There is no shortage of things to worry about as we start 2023.  The Federal Reserve is (rightly, in our opinion) worried about inflation becoming entrenched, and so is likely to continue hiking interest rates for much of 2023.  Putin looks unlikely to concede defeat in Ukraine, and his desperation may lead to escalation, potentially even of the nuclear variety.  California seems to be washing away while remaining in a drought. 

China has loosened the zero-Covid policies that helped the country continue functioning during the first stage of the pandemic, while much of the rest of the world shut down.  Unfortunately, the policy was remarkably successful at keeping people from catching the virus, meaning that the population has little natural immunity to the now more infectious strains of the virus circulating today.  Combined with a weak vaccination policy, Chinese infection rates, hospitalizations, and deaths from the virus are skyrocketing.  This is both a human tragedy, but also a source of considerable uncertainty regarding the country’s ability to continue to fill supply chains the world over.

In short, expectations for the world economy in 2023 are looking to be somewhere between A Clockwork Orange [1971] and The Exorcist [1973 and 2023] on the Hollywood scale of economic prospects.  

When it comes to the stock market investing, investor mood swings tend to overshoot.  If we think other investors are tuning in to horror movie marathons, it’s often a good move to surf on over to the Disney Channel for a little hope in the face of adversity.  At the Foundation Green Income Fund, our mood is less Texas Chainsaw Massacre [1974]  and more Up [2009].

Without a doubt, there are going to be moments when things don’t look good for our animated stock market heroes in 2023, but we’re feeling optimistic about the prospects for the clean energy income stocks that are the core of our portfolio.  The horror movie watchers have knocked valuations back down from the romantic comedy highs we saw at the end of 2021, and new policies like the inflation reduction act and Europe’s push for free itself from Russian fossil fuels are both greatly boosting the chances of an uplifting ending, despite the challenges.  The Russians are likely to inspire clean energy stock market progress.   Call it an October Sky [1999] theme for 2023.

The stock market is never without risk, so investors need to focus not on avoiding risk, but looking for those times and places where the potential downside is already reflected in prices, but the potential upside is not.  Those times come and go in both the market as a whole, and sectors.  

Since I started writing for AltEnergyStocks.com in 2007, I’ve only been more optimistic as I am now three times.  In early 2016.  A group of clean energy infrastructure stocks called Yieldcos had gone through a bubble which popped in mid-2015. Those same Yieldcos were trading at great valuations, and I bought lots of tickets to that feel-good movie, leading to a couple great years for my “10 Clean Energy Stocks” model portfolios in 2016 and 2017. 

Similar great movie and investment opportunities for the whole market were released in 2020 at the height of the pandemic, and in late 2008 during the implosion of housing bubble.  Both of these are great examples of the theme that when horror movies are playing (maybe Pandemic and The Shining, respectively) brave souls who buy during the scariest parts often end up doing well. I was less brave than I should have been about the market’s prospects in 2020, so did not go all-in; I cautiously bought a few tickets at the time.  In late 2008, I wanted to buy, but I had been less prepared for a downturn early that year than I should have been, so why I wanted to buy, I did not have the cash to invest that I should have.  2008 was an important learning experience for me, and a large part of the reason the crash in early 2020 did not catch me off guard.

This year, the previews have definitely gotten me interested again.  I’m not as confident that green income stocks are ready for the blockbuster year as I was in 2016 or late 2008/early 2009, but I’m more confident than I was at the lows of the pandemic bear market of 2020.

2023 is an investment movie I am excited to see.  I’m buying lots of tickets.

DISCLOSURE: No positions in the movies mentioned in this article.  I have not even seen all of them… horror movies are not my thing.

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 2023: Looking Up Like the 2009 Disney Movie appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

Horrific, Tragic, Unprovoked, Heartbreaking.  There is no lack of adjectives to describe Putin’s war on Ukraine.  And while there probably can’t be too much coverage of the tragedies and war crimes, many others can write those far better than I.

As an economic and stock market commentator, the adjective I will focus on is world-changing.  There is no doubt that the first land war in Europe since World War II, piled on top of a global pandemic, is already reshaping the economy in dramatic ways.

Some of those changes, like Europe switching away from Russian gas and back to coal for electricity generation, will cause environmental harm.  Others, like Europe’s longer term efforts to wean itself of dependence on Russia, will accelerate the transition to a clean economy.  Below are twelve ways I believe green investors can help the beneficial changes along, while staying out of the way of the financial impacts of the harmful ones.

