Navigating the Clean and Bloody Streets of Europe
Tom Konrad CFA
Blood In the Streets
|Walter Rothschild, 2nd Baron Rothschild
Image via Wikipedia
Rothschild was an 18th century British nobleman who
supposedly originated the phrase "Buy
when there's blood in the streets, even if the blood is your own."
Although accounts differ, Rothschild was a successful banker, and
supposedly made a fortune buying in the panic that followed the
Battle of Waterloo against Napoleon.
True or not, the tale of Rothschild buying when everyone else was
panicking is an excellent illustration of contrarian investing:
the notion that the best bargains are to be had when nobody else
wants them. As a contrarian investor myself, the Eurozone
turmoil and accompanying declines in European stock markets have
piqued my interest.
Clean and Bloody Europe
Europe, with its high energy prices and early acceptance of the
science of climate change has for many years been growing
industries with the technology and skills to confront peak oil and
climate change. These stocks have been falling along with
most other European stocks as a break-up of the Euro zone has
begun to look increasingly likely. If the Euro zone were to
fall apart, it would likely be disastrous for all European
economies. Many companies in debtor nations leaving the Euro
would be unable to repay their Euro-denominated debt and
have to declare bankruptcy, while companies in stronger economies
such as Germany would find it increasingly difficult to compete
because of a rapidly appreciating currency.
coordinated action of six central banks led by the US
Federal Reserve on November 30th gave European leaders some
breathing room to work out a way to deal with the spiraling cost
of financing peripheral economies' debt. But they must come
up with something much more decisive than previous deals if a
crisis is to be averted. If a deal can be reached, now could
easily turn out to be one of the best buying opportunities for
European stocks at extremely attractive valuations for
deal would also likely lead to a short term rally in the US as
well. If not, it may simply be a good way to lose a
lot of money.
Over the last few months, I have bought a handful of European
stocks at what appear to be very attractive dividend yields, but I
am also maintaining puts against major stock indexes which should
cover my losses if the crisis worsens. I'd be a lot more
cautious about buying European stocks at this point without a
hedge. The stocks I've bought recently are:
- Environmental services firm Veolia (VE), which I wrote about in Trash Stocks Trashed. At $12.69, VE yields over 12% on trailing dividends, although I expect the dividend in 2012 to be significantly lower than the $1.47 paid this year.
- Denmark-based global insulation manufacturer Rockwool (ROCK-B.CO/RKWBF.PK). At the recent price of $88.22, Rockwool has a 2% yield, and Rockwool's global operations should shelter the company somewhat from the fallout in Europe, especially since the global insulation market seems to be rebounding.
- German inverter manufacturer SMA Solar (S92.DE / SMTGF.PK), which at the recent price of $56.70 yields 3%. I most recently wrote about SMA in A Value BOS Play on Solar, although I inadvertently doubled the dividend yield in that article.
- Dutch bicycle and e-bike manufacturer Accell (ACCEL.AS / ACGPF.PK) is yielding about 7% at $17.47. I recommended buying Accell last week.
I normally follow North American stocks, and this eclectic group
are simply European stocks which have caught my interest over the
last few years and currently seem fairly cheap. Since the
Euro crisis is making stocks fall across the board, I polled my
panel of green money mangers to see what they thought of the
current opportunities across the Atlantic, and to see if they had
any specific picks of their own.
Dr. Robert Wilder is the CEO of Wildershares, and co-founded and
manages the WilderHill Clean Energy Index (ECO) which underlies
the largest clean energy ETF, PBW.
He also co-manages two other Wilderhill indexes, WHPRO and
NEX. As an indexer, he was not willing to pick stocks, but
he did have some thoughts to share on the situation in Europe:
Overcapacity from China taking poly[silicon] costs near $25/kg and c-Si solar modules under $1 on top of low prices, has been very painful for all European listed (and American) competitors.On the broader market:
That fact depressed many solar stocks on European markets in 2011, and some consolidation is expected in 2012. A few higher-cost firms have already failed.
Whether that means it's time to buy, is a different matter. Many believe more solar firms with fail ahead and shares have still further to fall.
