Tom Konrad, CFA
There is a silver lining to the
horrible year clean energy stocks had in 2011: the opportunity to buy clean energy
stocks (often considered a growth sector) at prices one would
expect from value stocks.
Each year since 2008 I have published an annual list of ten clean
energy stocks I thought were good buys at the beginning of the
year. While the 2008 list was not really intended as an
investment portfolio, my annual lists quickly evolved into a
mini-portfolio of stock intended for hands-off investors who did
not want to pay the high fees of clean energy mutual funds, but
who, like me, saw shortcomings in the available clean energy
exchange traded funds. In particular, the clean energy
exchange traded funds (ETFs) and
most clean energy mutual funds) are
far too focused on high profile sectors like solar and have
hardly any exposure to the most economic clean energy sectors,
such as energy
transportation, and biomass.
Most clean energy ETFs come with relatively high costs for ETFs
(usually around 0.6% to 0.7%), which is expensive enough that a small
portfolio of clean energy stocks can be acquired for less
over a modest holding period.
With that in mind, I now focus my annual list on the most
economic clean energy sectors. Within those sectors, I
include stocks I currently consider relatively good values,
similar to the clean
energy model portfolio I wrote about in late 2009.
The relative results have been good, when compared to the returns
investors would have gotten if they had invested in the clean
energy ETFs I use as a benchmark. (I've currently settled on
the Powershares Wilderhill Clean Energy ETF (PBW)
as a benchmark, because it is the most widely held of all clean
energy ETFs, but I used GEX
in the early years.) Over the past four years, my picks
have outperformed the benchmark by 12%
2010, and most recently by 4%
in 2011, despite company-specific bad news for three of the
stocks in the portfolio.
The Best Opportunity Since Early
Despite the good relative performance, the last four years have
been so bad for clean energy in general that someone who had been
following the portfolio since 2008 would still be down because of
large losses in 2008 and 2011. The upside of this poor
performance is that now is the best time to buy clean energy
stocks since the start of 2009.
In both 2010 and 2011, I cautioned readers that the stocks I
listed were only good values relative to clean energy stocks in
general. This year, as in 2009, I have the pleasure of
bringing you a list of ten clean energy stocks I think are good
values at current prices. This does not mean that my
current crop of clean energy names can't fall, but it does mean
that they have much more upside potential than they did in either
of the last two years. If this portfolio ends 2012 lower
than it is now, I'm confident the decline will have been caused by
a fall of the stock market as a whole: Bad news specific to clean
energy seems to be more than adequately reflected in the current
prices of clean energy stocks.
That said, the fragile economy and political paralysis in both
the US and Europe hold many risks for the stock market in general
in 2012, so investors in these stocks would probably be wise to
hedge their positions with puts on broad market ETFs such as SPY
dimmable LED downlight. Photo by author
Energy Efficiency has long been a staple of my annual lists, because
energy efficiency measures make sense in both good times and bad,
both as a way to save money, and to stimulate the economy.
Because energy efficiency measures cost less than conventional
energy, they stimulate economic activity twice: first when they are
installed (as would any investment) and then for years to come, as
the energy cost savings are spent on other goods.
My energy efficiency picks are:
1.Waterfurance Renewable Energy
(WFIFF.PK $15.3455, WFI.TO), a perennial favorite because of
their profitable business selling geothermal heat pumps.
Waterfurnace recently increased their quarterly dividend to $0.24,
for a 6% annual
2. Lime Energy (LIME, $3.18)
was one of my two
top picks in the energy services sector, the other being
I chose to include LIME in this list rather than AMRC because AMRC
is already up 35% since I recommended it. While I still like
AMRC at current prices, I think LIME has better potential upside.
3. Honeywell (HON, $54.35) has
a strong business providing building controls and efficient
heating and cooling equipment, as well as a performance
contracting arm. I currently like the company's relatively
modest trailing and forward P/E's of 16 and 12, respectively,
strong cash flow, low debt, and 2.7% annual dividend yield.
473 DKK10) is an international insulation manufacturer whose share
price has fallen because of the EU crisis along with many other
Eutopean stocks. Yet with only 43% of 2010 revenues
originating in Europe and headquarters outside the Euro zone, the
company seems relatively insulated
from the full effects of a Euro crisis. Rockwool pays
an annual dividend, and has a yield of 2% based on the most recent
I think one of the best ways to play cellulosic biofuels is to
buy the companies which control the cheapest potential
feedstocks. I'm not sure that the best use of trash is to
make biofuel, but whether it is recycled, composted, digested,
incinerated, or converted in to biofuel, I see trash as a future
source of revenue in a resource constrained world, and who better
to profit from trash than the companies that collect it?
Last summer, I highlighted environmental services companies as a
way to invest in biomass in my article Trash
Stocks Trashed: An Income Opportunity?
5. Waste Management (WM,
$32.71) was my top pick at the time. Since then, the
stock has since risen over $2 while continuing to pay its $0.34
6. Veolia Environnement SA (VE,
$11.05) was then trading around $16, and I was cautious
about the compnay. Today, Veolia seems too cheap to pass up,
despite the fact that I expect its 2012 annual dividend to be
significantly lower than the $1.47 (13.3%) paid in 2011.