Substituting for Russian Oil and Gas Imports

In the immediate term, Europe is switching back to coal from Russian natural gas, and looking to import more fossil fuels from the US and other friendly countries.  Clearly, green investors should

1. Avoid shorting US fossil fuel companies.
2. Consider the benefits to biofuel producers, especially fuels like wood pellets and some biodiesel and renewable natural gas with non-food feedstocks such as agricultural residues like the corn stocks left in the field after harvest, waste from food processing, such as peels and shells, as well as the organic components of household waste.
3. Although recycled plastic will probably remain more expensive than virgin plastic made from fossil fuels, the price differential will fall.  Plastic recyclers and producers of bioplastics may benefit as rising oil and gas prices erode the price premium for their products.

Food Shortages

The war is sending food prices soaring, and they will remain high for at least a year or two.  Not only are Russia and Ukraine two of the largest producers of wheat, but agriculture is heavily dependent on nitrogen fertilizer, which is largely made from natural gas.

Green investors should

4. Not get too excited about the rising prices of biofuels if those biofuels use food commodities as a feedstock.
5. Consider investments in organic farming and farmland.  Not only will the prices of their products rise, but the fact that they don’t use inorganic (fossil fuel based) fertilizer and pesticides will mean that their costs will rise less than their conventional competitors.

Europe’s Long Term Shift Off Fossil Fuels

While in the short term, Europe will simply be substituting fossil fuels from other sources for the ones it imports from Russia, in the longer term the continent’s move to get off fossil fuels entirely will only accelerate.  The means they will use to accomplish this shift are myriad, and most are investible.

6. European renewable energy developers will benefit.  This will not just include wind and solar, but also renewable natural gas.
7. Europe’s push to develop a hydrogen economy will also accelerate, benefiting hydrogen companies.
8. High gas prices and policy will accelerate the shift to electric vehicles (but beware supply disruptions for critical minerals such as nickel, cobalt, and rare earth elements.
9. Also driven by high fuel prices, expect a shift back to public transit, like rail and buses. Train and bus manufacturers should benefit.  Public transit ridership was hurt badly by the pandemic, but for the most part, governments have stepped up to help fill the revenue gap this caused.  While many workers may continue to work from home, others must commute to work, and high fuel prices will accelerate their return to public transit from private vehicles.
10.  Heat pumps and heat pump water heaters are two of the quickest and simplest ways to cut fossil fuel use in buildings.  These devices are so efficient at producing heat that, even when operated with electricity generated with natural gas, the overall use of gas declines compared to heating directly with gas.  Manufacturers and installers will benefit. 
11. Insulation and air sealing. Building energy use can also be slashed by improving the building envelope by sealing air leaks and improving insulation.  Firms that upgrade buildings, as well as insulation manufacturers should benefit. 

Critical Minerals

All the new investment in fossil free technologies will only worsen the shortages of critical minerals mentioned above in the note on electric vehicles.  Wind and solar also use rare earth elements, not to mention large amounts of copper and steel.

Even though the price increases the additional demand will be good for mining firms, I am not a fan of the significant environmental trade-offs that are involved in mining.  Also, since much mining takes place in unstable countries with unsavory regimes, many mining firms also face significant political risks, and can contribute to funding wars like the one in Ukraine. 

12. One way to benefit from rising materials prices without these environmental, political, and moral compromises is by investing in recycling.  Given the expected increase in demand for all sorts of metals, minerals, and other materials, recycling will not be able to meet more than part of the world’s demand for decades to come.  But that will not stand in the way of recycling of all sorts to rapidly expand the slice of materials it does supply, and for recycling businesses to rapidly grow both their size and profitability.

Conclusion

Although we cannot ignore  the tragedy of the war in Ukraine, investors (green and otherwise) also cannot afford to ignore the changes and opportunities it is bringing to the investing landscape.

Fortunately, we do not have to compromise our morals to do so.

ABOUT: Tom Konrad Ph.D., CFA is the Editor of AltEnergyStocks.com and the manager of the Foundation Green Income Fund.

DISCLOSURE: None.

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 Twelve Green Investment Themes From Putin’s War on Ukraine appeared first on Alternative Energy Stocks.

