November Update: What Will The Election Bring for Clean Energy Stocks?
11 Clean Energy Stocks for 2012
Tom Konrad CFA
October brought a gentle fall to my Clean
Energy model portfolio, and a slightly-less gentle decline for
the clean energy sector and the stock market as a whole. Both the
unhedged and hedged versions of my model portfolio fell 2.3% for the
month, compared to a 4.1% decline for the widely held Powershares
Wilderhill Clean Energy ETF (PBW),
which I use as a benchmark for the clean energy sector as a whole,
and a 4.0% decline in the broad market, as measured by the Russell
2000 ETF (IWM.) All returns are as of Friday's close.
For the year, my clean energy model portfolio leads PBW by 25% but lags the broad market by 7%. The unhedged portfolio is up 4.3% for the year, while the hedged portfolio is down 2.6%, having lost money on the hedge as the broad market rose. For comparison, PBW is down 20.3% and the IWM is up 11.4%.
For details on the performance of my individual picks, see the chart and discussion below.
Among individual stocks, only Finavera Wind Energy
and Honeywell, Inc. (NYSE:HON)
had positive returns. Finavera's 6% gain came as the market
continued to digest the prospect of an outright sale of the
company, as I discussed in some detail in the October
update. Analyst Felix Pinhasov thinks
the company is worth about $1.10 per share, and expects
investors will " receive a fair offer and a healthy premium" on
the current price of $0.38 a share.
Honeywell's 2% gain seems largely due to a contract to equip
new Cessna aircraft, and both Deutsche Bank and Barclays
initiating coverage on the stock with Buy and Overweight ratings,
Battered Lime Energy (NASD:LIME) was down another 2% on a dilutive convertible note private placement to a group of investors led by Lime Director and largest shareholder Richard Kiphart. I thought the timing of this private placement unusual, given that the stock price is currently depressed due to an ongoing internal audit to clean up Lime's books after misreporting of income. If the placement could have waited until after the results of the audit were announced, the pricing of the placement would almost certainly have been better, making it less dilutive to existing shareholders. I contacted Lime's CEO, John O'Rourke on October 23rd, to see if he could explain the timing. O'Rourke stated that he was "not ready to have a conversation yet," but promised one "soon."
Lime management will have to communicate extensively with
shareholders soon, since the company will have to seek shareholder
approval for the transaction by February 28th at the latest.
The most significant declines came from Alterra Power
(TSX:AXY / OTC: MGMXF,
down 13%) and Veolia (NYSE:VE,
down 8%). Alterra's decline did not seem to arise from any
news, and even came in the face of an agreement
with the Philippines based Energy Development Corporation
(EDC) to fund the development six of Alterra's geothermal projets in Chile and Peru, subject
to EDC being satisfied with the results of due diligence field
work on the projects. While I would have expected a funding
agreement with a global geothermal leader such as EDC to have
given Alterra's stock a significant boost, this announcement only
managed to halt the stock's decline, most likely because EDC has
not yet committed to the projects. Given Alterra's current
value pricing and the likelihood that EDC will choose to proceed
with some of the projects in the next six months, now is probably
a good time to buy Alterra if you have not already done so.
Veolia's decline seems mostly due a downgrade of the stock from
HSBC Securities from Overweight to Neutral on October 9th. I
took the opportunity to add to my position high dividend paying
stock at $10.09 and $9.75.
I did not see significant news for any of the other stocks in the
portfolio, most of which traded nearly flat. Their
performance was as follows:
|Western Wind Energy (TSX-V:WND / OTC: WNDEF)||-1%
|New Flyer Industries (TSX: NFI / OTC:NFYEF)||-1%
|Waste Management (NYSE:WM)||+3%
|Rockwool International A/S (COP:ROCK-B / OTC:RKWBF)||-4%
|Waterfurnace Renewable Energy (TSX:WFI / OTC:WFIFF)||-3%
Conclusion and Election Outlook
While October was a quiet month, the US Presidential election
promises to bring significant news both for clean energy and the
market in general. Romney's hostile attitude towards
clean energy and Obama's supportive policies mean that PBW is
likely to decline significantly on a Romney victory, and gain from
an Obama win, while results for the broader stock market will be
much more dependent on Congress successfully tackling the looming
fiscal cliff during its lame-duck session. I personally am
worried that our dysfunctional Congress may not be up to the task,
which is why I recently wrote about how to protect
your portfolio with puts.
In terms of the model portfolio stocks, most are relatively
immune to domestic politics because their operations are broadly
international (ACCEL, VE, RKWBF, MGMXF, FNVRF), or likely to be
dominated by company specific news (LIME, FNVRF.) The
exceptions to these rules are Waste Management, whose
primary business is far enough removed from clean energy that
changes in Federal policy towards renewable energy are unlikely to
affect its returns. Western Wind, New Flyer, Honeywell, and
Waterfurnace should all feel electoral effects to varying degrees.
Waterfurnace gets a boost the 30% Investment Tax Credit
for geothermal heat pumps, which is currently expected to revert
to 10% in December 2013. However, even an Obama
administration is unlikely to be able to extend this in the
current political environment, so I expect the stock to follow the
real estate market more than the political cycle.
New Flyer's US bus sales are heavily subsidized by the
Federal government, and all mass transit subsidies will be at risk
under a deficit cutting, car-friendly Romney administration.
Expect NFYEF to gain from an Obama victory or fall in the event of
a Romney win.
Western Wind Energy is currently in the process of
auctioning itself to the highest bidder, but we can expect those
bidders to place significantly more value on the company's wind
development pipeline under a wind-friendly second Obama
administration than under Romney, although this effect may not
immediately show up in its stock price.
Although Honeywell is quite active in building
automation and energy efficiency, the stock is more likely to get
a boost from expected increases in defense spending under Romney
than it is to be hurt by loss of support for energy efficiency.
Overall, this model portfolio might be helped slightly by an
Obama win, but traders looking to speculate on the election result
would probably do better to buy (Obama) or sell short (Romney) PBW
than on any of my relatively stable picks.
DISCLOSURE: Long WFIFF, LIME, RKWBF, WM, ACCEL, NFYEF, FNVRF, WNDEF, MGMXF, VE.
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.