Macro-level debt risk too in Europe is adding to woes there. Financing has become more difficult, and Eurozone subsidies are uncertain.
So there is 'blood on the streets' in Q4.
[T]here's no certainty, but one thing for sure is renewable energy is trading far below where it was just 6 months ago, as November 2011 concludes.
[Some] feel clean tech and solar in particular has still farther to fall in 2012. Others contend that to some extent, bad news is already priced into stocks on European markets, and optimism about fixing the Euro crisis along with return to the risk-assets like clean energy could possibly turn things around in a hurry. Especially since this sector has been quite beaten down the past 3-4 years.
Jim Hansen is an investment consultant at Ravenna Capital Management in Seattle. He publishes the weekly Peak Oil focused newsletter The Master Resource Report. Hansen does not reccommend any European alternative energy stocks, and he does not have any on his "list of near buys." He prefers "to go at the alternative energy producers from the infrastructure side... [so] we don’t have to pick the best on the cutting edge technology side or determine who is going to be able to produce PV or Wind Turbines at low enough cost to stay ahead of the price decline curve." Hansen's clients hold a few infrastructure companies such as ABB (ABB) with exposure to alternative energy.
On the overall situation in Europe, he thinks "There will come a
day [to buy] but not yet. Reminds me a something read
recently on LED lights: 'Overall, I think it's currently
safer to be an LED consumer than an LED stock investor.' In this
case we may need to see some bodies in the street."
Garvin Jabusch CIO of Green Alpha Advisors, and manages the Sierra
Club Green Alpha Portfolio. On the overall situation
The short term situation in Europe is pretty brutal. It looks increasingly likely that the single currency may not survive much longer, and the short term volatility if and as they go through the process of reverting to respective national currencies will be pretty scary.For particular stocks he likes Aixtron (AIXG):
That said, there are good macro reasons why this could present good buying opportunities in cleantech and renewable energy. First, as national central banks regain control of their monetary policies, the stronger nations will be more insulated (not to say immune by any means) from Euro-contagion. So, for example, Germany may be a little better off with D-Marks than with Euros, but Greece will have to swim more on its own. Imagine if U.S. states had their own currencies and monetary policies. Do we like the opportunities offered by the economy and industrial base of an Ohio or Pennsylvania, or do we want to buy bonds from Arkansas or Mississippi? Nothing against those states, but there is regional variability being masked by the Euro.
The second factor is that cleantech and renewable investing is the one bright spot in global growth today. Bloomberg captured the trend perfectly with this quote: “The progress of renewables has been nothing short of remarkable,” United Nations Environment Program Executive Secretary Achim Steiner said in an interview:“You have record investment in the midst of an economic and financial crisis.”
We believe that combining the rapid growth in renewables with an eye for the Euro nations with competitive economic advantage, and then looking for companies that within this context become very undervalued in the continuing if not accelerating euro volatility, will likely be a source of good returns over the long term.
If this sounds like a lot of contingencies, it is. But given the complexity and changeability of the situation, I'm happy to feel like there's any path, even one strewn with caveats, through the 'bloody streets.'
It's an upstream, manufacturer agnostic play in both energy (solar) and efficiency (LEDs), it has cut forecasts recently but is still comfortably profitable going forward and has good growth prospects as renewable continue to thrive. It also rests on the relatively strong German industrial base. If the Euro crisis causes a large dip in AIXG, we'd have to look very seriously at increasing our position there.After he saw this draft (and my mention of Veolia (VE) above) he added, "I almost mentioned VE in my comments instead of AIXG. I mean, double digit dividend yield on a water play? Fantastic."
It's difficult to overstate the seriousness of the Euro crisis, and the universal caution of my panel of experts bears that out. On the other hand, that near universal caution could be a contrarian indicator. If Europe's political leaders do work out a deal with substance when they meet on December 8th.
Is a European fiscal union on its way? If so, investors who are buying European stocks now will be able to not only congratualte themselves for their bravery, but also have some tidy profits to walk home with. If not, there will be even more blood on the streets when the time to buy comes.
Some of it will be my own. And I'll be buying.
DISCLOSURE: Long VE, RKWBF, SMTGF, ACGPF. Long puts on SPY, IWM.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
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