Tom Konrad, Ph.D., CFA

I don’t spend much time reading investment company ESG reports, but a friend asked me to take a look at a copy of the TIAA’s 2021 Climate Report.  I was deeply unimpressed.  Here are a few things in the report that triggered my greenwashing radar:

• TIAA wants to work with companies to improve their behavior.  They call this company engagement.  “[W]e do not expect [asset sales] to account for the majority of our emissions reduction — we are primarily focused on company engagements” page 9.
• Much of TIAA’s emphasis is on reducing emissions from their own operations, rather than the companies they invest in. For an investment company, the greenhouse impact of its offices and computers are tiny compared to the impacts of the companies that it invests in.
• While TIAA has set greenhouse gas reduction targets for the assets it owns directly, it also manages over four times as much money for other investors.  The report completely ignores the greenhouse gas impacts of these investments.
• Where TIAA does have targets, they are long term, for 2040 and 2050.  We need to act now, not in a decade or two.

Given the urgency of the climate crisis– “Code red for humanity” as the UN Secretary General puts it– incremental change falls so short of the need that it’s difficult to consider it green.  

Why Company Engagement Doesn’t Cut It

At best, working with companies to improve their behavior will produce incremental change.  Do we really see an oil company completely ceasing new development of fossil fuels, and phasing down its current operations over the next 20 years because of shareholder engagement?  The idea seems laughable, but that is exactly what an oil company would have to do if it plans to be part of the solution, not just a smaller part of the problem.  Even the most ambitious oil majors, like BP (NYSE:BP) are just hoping to reduce the emissions from their own operations to zero by 2050.  If they are still producing oil after 2050, they are part of the problem.  

Engaging with companies to try to get them to reduce carbon emissions is better than nothing, but stronger measures are needed.  The potential gains from shareholder engagement are fine if a company only needs to make small changes to reduce its greenhouse gas emissions, but stronger measures are needed when a company’s core business causes climate change.  If an investment management company wants to help solve the problem of climate change, the only real solution is to sell companies (like coal, oil, and gas producers,) whose core business causes climate change.

Too Little

The difference between powering your computer with renewable electricity and powering your computer with electricity generated from coal is negligible if what you do with that computer is buy shares in Exxon Mobil (NASD: XOM).

Like an oil company that has a target to reduce the emissions from its own operations to zero, while ignoring the emissions when its customers burn the fuels it produces, an investment management company that reduces its own emissions while ignoring the emissions of the companies it invests in is missing the point. TIAA is doing just that.

Apparently without intended irony, TIAA included the following diagram of its emissions targets in its report (slide 17):

The tiny orange/green triangle represents the carbon emissions from TIAA’s own operations (i.e the power that heats and cools its offices and powers its computers.)  The larger blue triangles represent the financed emissions from the assets which TIAA owns directly.  The (even larger) financed emissions from the companies owned by TIAA mutual funds and other investment products are not even shown. (TIAA has $1.3 trillion under management.  The general account and real estate assets shown in the diagram are only about a quarter of that… and still they make the emissions from TIAA’s own operations look insignificant.)

In short, TIAA’s climate targets only encompass about a quarter of the carbon emissions from the investments it manages… the ones where it has the most control.  A more accurate picture of the relevant sizes of TIAA’s targets (and lack thereof) would be shown in the expanded diagram below:

(Diagram by author. Large gray triangle drawn as approximately 4x the area of the TIAA general account, to reflect the relative sizes of TIAA’s assets under management.)

Too Late

Even if TIAA’s targets covered all of its assets under management, including only 2040 and 2050 targets without significant shorter term goals means that these targets fall far short of what we need to accomplish to avert the worst effects of climate change.  

According to the International Panel on Climate Change, the entire world (and hence all assets which TIAA invests in, including those it manages for others) needs to produce net zero carbon emissions by 2050.  To get there, we can’t leave most of the work until the last few years.  We need to make significant progress by 2030.  For TIAA, this might mean moving up its 2040 net zero targets (Nuveen Real Estate and its own operations) to 2030, its 2050 target for the general account to 2040, and setting additional targets for the funds it manages for others to be one third of the way to net zero by 2030, two thirds by 2040, and at net zero by 2050.

That’s what it would take for TIAA to stop being part of the problem.

To be part of the solution, green money management leaders go much further.  A net zero portfolio can be built today.  We also actively invest in the companies that will help the world get to net zero, and avoid the major greenhouse gas emitters entirely.  Not everyone can lead, so I’ll be happy if TIAA just stops being part of the problem.  The sooner the better.

