Tom Konrad CFA
As we come into the final stretch of 2013, my annual model portfolio of Ten Clean Energy Stocks for 2013 looks certain to break its five year winning streak of beating its industry benchmark. As of December 6th, the model portfolio’s total return has been 19.0%, compared to a sunny 56.1% for my benchmark, the Powershares Wilderhill Clean Energy (PBW). The broad market, as represented by the Russell 2000, also resoundingly beat my model portfolio, and is up 37.5%. My six alternative picks fared even worse than my top ten.
The consolation of a bad year is the chance to look at my mistakes and see what I can learn from them. There were three reasons for my under performance. First, 2013 was a year led by popular, “story” stocks which appeal to the imagination. Second, solar stocks had a blistering comeback after being massively oversold at the end of 2012. Finally, I repeated a mistake from prior years and stuck with two clean energy developers, thinking that the market would recognize the value of their assets.
The big stories of 2013 were Elon Musk’s Tesla Motors (NASD:TSLA) and Solar City (NASD:SCTY), up 306% and 350% respectively. As a value-focused contrarian investor, I’ve long known that there will be many years when story stocks outperform, but they also have a tendency to fall rapidly from their peaks. Tesla has already fallen 30% from its peak over the last two months. A contrarian eschews such spectacular gains in order to avoid the rapid declines that come to such story stocks on the slightest bit of bad news.
Even if 2014 were to be another year led by other story stocks, I would not consider that reason to abandon my contrarian strategy. Missing the rapid rise of stock you don’t own is not a loss, although it may feel like it to people who focus overmuch on the headlines. If holding a contrarian investing stance were emotionally easy, everyone would be doing it.
Time to Reconsider Solar?
I also made a conscious decision to avoid solar in 2013, even though I suspected the sector might be over-sold and could rebound. I toyed with the idea of including a few solar stocks in the 2013 list, but in the end decided not to for the simple reason that I would not know which stocks to pick. I’ve been avoiding solar stocks for many years, because I believed that the competitive structure of the market leads to commodity pricing and temporary capacity gluts, making it unsuitable for the long term investor. Since I wrote the two articles linked in the previous sentence in March 2010, the two solar ETFs TAN and KWT have fallen 50% and 60%, respectively, despite their 129% and 98% gains so far this year.
My concerns about the solar industry’s competitive structure have kept me away from solar stocks for so long that, even if I had been certain (and I wasn’t) that the industry was about to turn a corner at the end of 2012, I would not know which solar stocks to pick.
With solar stocks trading for roughly double their prices of a year ago, my feeling is that the rally has mostly run its course. Finding undervalued solar stocks will be much more difficult than it was a year ago, and I’m no better equipped for the job. In short, the solar stock rally has not made me reconsider investing in the solar manufacturers. Investing in solar installations is another matter. While there are not currently any stocks focused on investing in solar infrastructure, I expect that a least one will go public before the end of 2014. For now, there are a number of interesting infrastructure plays which include solar as part of their renewable generation portfolios.
Clean Energy Developers
Unlike my avoidance solar and story stocks, I view choice of renewable energy developers for these portfolios to be a mistake. The mistake was that I did not make as good a decision as I should have given the information available at the time. It would have been a mistake even if the stocks had gone up, although I probably would not have noticed it.
First, I underestimated the risks faced by tiny companies owning just a few projects. Two suffered because of setbacks at particular projects. Finavera Wind Energy (TSX-V:FVR / OTC:FNVRF) found that two of the projects it had hoped to sell to Pattern Renewable Energy (NASD:PEGI) turned out to be un-permitable. In addition, the process of selling the other two is taking longer than expected, and interest charges are eroding the company’s value. Ram Power (TSX:RPG / OTC:RAMPF) also has a project setback, and is currently in the process of a costly remediation project at its main geothermal plant in Nicargua to bring power production back up to a point where the can again receive distributions from the project.
A third developer, US Geothermal (NYSE:HTM, TSX:GTH) managed to avoid any setbacks, while more diversified Alterra Power (TSX:AXY, OTC:MGMXF) has had relatively minor project delays. Nevertheless, the former has only appreciated slightly, while Alterra has drifted lower over the course of the year. I think this behavior is a sign of growing disenchantment with the sector, especially when the returns from other clean energy stocks have provided much more exciting opportunities.
The lesson I draw from this is to stay away from undiversified and unprofitable project developers. The market is slow to reward success, such as that at US Geothermal, but swift to punish failure. It is possible to make significant, rapid gains from a buy-out, as I and readers did when Brookfield Renewable Energy Partners (NYSE:BEP) bought Western Wind Energy at the start of the year. But such returns are highly uncertain. The Western Wind sale came very close to not going through, and was at a price I felt was well below Western Wind’s true value.
