they could raise them, making it appear that dividend increases would continue long term.

Konrad is not pessimistic about the long term after the correction of the bubble, and believes yieldcos serve a real need that has been overlooked in the recent bad news.

“I do think that there will be more people buying solar farms once they understand the characteristics,” he said. “They are simple vehicles to allow you and me to buy solar and wind farms.”

This article was written for YieldCon, the Renewable Energy Yieldco Conference to be held in NYC on December 3rd.  Tom Konrad Ph.D. CFA will speak at the conference.

The post US Yieldcos Will Survive appeared first on Alternative Energy Stocks.

by Tom Konrad CFA

Renewable Energy World asked me to write a commentary on Bloomberg New Energy Finance’s recent report on the difficulties institutional investors are likely to have divesting from fossil fuels.  The report details how the scale, yield, liquidity, and historic growth of the oil and gas sector are impossible to match with any other investment sector.

While this is quite true, much of the other coverage has missed the point.  Ironically, I thought Bloomberg News’ coverage was some of the worst, because it focused on the least important aspect of fossil fuels as an investment sector: historical growth.  While a sector’s yield, liquidity, and especially scale generally persist for decades, growth trends are prone to sudden reversals.  The fact that oil and gas stocks have done so well over the last five years should prompt all wise investors to start taking some profits, regardless of their attitudes towards the environment.

Instead, I focus on likely future trends for oil and gas stocks, and consider how fundamental factors and the potential growth of the divestment movement may affect the potential future growth of the oil and gas sector.  The prognosis is not good.

You can read the whole commentary here: Divesting from Fossil Fuels: Last One Out Loses.

I interviewed the report’s author, Nathaniel Bullard, for the piece.  He had some interesting points that did not fit into my commentary, so I include the whole transcript below.

Nathaniel Bullard Interview

Conducted via email, 8/28/2014


TK: Why do you focus on past performance in your analysis?
NB: The past is where the data are available for analysis (as opposed to forecasts and predictions) and I think this is particularly applicable to older, established sectors such as fossil fuels.

TK: Do institutional investors generally believe past performance is a reliable indicator of future returns?
NB: I do think that oil and gas dividend yields in particular will be viewed in a “past performance is a reliable indicator of future returns” paradigm. US coal, however, has had clear indicators of future change in place for a while, in particular cross-state air pollution regulations, so companies such as Bloomberg have been able to analyze the number of plants which are likely to be removed from market, therefore lowering coal demand.

TK: If you had done this analysis in mid 2011, how would that have changed your conclusions?
NB: US Coal would have performed relatively better if we used the original start position of mid-2009, largely because the US shale gas boom was not yet depressing gas prices and leading to massive fuel switching –  though prices began slipping in 2011. Chinese coal stocks were higher and stable, but would later be hit with overcapacity concerns.  Clean energy equities were in the midst of overcapacity depressing margins and share prices, in particular solar stocks.

TK: Do you have any thoughts on why Coal has so greatly underperformed other fossil fuels over the last 4 years?
NB: In the US in particular, natural gas prices (but also to some extent the price of wind power) have moved coal from the bottom of the merit order.  In China, coal is quite oversupplied and many of coal companies are heavily indebted, often with local debt that is a bit opaque.
China has lots of particulate emissions laws in place around coal, and it’s making them more stringent – but 1) they’re not always enforced and 2) they’re not really making a major dent in coal demand…yet. They are, though, shaping our expectation of future demand.  While China does not have the strong and proximate regulations in place to shift demand away from coal, environmental concerns in China’s major cities are forcing coal production to move out of urban areas and there are efforts underway to ramp up domestic gas production (and gas imports) as a substitute.

TK: If coal stocks had not declined so drastically in the last couple years, would they be as easy to divest from now?
NB: In a word, no. Some US coal equities have lost 90% of their value since 2011 (Arch Coal, for instance).  This much-diminished size means that all other things being equal, or not equal in a stock market that is performing well, coal stocks are underperformers and the same number of shares will represent a much smaller portion of an investor’s overall portfolio relative to 2011.