DISCLOSURE: No positions in any companies mentioned.

The post This Isn’t What Green Money Management Looks Like appeared first on Alternative Energy Stocks.

by Jan Schalkwijk, CFA

ESG investing is all the rage these days. That is, investing that includes the non-traditional  environmental, social, and governance factors in the investment process.  Its appeal to the broader investment industry is twofold:

1) The writing is on the wall: as wealth is passed down to younger generations who in the aggregate care more about values alignment, the asset management industry does not want to lose the assets and the fees they generate.

2) Thematic investing is popular and ESG is one of the hottest themes. Wall Street is not going to miss out. Much like crypto is too good to pass up.

Not everyone is enamored. Some folks accuse ESG investing of greenwashing, others argue that ESG is progressive politics spilling over into investing, that heretofore was “neutral,” and just concerned with the financial bottom line.

In the spirit of every niche gets an ETF, there now is fund that is unabashedly the anti-ESG fund: the American Conservative Values Fund (ACVF). It has $10m in assets under management, so not competing with ESG anytime soon or ever, but what struck me is that its top 10 holdings have a 50% overlap with the top 10 holdings of iShares MSCI KLD 400 Social (DSI), which tracks the broadest and longest-running US SRI/ESG index.

If the ESG flagship benchmark, and the anti-ESG fund agree on 5 of their 10 biggest holdings, then that begs the question: what is ESG anyway?

Jan Schalkwijk, CFA is the founder and Chief Investment Manager of JPS Global Investments, an investment firm specializing in green investing on a global basis.

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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.

by Tom Konrad, Ph.D. CFA

The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel.

Since the BDI is a measure of the income which firms that own dry bulk cargo ships can earn, changes in the BDI tend to drive changes in the stock prices of such companies.

Stock Price Correlation

Until recently, one such company was Scorpio Bulkers (SALT), one of my Ten Clean Energy Stocks for 2021 picks. The chart below shows the last 5 years, with changes in the BDI leading to changes in SALT’s stock price.

There is also one notable exception to these correlated moves in June 2020, when the company recapitalized in a secondary offering.

On August 3rd, SALT announced its new strategy of investing in the next generation of offshore wind turbine investment vessels and selling its fleet of dry bulk carriers.

As SALT’s dry bulk fleet is sold, the company’s future earnings become increasingly independent of BDI. If the market were acting rationally, the correlation of the stock with BDI should also fall over time.

We’re not seeing that.

In October, 50-ish percent moves in the BDI led to 25-ish percent moves in SALT. In January, we saw two 30-ish percent moves in the BDI, and the corresponding moves in SALT were around 10 percent to 20 percent.

Vessel Sales

In both cases, the stock moves were approximately half the size of changes in the BDI. Between the start of October and the end of January, SALT announced the sale of 22 Vessels: 7 in October, 3 in November, 6 in December, and 6 in January. The company has sold approximately two-thirds of its fleet since the new strategy was announced on August 3rd, but the stock is still following the index..

Why is BDI Still Driving the Stock?

The continued correlation between SALT and BDI is likely due to quantitative hedge funds using programmatic trading to take advantage of correlations between BDI and all dry bulk shippers. Some of these programs (which may rely entirely on machine learning) have not yet been updated (or updated themselves) to reflect SALT’s declining dependence on dry bulk shipping for its future earnings.

Timing

When a stock falls for reasons that do not have to do with its fundamentals, I call it a buying opportunity.

BDI and SALT have both fell in late January. Enough said.

DISCLOSURE: Long SALT.

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 SALT: Buying the Balitc Dry Dips appeared first on Alternative Energy Stocks.

It comes to mind again now that Robinhood types are short squeezing hedge funds with GameStop (GME) and other nostalgia stocks.  

The post Voting and GameStop appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Since my 10 Clean Energy Stocks for 2021 list contains 5 foreign stocks this year, a reader asked about the relative merits of buying a foreign stock compared to a US ADR.  Here is a summary of the relative merits (for US investors) of buying a foreign stock directly compared to buying the American Depository Receipt (ADR).