In the future, I plan to stay away from undiversified and unprofitable renewable energy developers. Yes, they often trade at significant discounts to the value of their assets, but such companies are fragile and the constant flow of expenses means that time is not on the side of the investor.
The chart and discussion below show individual stock performance. I will focus on the alternative picks, since I neglected them in the last update.
Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF)
Finavera reported their third quarter results. Highlights were the on-time submission of the Miekle wind project for up to 187 MW. This means that Pattern and Finavera are still hoping that permitting and wind regime will allow the most lucrative “Super-Miekle” option, discussed here. On the downside the financial close of the Cloosh wind farm was delayed “caused by changes to the project financing logistics between the majority partners, and more specifically a shift from balance sheet financing to non-recourse project financing.” An additional delay was caused by an Irish lawsuit filed by one of the project’s lenders. From my reading of the most recent ruling and discussions with Finavera’s CEO, the substance of this lawsuit concerns who gets paid when, not the amounts owed. Hence the delay’s effect on Finavera’s final valuation should be limited to interest.
Alterra Power (TSX:AXY, OTC:MGMXF)
Diversified renewable energy developer Alterra Power Corp announced the sale of its 10% stake in a 50MW solar project acquired earlier this year. Alterra CEO John Carson justified the sale by saying “This transaction provides immediate positive returns to our shareholders,” but I doubt the profits were significant given the quick turnaround. Rather, I think his comment that “our primary development focus is placing the Jimmie Creek Hydro and Shannon Wind projects into construction” describes the real reason. Small solar projects were likely proving a distraction and a drain on tight liquidity.
I think Alterra’s recent joint venture in Italy, where its Italian partner will be able to earn a controlling 55% stake in its Italian geothermal and solar projects, and Alterra’s termination of its solar joint venture with Greenbriar in Puerto Rico both support my theory that management decided it needed to focus on these two large development projects.
Six Alternative Clean Energy Stocks
New Flyer Industries (TSX:NFI, OTC:NFYEF)
Leading mass transit bus manufacturer New Flyer has been drifting lower after a $0.50 lowering of the company’s price target from C$12.50 to C$12 by CIBC. I suspect analysts there were disappointed that the company did not announce an increase of their production rate in the third quarter despite strong backlog growth. I think this recent decline represents an improved buying opportunity given New Flyer’s recent acquisitions in the North American aftermarket parts business. I believe these acquisitions will provide a steady stream of income and widening profit margins going forward.
LSB Industries (NYSE:LXU)
LSB missed analysts’ third quarter earnings expectations on what I believe were delays in insurance payments. I thought the sell-off unjustified and added to my position as the stock dipped below $30.
Maxwell Technologies (NASD:MXWL)
Ultracapacitor maker Maxwell Technologies has been drifting slowly lower since there has been no renewal of Chinese hybrid bus subsidies. I’m increasingly convinced that the plug-in-hybrid bus subsidies announced in September will be all there is, and Maxwell is unlikely to match its former hybrid bus revenues in the plug-in hybrid market.
US Geothermal (NYSE:HTM, TSX:GTH)
Geothermal power developer US Geothermal sold off after filing an S-3 shelf registration to potentially sell additional shares on November 29th. I think shareholders may over-reacted in this case because November 29th happened to be the day after Thanksgiving, and so it appeared that the company was trying to sneak the filing in when investors were out shopping. While such filings can often be a signal of impending shareholder dilution, in this case the filing simply replaced an existing filing which would have expired on December 1st. The seemingly clandestine Black Friday timing is fully explained by the fact that November 29th was the last business day in November.
Ram Power Group (TSX:RPG, OTC RAMPF)
Geothermal developer Ram Power filed a Rights Offering to raise funds from existing shareholders, which I discussed in detail here. One additional detail concerns the “additional subscription” privilege included in the rights. This allows rights-holders to offer buy shares allocated to un-exercised rights. The press release stated that such shares would be allocated on a “pro-rata” basis, but did not specify if they were pro-rata by the number of rights held, by the number of shares held, or the number of shares the rights holder asked for. I called Ram’s investor relations contact, who could not answer the question but referred me to the transfer agent. It turns out that additional shares will be allocated pro-rata based on the number of shares requested. Hence, even a holder of a single right would be able to participate in the offering in a meaningful way by requesting a large number of shares under the additional subscription option.
Disclosure: Long WFI, LIME, PFB, HASI, ACCEL, FVR, AXY, WM, NFI, LXU, AMRC, PW, HTM, RPG. Short: KNDI.
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.