TK: If or when one of more of the paradigm shifts you discuss in section 7 take place and the divestment movement reaches scale, what would be the effect on the portfolios of investors who choose not to divest?  What would be the effect on the portfolios of those who are divesting today?
NB: I think we can expect some oil and gas stocks to still generate dividends, meaning that the yield attribute they carry is still in effect and attractive to some investors.  Using the Fossil Free Index which I mentioned in my white paper, historical data suggests that removing fossil fuels from a broad portfolio should not adversely impact returns and could in fact be slightly positive.

TK: Do you have any other thoughts you’d like to add?
NB: I wrote this paper because divestment is a fast-moving idea with the first signs of traction outside of its motivated core of intellectual founders.  The sectors it touches upon are essential parts of our physical energy system, at least today, and are almost as deeply embedded in our financial system due to their scale. I thought that divestment deserved a thought exercise, passed without judgment: if divestment is to occur at scale, what shape might it take?

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Tom Konrad

When I asked my panel of green money managers their predictions for trends 2013, I got enough material for four articles: On where the cleantech sector is heading in 2013, as well as on Solar, Smart Grid, and LED technology.

I also asked them for stock picks, some of which I included in the previous articles.  Several had opinions about EnerNOC (NASD:ENOC), which I wrote about here, and two picked LED stocks Veeco Instruments (NASD:VECO) and Universal Display Corp. (NASD:PANL), which I discussed here.

Since I just published my annual model portfolio of Ten Clean Energy Stocks for 2013, I thought it would be interesting to compare the performance of their six picks as well, especially since there is absolutely no overlap.   It’s not exactly an apples-to-apples comparison, since I did these interviews before the holidays, but I still expect it to be interesting.

Here are the rest of their picks.

Shawn Kravetz: Amtech Systems

Shawn Kravetz is President of Esplanade Capital LLC, a Boston based investment management company one of whose funds is focused on solar and companies impacted by the emergence of solar.  Kravetz likes Amtech Systems (NASD:ASYS), a maker of capital equipment for the semiconductor and solar industries.  He likes Amthech because it is

 Currently trading at a 40% discount to the cash on its balance sheet as their business has deteriorated sharply, they are managing cash superbly and have significant business opportunities should there be any activity whatsoever in solar manufacturing in 2013.

Kravetz made these comments when Amtech was trading at $3.10.

Sam Healey: Hudson Technologies

Sam Healey is a portfolio manager at Lamassu Capital.  He likes Hudson Technologies (NASD:HDSN), saying:

Hudson is a refrigerant technology/reclamation company.  For the majority of the past years they have served as a refrigerant re-seller, selling R-22 and other refrigerant gases.  With the EPA currently cracking down on its R-22 phase out and severely limiting the virgin R-22 production, R-22 prices tripled in 2012 and will likely move up materially again in 2013.  Hudson has the ability to reclaim used R-22 (it is illegal to vent though many do it) and clean it up and resell in.  Prior to the EPA phase out the economics were not attractive enough to promote wide spread reclamation   Despite the fact that it is illegal, many many contractors would and did vent the gas into the air rather then capture and reclaim it because in many cases they would have to pay to get rid of the dirty gas.  With the R-22 price spike HDSN can now pay contractors for the dirty gas thereby getting supply to clean up and decreasing the amount of gas that gets into the atmosphere.  The demand for R-22 will last years beyond the allowed period of virgin production.  If one uses the R-12 phase out as a template, R-12 prices went from 3$ per pound to 20$ per pound.  R-22 went from $4  up to $9 last year, and now I think is moving into the low double digits.  HDSN also has R-Side technology which they use to enhance/diagnosis large cooling units and make them much more energy efficient   The R-side product, though not materially significant in Revenue right now, I think gets this company into a clean energy universe as an energy efficiency play.  I like HDSN, think it has the right product at the right time and has a large upside potential.

Sam made these comments when HDSN was trading at $3.31.