First, let’s look at the tickers for the five foreign stocks in the list.  There are four types of ticker in the list this year:

1. The stock on its home exchange in the local currency.  These have the form TICKER.EX, where TICKER is the stock ticker on the foreign exchange, and EX is an abbreviation for the name of the exchange.  European stocks usually trade on several European exchanges. I try to use the ticker on the exchange with the most liquidity, which is usually also in the company’s home country.
2. The US ticker for the foreign stock – a five letter ticker ending in F.
3. An unlisted ADR – a five letter ticker ending in Y which trades over the counter.
4. A listed ADR – this is an ADR that trades on a US stock exchange such as the NASDAQ or NYSE.

For the companies in the list this year, MiX Telematics is the only one with a listed ADR, MIXT.  I don’t usually mention its listing on the Johannesburg stock exchange, MIX.JO because it does not have a corresponding US ticker, but include it here for completeness.

The others all have unlisted ADRs:

ADR fees are often withheld from dividend payments to ADR holders, but can also be charged directly to the account holding the ADR.  Both holders of the foreign stock and holders of the ADR will also have foreign taxes withheld from the dividend payment.

I have not found any way to determine how much an ADR fee will be.  Sponsoring banks can change ADR fees over time, and sometimes they are charged as a fixed number of cents, other times they are a percentage of the dividend.  I called and asked my broker to look up the total ADR fees charged on each of the ADRs above in 2020.  The results are in the last column. 

Foreign Stock or ADR?

To determine if you are better off buying the foreign stock (F ticker) or the ADR (Y ticker), you should first determine the commission your broker will likely charge you for either trade.  I usually just enter the trade into my broker’s online platform to see the estimated commission but hit “Cancel” instead of confirming the trade.  If the commissions for the foreign stock and the ADR are the same, then buy the foreign stock.

If the commission to buy the foreign stock is higher, then you have to consider how long you plan to hold the stock and how much you intend to buy.  

Small investors and investors not expecting to hold the stock for long will find the ADR is usually more cost effective. Larger investors and long term holders should generally buy the foreign stock.

Rule of Thumb

I find that I typically pay an extra $50 per trade for a foreign stock compared to an ADR.  I generally hold stocks for one to five years. Since there is also a similar fee to sell the stock, I will generally pay an extra $100 to buy and sell a foreign stock.  Annual ADR fees seem to usually be around 1% of the share price, so if I can make a trade large enough to keep the extra commission paid less than 1% and hold the stock longer than a year, it makes sense to buy the foreign stock rather than the ADR.

As a formula, I buy the foreign stock if 

D x Y > 100 x C 

Where D is the size of the trade in dollars (500 shares at $10 is $5,000), Y is the number of years I expect to hold the stock or ADR, and C is the extra commission I have to pay to buy the foreign stock.  Since my expected holding time is typically stocks is 2 years or more and I usually pay an extra $50 to trade foreign stocks, the foreign stock purchase will usually make sense for trades of $3,000 or more.  

In general, I dislike ADR fees, so I try to buy foreign stocks using large trades. 

DISCLOSURE: Long MIXT, REDIF, VLEEF, VEOEF, UMICF..

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 Buying Foreign Stocks: To ADR or Not To ADR appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

A large and growing number of individual investors are showing an interest in divesting from fossil fuels.  Where in the past I have been asked to give a talk on divestment once every year or two, I’ve spoken on the subject three times so far in 2020.  (Here is a recording of a presentation I did for my college alumni association.)

The response to these talks has been overwhelmingly positive, but I’m left with the impression that a lot of the less financially sophisticated attendees are still not sure where to start.  For most of these attendees, the right approach will be to find an investment advisor who has a focus on environmentally sensitive portfolios, or to build their own portfolio using mutual funds.  I think I give most attendees what they need to find a good investment advisor, but I usually don’t have the time to go through the steps of building an appropriate mutual fund portfolio from scratch.

So here it is, step by step.

Step 1: Pay down debt and defossilize your life.

If you have investable assets (beyond a six-month emergency fund) held outside a tax advantaged account such as a 401(k) or an IRA, and you also have debt, you can save on investment fees and lower your overall risk by taking enough money out of your mutual funds to pay off your debt (car loan, credit cards, and even a mortgage.)  If those mutual funds are invested in fossil fuel companies, this also has the advantage of starting you on your way to divestment.   