Electric vehicles (EVs) may be cool and appeal to early-adopter
techies and some conspicuously consuming greens, but I think EV
adoption will be a long, hard slog. The technologies
which are likely to advance faster are those that are already
economic, but also save transportation fuel. Alternative
transportation such as biking, light rail, and buses top my list.
7. Accell Group (ACCEL.AS,
€14.15/$18.33) is a Netherlands based bicycle maker which I
recently highlighted as a peak
oil investment to buy now, because the company has
by the EU crisis. Accell is up 11% since then,
although the stock still has significant Europe risk.
8. New Flyer Industries
(NFYEF.PK $5.6492, NFI.TO) is the largest North American
manufacturer of heavy duty transit buses, and currently looks like
a steal, despite the fact that the cyclical bus industry is in a
downturn, undermining profits.
Both alternative transportation stocks pay healthy dividends,
with Accell's over 6%, and New Flyer's expected to fall next year
to a still healthy 8% to 9% at the current stock price.
Renewable Energy Developers
|Western Wind's Kingman I Wind & Solar park.
Photo courtesy of the company.
among solar module and wind turbine manufacturers, the
consumers solar modules and wind turbines seem best placed to
benefit. Low prices are not only good if you are a homeowner
looking to put a small PV system on your roof, they are also good
for renewable energy developers.
Government subsidies may be cut, but manufacturers still have
product to sell, and they'll continue to do so as long as the
price exceeds their marginal cost of production... even if that
means they'll never recoup the capital invested in their
This is good news for renewable project developers who have
projects locked in with the current subsidy regime, and who have
the financing to build them. The improved economics of
owning solar farms can not be more aptly demonstrated by the
purchase of a second
solar farm by Warren Buffett controlled MidAmerican Energy
While selling renewable energy equipment can be an extremely
competitive business with constantly eroding margins, power
production is one of the most defensive businesses there is, with
electricity usually sold under long term (15-20 years) contracts
at pre-determined prices. Nevertheless, small renewable
energy power producers are looking cheap compared to their future
discounted cash flows.
8. Finavera Wind Energy
(FNVRF.PK, $0.409) is a wind project developer in Ireland
and British Columbia. Although the company is small, risk is
much reduced by joint
development agreements with industry heavyweight like GE
which will be providing the equity needed to develop the company's
first 77 MW project in British Columbia, and has indicated
interest in additional projects on similar terms. This
outside financial muscle is good, since the company's balance
sheet is weak, but the company is working to rectify that:
Finavera just closed a $442M
private placement at $0.45 a unit (1 share plus half a 12
month $0.55 warrant.)
9. Western Wind Energy Corp
just completed its 120 MW Windstar project
in time to qualify for the 30% federal cash grant before it expired
at the end of 2011. Based just on the company's completed and
advanced projects, I think the discounted
cash flow value of Western Wind is now approximately $6
making the company a safe bet with an easy 2-3x upside.
10. Alterra Power Corp. (MGMXF.PK
, formed by the merger
of Magma Energy and Plutonic Power Corp
, Alterra has a solid
cash position and a diversified base of producing assets across both
technologies and geographies. As the company continues to
develop projects in-house and bulk up through mergers and
acquisitions, I expect the stock price to increase towards the value
of its assets, leading to outsize gains for investors who buy at the
currently depressed price, which is currently half of book value,
and includes $0.10 a share in cash.
As discussed above, I think 2012 is a good year to hedge against
a broad market decline, and buying puts is the simplest and safest
way to do this.
SPY ($125.50) tracks the S&P 500 and has a fairly liquid
options. In order to be able to hedge ten stocks with an
equal investment in puts, we'll need to buy significantly
out-of-the money puts. For a complete hedge, we'd want the
notional value of the underlying shares of SPY to be equal to the
value of the hedged portfolio times the portfolio's beta.
Since I don't put a lot of faith in such calcualtions because
betas and other correlations tend to change during market crises,
so I'll just guess and use:
SPY January 2013 $110 Put
$7.81). For every $781 put contract, the notional value of
the underlyng is $11000. If we assume our portfolio's beta
is 1.1, each such put contract would be sufficient to hedge a
$10,000 portfolio. The beta of 1.1 is just a guess, but it
makes for round numbers. Betas are generally near 1, and are
usually higher for riskier stocks.
hedge not only provides us with some insurance against a large
(greater than 13.4% = 1-110/125.5) decline in the S&P 500, it
also makes the hedged portfolio greener than the unhedged
one. Puts and shorts are effectively dis-investments in the
underlying stock or ETF, and to the extent that companies in the
S&P 500 index reflect the generally "brown" economy, the
hedged portfolio is greener than the unhedged one.
What will 2012 Bring?
I'm optimistic about 2012. Unless we see a total economic
meltdown (for which I suggest readers hedge their portfolios, as
discussed above), I expect strong appreciation of this portfolio
of undervalued clean energy stocks in 2012.
As usual, I'll track the performance with quarterly updates, with
the stock picks benchmarked against PBW.
DISCLOSURE: Long WFIFF, LIME, AMRC, RKWBF, WM, VE, ACCEL, NFYEF,
FNVRF, WNDEF, MGMXF, and puts on IWM and SPY.
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.