Garvin Jabusch: First Solar

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog ”Green Alpha’s Next Economy.” Among renewable energy companies, he likes First Solar (NASD:FSLR).  He says,

They’re the global thin-film leaders, to the extent that they’ve even been invited to bid and work on projects in China, where the state is aggressively trying to support its domestic PV manufacturing players. Yet, where thin film is the appropriate approach, FSLR gets the call. FSLR will continue to be strong in the U.S. as well since it’s not subject to tariffs imposed on Chinese solar makers. First Solar – and solar in general – have been so unfairly maligned that the stage is set for an upside surprise as the reality of how we need to power the global economic production function sets in.

Jabusch made these comments when FSLR was trading for $32.56.

Conclusion

I find other manager’s picks particularly useful because they give me new companies to consider.  Of these, I find Amtech and Hudson Technologies particularly interesting, and will be keeping an eye out for a stock pull-back to possibly acquire one or both.

Disclosure: Kravetz has along position in ASYS, and Healy owns HDSN.  I have no positions in these stocks.

This article was first published on the author’s Forbes.com blog, Green Stocks on January 2nd.

DISCLAIMER: Past performance is not a guarantee or a reliable indi
cator 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 Three Green Money Managers; Six Green Stocks for 2013 appeared first on Alternative Energy Stocks.

Tom Konrad

In 2007, it seemed like clean energy was finally becoming mainstream.  Both candidates for the US Presidency accepted the need to act on global warming, even if they did not agree on the degree, and clean energy stocks were rising even faster than the broad stock market.

This article was first published on the author’s Forbes.com blog, Green Stocks on December 27th.

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 A Clean Energy Inflection Point in 2013? The Best ETF to Play the Trend appeared first on Alternative Energy Stocks.

Tom Konrad

LED lights on an outdoor tree. Photo by author

This is the third article in my series based on my panel of green money managers’ predictions for 2013.  The first article looked at what they expect 2013 holds for the Solar industry, and the second looked at their predictions  for the Smart Grid.  This installment focuses on the LED industry.

Jeff Cianci: Faster than Anyone Expects

Jeff Cianci is Chief Investment Officer at equity investment fund Green Science Partners.

Cianci says “The trend toward LED lighting for energy efficiency will move more quickly this year than anyone expects, driven by cost declines, regulatory incentives and rapidly increasing consumer awareness.”   He thinks the place to be is Organic LEDs (OLEDs), and thinks OLED research and intellectual property license shop Universal Display Corp. (NASD:PANL) “Could double from here.  The launch of OLED TVs will complement rapid growth in smartphone and tablet screens.  PANL is a high margin royalty play on all of this surface ‘real estate’.  Everyone will want an OLED screen as the costs come down.”

Rafael Coven: Building Momentum

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven expects “Stronger momentum into LED Lighting especially as the economics improve enough that it can start really challenging replacing T8, T5, and other fluorescent lighting applications.   This should help LED manufacturers such as Cree (NASD:CREE), Philips (NYSE:PHG), and component makers such as Advanced Energy Industries (NASD:AEIS) and Rubicon (NASD:RBCN) but really punish the old line lighting companies that haven’t kept up in the space such as Siemens (NYSE:SI) and General Electric (NYSE:GE), among others.”

Jan Schalkwijk: A Cyclical Bottom

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk thinks the adoption of LED lighting has yet to take off, but he sees its acceleration will help Veeco Instruments (NASD:VECO.)  Veeco makes LED manufacturing equipment tools, and he thinks it is currently cheap because “A pending reassessment of revenue timing has delayed its quarterly filing, and orders last quarter came in low. The latter I believe is more a cyclical bottoming out than an indication of poor future orders.”

He adds a note of caution, saying Veeco is volatile and “Wall Street does not always know what to make of it.”

Bottom Line

The future of LEDs is bright, and these three experts think 2013 could be the year when they really take off.  I tend to be cautious when there seems to be an investment concensus for a sector, because it means that the stocks are unlikely to be cheap.  That’s certainly true for Cianci’s pick PANL, which trades for 32 times expected 2013 earnings.  Analysts’ prediction of 25% expected growth over the next five years isn’t enough to justify that valuation.

Even while Schalkwijk’s Veeco is trading 22% off its 2012 high because of the uncertainty surrounding the stock, it’s still priced at 22 times expected 2013 earnings.  That might seem a relative bargain compared to PANL, but not if you believe analysts’ predictions that the company will shrink an average of 4.6% for each of the next five years.