The benefits of paying down debt are so great that even the mortgage interest tax deduction is not worth it.  If you can pay down or pay off your mortgage using investment money, do so! By reducing your monthly expenses, you will free up more money to invest in the future, and the amount of money you save is more reliable and likely to be significantly more than the money you would earn with mutual funds.

If you own a home, you can next consider upgrades like having your home weatherized (insulation and air sealing), upgrading your heating and cooling system to heat pumps (air source or geothermal), installing a heat pump water heater, making your next car an electric or plug-in electric vehicle, an electric induction stove, and installing solar on your home.  Check your local utility to see if they have rebate programs for measures like these.  There is now also battery electric yard equipment that is as powerful as gas for a similar price.  Defossilizing your whole life is not only a great way to get off fossil fuels, but it often pencils out as a very attractive investment.

Step 2: Determine your target asset allocation

The mix of stock mutual funds and bond mutual funds you need depends on your risk tolerance, level of assets, and financial goals.  You can determine an appropriate asset allocation for yourself using an online asset allocation calculator, such as this one. 

The asset allocation calculator will give you a percentage allocation to stocks, bonds, and cash.   All you have to do then is to put your money into appropriate mutual funds or other investments in each of these categories.  

Step 3: Cash Investments

In a brokerage or mutual fund account, most people generally keep their cash investments in a money market mutual fund.  In general, the default is for cash not invested in other funds to be “swept” into a default mutual fund.

Funds from money market mutual funds are generally lent to banks and other companies as very short term loans.  Because most large banks in turn invest in fossil fuels, these money market mutual funds are not fossil fuel free.  

For a fossil free cash investment, one of the simplest options is to open a savings account at a local credit union.  Credit unions lend money to local individuals and small companies, and so their investments are almost always fossil fuel free.  In addition you are covered by NCUA insurance against the insolvency of the credit union.  

If you want your money to be actively helping the clean energy transition, a good option is Clean Energy Credit Union.

Step 4: Bond Investments

Most fossil fuel free mutual funds focus on stocks (aka equities) rather than bonds.  

Interest rates are very low right now, and the few fossil fuel free bond funds out there pay very little interest.  For example, the Calvert Bond Fund (CSBCX) currently pays only a 0.90% yield.  At this interest rate, most people are better off turning to their credit union (see step 3) and building a CD ladder (see link for a how-to or your credit union can help you with it).

A five-year CD ladder at my local credit union is currently paying about 2% annual interest, far better than the bond fund above.  Plus, you also get the benefit of NCUA insurance, mentioned above.

Step 5: Equity Investments

To keep this simple, and low cost, we will use a fossil fuel free index ETF, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) for 80% of your equity allocation.  Hence if your target asset allocation is 60% equities, 80% of that or 48% (0.48 = 0.60 x 0.80) should be allocated to SPYX.  You can buy SPYX in almost any online investment account.

We want to allocate the remainder of your equity allocation to small and medium capitalization companies, since SPYX contains only large capitalization firms.  To find one of these, I took the top rated fund in the “small blend” (which means a blend of growth and income stocks with small capitalization) category on FossilFreeFunds.org.  This was the Aperture Discover Equity Fund (ADISX). 

Including SPYX and ADISX in this example is not intended as an endorsement of these particular funds, but rather of the general strategy of using an index fund for most of your equity allocation, combined with a more specialized fund or funds to fill in the gaps in equity allocation that the index fund might be missing.  

The options for fossil fuel free index funds are limited.  SPYX was simply the only broad market fossil free index fund I found.  In contrast, there are many small and medium capitalization fossil free funds which I could have used.  ADISX stands out because of its sustainability mandate and because it is a concentrated, actively managed fund holding just a few stocks.  While most actively managed funds fail to outperform the market, research has found that concentrated actively managed funds can and often do.  If we are going to pay higher fees for active management, we should at least invest in a fund that has a good chance of outperforming the market.

Step 6: Rebalance

Every year, one of the CDs in your CD ladder will mature.  This is a great opportunity to rebalance your portfolio.  To do this, use the asset allocation calculator again.  The allocation may change slightly as you age, and as your income requirements and market outlook change over time.   The value of your equity mutual funds will have changed as well with fluctuations in the stock market.

If your mutual fund investments have grown beyond your target equity allocation, sell some of one or both of the mutual funds to bring them back to a 80:20 ratio between them, and to bring your overall equity allocation back in line with your target.  Allocate the cash from your maturing CD into a new 5 year CD and your savings account to bring your cash and CD ladder in line with your new bond and cash allocation targets.

Then, keep saving but otherwise ignore your investments until your next CD matures in a year.

Example

Suppose a 55 year old on October 28th, 2019 has $120,000 of investable assets after paying off her mortgage and investing in her home.  She has a moderate risk tolerance, but is worried about the economic outlook, so the asset allocation calculator tells us that she should have 51% ($61,200) in equities, 25% ($40,000) in bonds, and 24% ($28,800) in cash.

She puts $28,800 in a local credit union savings account, and, in addition, buys 5 CDs for $8,000 each.  She splits the $61,200 into $48,960 which she invests in SPYX and $12,240 which she invests in ADISX.  

The amount invested in SPYX may need to be slightly more or less in order to buy an even number of shares, although some brokers allow you to buy fractional shares of some stocks and ETFs.  Do not be concerned about this type of adjustment; asset allocation is far from an exact science.

A year later, on October 28th, 2020, the savings account earned $144 in interest, the CDs have earned $800 in interest.  She has saved another $15,000 to add to her investments.  SPYX has returned 13.8% in combined capital gains and dividends.  ADISX did not exist before January first this year, but it has gained 29.7% since then, so we will use that gain in our example.

We will assume the woman’s target allocation has changed to 50% equities, 26% bonds, and 24% cash when she puts in her new age and outlook into the allocation calculator.

After the first year, her assets are:

Since ADISX is above its target, she sells $242 of that.  SPYX is below its target, so she buys $6,818 of that.  Finally, she reinvests $8,647 of the maturing CD and cash in a new 5 year CD and keeps the rest as cash in her credit union savings account.  A Google spreadsheet with these calculations can be found here.

For the next year, she does not think about her investments (except for putting whatever she can spare in her savings account every month) until the next CD matures.  Then she repeats the rebalancing process.

Conclusion

The above is intended as a simple guide to get an fossil fuel free portfolio for most small investors.  There are numerous possible refinements or variations that could be equally appropriate, including using more or different mutual funds, and including allocations to other asset classes such as international stocks and bonds or real estate. 

I did not cover any of these variations in the interest of putting together something that is simple and actionable.  Few small investors currently have portfolios that are really right for them.  For most such investors, this framework will help them create a low cost fossil fuel free portfolio that suits their needs as well or better than what they currently have.

The post Step By Step Fossil Fuel Divesting With Mutual Funds appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

My friend Jan Schalkwijk, CFA of JPS Global Investments just asked me if I had any thoughts on Kontrol Energy (KNR.CN, KNRLF), a Canadian smart building firm I had never heard of. (I just added it to AltEnergyStocks.com‘s Energy Efficiency and Smart Grid stock lists.)

The stock had just shot up after the client sold and went on a kayaking trip.  It had disclosed a sensor for detecting COVID-19 from the air.

While I didn’t have anything to say about the company, I did have some thoughts on dealing with the emotions around missing out.  Since it’s general advice, I thought readers here might appreciate it as well:

Speaking of gains that she might have had, she should ask herself if she missed out on a lottery ticket or if she made a mistake.  Every week, there is a lottery ticket that wins millions of dollars, but the wise investor does not play the lottery.  If the situation with Kontrol was one that she would never have anticipated, then it was simply a lottery ticket that she did not win… a lucky break for someone else, but not something to take personally.

If, on the other hand, it was something she could have anticipated if she had decided not to go kayaking, she should ask herself about her life choices.  Does she want to be a person who never takes a vacation and constantly watches the stock market in the hopes of someday getting a big win, or does she want to be a person who sometimes takes a break to maintain her mental health and relationships by reconnecting in the real world.  If the latter, then missing out on the occasional big win is part of the price…. but it also means missing out on the occasional big loss.  In this case it was a big win that didn’t happen… but there might also have been a bunch of big losses on all the other stocks she might have been obsessing about.

This sort of thing is all about life choices, and accepting the consequences.  Sometimes you go kayaking and the stock you sold goes to the moon.  Other times you go kayaking and the stock you sold goes bankrupt.  If you did not see it coming before you left, you should not take credit for the stock that goes to the moon, or take the blame for the stock that goes to zero.

The big difference is that you are less likely to remember the stock that went to zero after you sold.

Disclosure: No positions.

The post The Big Win You Missed appeared first on Alternative Energy Stocks.