To own either of these stocks, you need to believe that Cianci is right and LEDs will light up “faster than anyone expects.”  For “anyone” read “most other investors,”  and hope that the investor who sells the stock to you is one of the most surprised.

Disclosure: I have no position in any of the stocks mentioned.  Green Science Partners owns PANL and Schalkwijk and his clients own VECO.

This article was first published on the author’s Forbes.com blog, Green Stocks on December 19th.

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 Three Money Managers See LED Industry Shining in 2013; Their Stock Picks appeared first on Alternative Energy Stocks.

Tom Konrad, CFA

Last week, I asked three green money managers if they thought cleantech stocks, especially solar and wind sectors were near a bottom.  While they did tell me about eight cleantech value stocks, they were not ready to call the bottom.

Commoditization in Clean Energy

In response to my questions, Rafael Coven, the manager of the Cleantech Index (^CTIUS), which is the index behind the Powershares Cleantech Portfolio ETF (PZD,) told me that he and his colleagues at the Cleantech Group

“are continually reminded how fast certain sectors have product commoditization, where intellectual property isn’t strong enough to differentiate products sufficiently, then prices have been collapsing  even faster than we had anticipated.  This is true for smart power meters, solar panels, wind turbines, and most lighting products – especially LEDs. … Sector growth doesn’t necessarily mean that many companies will make economic profits in LED lighting or solar PV.”

In other words, Coven sees the decline in solar PV stocks to be a consequence of changing market structures.  If he is right, there is no reason to expect investors in sectors which have experienced the rapid commoditization to ever recover their losses.  Just because these stocks look cheap based on historic earnings, they could easily continue to fall.

Spencer Hempleman, a partner and clean energy portfolio manager at Ardsley Partners in Stamford, CT thinks similarly.  He says,

“[S]olar and wind have underperformed the more broadly defined cleantech sectors because China is subsidizing the manufacturing ramp of those industries and creating overcapacity.  Commensurate with pricing pressure due to the supply and demand imbalances are raising commodity costs like steel, silver, copper etc which pressures margins for solar and wind manufacturers throughout the value chain.”

Other Structural Problems

Commoditization is not the only potential structural problem in clean energy.  I also corresponded last week with Robert Wilder, the manager of the Wilderhill Clean Energy Index (ECO) and the Wilderhill Progressive Energy Index (WHPRO).   The largest clean energy ETF, PBW is based on ECO, while the Powershares Wilderhill Progressive Energy Portfolio (PUW) is based on WHPRO.  Wilder and I were discussing why broad-based ETFs such as PUW and Coven’s PZD had outperformed narrower clean energy indexes like PBW recently.  Wilder says,

“Indexes capturing broader themes simply had been able to avoid the narrow, sharp drop. A wider Index for say, cleaner technology with lesser green energy weightings would in a sense do ‘better’ the past couple years, while Progressive energy emphasizing efficiency and the smart use of dominant energy would do even ‘better’ than that.”

In addition to the quick commoditization arising from the rise of Chinese manufacturers, Wilder and Hempleman also see structural problems for solar PV and wind in the reduction of subsidies.  Wilder says that the paring back of subsidies has quickened recently as “several governments are suddenly fiscally flat on their back. … One-off events like Japan’s nuclear crisis, or sharp doubling in oil prices, spotlight moves to new energy in places like Germany, but that alone is not enough to offset these partly structural near term structural forces.”  Hempleman adds that “this is a major structural issue as many of the companies that compete in these sectors are highly levered and the barriers to entry are fairly low.”

The Cyclical Case

While Wilder and Hempleman see the recent decline as mostly structural, Wilder also sees some cyclical causes.  He sees an analogy to semiconductor makers, which go through boom and bust as wafer makers over-expand, and then are forced to contract, but he sees the forces driving down solar, wind, LEDs, and geothermal in recent times as much more powerful than those in the semiconductor industry.

Garvin Jabusch, manager of The Sierra Club Green Alpha Portfolio, emphasizes more cyclical causes.  He sees a big driver of the decline in the solar and wind stocks to be the political shift against pricing in fossil fuels’ externalities, such as the effects of global warming, increased health care costs caused by pollution, and the costs of going to war for oil.  He says “These costs have not been accounted for in the economics of fossil fuels, but if the international political economy is ultimately rational, sooner or later (preferably sooner) they must be. … [E]merging scale and accurate pricing of combustion’s externalities will inexorably reverse this trend.”

Hence, if politics is cyclical (i.e. mean-reverting or “ultimately rational”) then political drivers for renewable energy will be cyclical as well.  And right now he sees the political pendulum swinging to the extreme detriment of renewable energy due to disinformation.  “Polls show that (in the U.S. anyway), this [disinformation] is working. Except for a very recent rebound in belief in global warming, the last two years have seen a general decline in belief in warming science among Americans, particularly but not exclusively among conservatives.  It’s hard not to notice that this period of declining belief has approximately corresponded to the period of declining valuation, and increasing short interest (some solar companies have had short interest as high as 30-40% of total float), among renewables.”

Jabusch also scoffs a bit at the commoditization argument.  He says that, as the price of solar declines to the point where it becomes competitive with fossil fuels such as coal, “some of the same analysts who derided renewables’ expense now deride their inexpensiveness as ‘commoditization’ and ‘margin squeezing’ that means solar companies can’t make much money going forward. To me these guys are missing the point that the rapid, large reductions in the price of solar, which by the way show every sign of continuing, mean that solar will now begin to supplant coal far faster than anyone could foresee even five years ago.”  

Conclusion

I think it’s fairly safe to conclude that both structural and cyclical factors have been at work in the recent declines of solar, wind, LED, and geothermal stocks.  For the investor, the question should be, “Have the structural factors and most of the cyclical factors been fully priced in?”  If so, these stocks will benefit as cyclical factors begin to reverse themselves.  If,
however, the full effects of the structural problems in these industries have yet to be felt, then even a political and cultural shift back towards pricing in the full costs of fossil fuels may not be enough to make the current batch of solar and wind stocks profitable again.

For myself, I find the bears’ structural arguments more convincing.  While I think Jabusch is right that the political pendulum will swing back in favor of the recognition of the very real harm done by the use of fossil fuels, the resurgence of the solar and wind industries in terms of volume may be a great boon to society yet still fail to return great profits to the current shareholders of solar and wind companies.  This is because a new, more clean-energy friendly political environment may draw in new competitors into these industries, further increasing pricing pressure, and preventing solar and wind companies from “more than mak[ing] up in volume what they’re losing in margins,” as Jabusch predicts.

It is possible to do well by doing good.  As Rob Wilder points out, “an Index capturing global energy efficiency in transportation is well up” over the same period solar and wind have been down.  I think that’s probably due to the fact that transportation efficiency competes with oil, and the price of oil is up 50% over the last two years. 
Solar, wind, geothermal, and electrical efficiency technologies such as demand response and LEDs compete with the marginal supplier of electricity, which in most of the developed world is natural gas, and the natural gas price has been very low since early 2009 compared to 2004-2008.  This is why many renewable developers are now focusing more on developing countries where it is possible to displace oil in electricity generation.

Fossil fuel prices are far from the only factor influencing clean energy stocks, but they seem significant.  If we want to know if the current price trends for renewable electricity and electricity efficiency technologies are structural or cyclical, we also need to know if the price trends for natural gas are structural or cyclical, which in turn depends on our assessment of the long term course of the shale gas boom.  If we want to know if the recent positive trends in transportation efficiency will continue, we need to decide if recent oil price trends are structural or cyclical.

Unfortunately, as with the trends in renewable energy, I think the recent trends in oil and natural gas have both structural and cyclical factors.  Which of those factors will dominate over the next two years is beyond this analyst’s expertise to predict.  Over the long term, though, the trend for fossil fuel prices is likely to be up.

DISCLOSURE: No positions.

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 Are the Declines in Solar and Wind Stocks Structural, or Cyclical? appeared first on Alternative Energy Stocks.