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The Pros' Clean Energy Picks: Solar Dominates, Emerging Markets Drag

Tom Konrad CFA

Disclosure: I am long ACCEL, SBS, MIXT, ANGRF, EBODF and HASI. I have sold puts on FSLR (a net long position.)

In December, I asked my panel of professional green money managers for their top three stock picks for 2014.  You can find the full list and descriptions of the companies here.

Three months have passed since I asked them for their picks, and given the popularity of my regular updates on my own 10 clean energy picks for 2014, I decided to ask them what to tell us what they thought of the performance of their picks (shown in the chart below:)

14 Pros Q1.png 3 month total return for the picks from my panel of professional green money mangers. The blue “Avg” bars are for each manager’s three picks, while the red/brown “Fund” bars show the returns of the publicly traded mutual funds or ETFs they manage, if any. Robert Wilder (PBW) is also on my panel, but as an indexer, he does not pick stocks.

Individual Stocks

Here is what each manager had to say about their picks, in the order they got back to me:

Shawn Kravetz

Shawn Kravetz is the solar expert on my panel.  He is President of Esplanade Capital LLC, a Boston based investment management company one of whose funds is focused on solar and companies impacted by the emergence of solar.  He says,

“Solar stocks have enjoyed a sensational start to 2014, reminiscent of 2013. We expect more bumps than in 2013, with both long positions and short positions offering opportunity.

Meyer Burger (Swiss:MBTN) is up a whopping 50% year-to-date as investors have suddenly embraced the emerging turn in the equipment cycle that we have been discussing for several months.  We have sold our holdings of this stock.

Hannon Amstrong (NYSE:HASI) is up a bit in 2014, after digesting strong returns in Q4 2013. Their solid dividend and business performance in Q4 set the stage for what should be a solid year in 2014 as they continue to execute and grow their dividend.

Renewable Energy Trade Board (OTC:EBODF) is also up a bit in 2014, after digesting strong returns in 2013. I believe it is like a jet burning off a bit of fuel before climbing higher. Its core holding United Photovoltaics Group Ltd. (formerly known as Goldpoly) just announced a partnership for crowd-funding solar projects. EBODF is a partner in this venture. This appears to be an outstanding business opportunity and it further reinforces EBODF’s standing in high potential ventures poised to add substantial incremental value for shareholders. This remains the quirkiest and yet most compelling opportunity we have seen in our decade investing in solar. With asset value ($22) nearly 4 times the current ($6.50) stock price and emerging business ventures starting to gain traction, I would not be surprised if EBODF were our largest winner in the remainder of 2014.”

Garvin Jabusch

Garvin Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, and is co-manager of the Shelton Green Alpha Fund (NEXTX), and the Sierra Club Green Alpha Portfolio.  He says,

First Solar (NASD:FSLR) – up 2.69% YTD through 3/7/14 – First Solar has had a volatile year, swinging down on a Goldman downgrade, back up on project news, and most recently down on what some felt was a disappointing earnings report (on February 25th). For me, the bottom lines are that FSLR continues to lead the solar industry by providing panels at a manufacturing cost of $0.48 per watt of generation capacity, with plans to and a track record showing ability to decrease costs further, potentially rapidly (e.g. their thin film tech is gaining conversion efficiency faster than silicon PV tech is). This has and will continue to make FSLR the go-to for utility-scale projects both in the US and abroad. The shares will continue to be volatile, and demand and pipeline visibility will vary, but overall, FSLR will grow in proportion to the economy’s growing use of solar both for new electricity demand and to replace coal and other fossil fuel based generation.

Solar City (NASD:SCTY) – up 36.92% YTD through 3/7/14 – After last year’s outrageous run, some folks thought I was crazy to keep SCTY in portfolios for 2014. But this is simply one of my favorite stories. SolarCity buys the least expensive quality panels they can, installs them on home and commercial properties, signs a 20-year lease or maybe a PPA with a business or other enterprise like a utility, and collects revenues for decades with little further capex. The only thing limiting SCTY’s growth potential is in raising enough capital to grow as rapidly as they’d like, but we’ve so far seen them come up with some very creative and relatively inexpensive ways to do that. To those who object that SCTY is still negative EPS, I say that every penny they spend growing now represents essentially unlimited recurring revenue in the future, and that if they wanted to be positive EPS today, they easily could, simply by slowing growth to less than current revenues. So, it’s not like they’re negative EPS because they’re failing. On the contrary, rapid growth now is the obvious move while the industry is still in its infancy.

Digi International (NASD:DGII) – down 17.49% YTD through 3/7/14 – Obviously a disappointment so far this year, DGII missed on both revenue and EPS for Q4 (Q1 in DGII’s world), and guided lower for 2014 in their report of Jan 23. Digi International works in the mobile Internet and machine-to-machine Internet space, by all accounts and anecdotal visibility one of the the fastest growing pieces of telcom and IT and even commerce. I picked DGII because it is profitable and showing good growth (even with the revised, lower numbers), it has no debt, its products have a good reputation and it was (and still is) trading below book value. Moreover, as DGII is a smaller firm (mkt cap $256mm), I liked the potential for rapid growth or even possible takeover. It is unfortunate that the company has not been able to grow revs or earnings as fast as I had hoped, but I think the long term prospects are still in place, and the recent decline therefore represents a more attractive entry point.”

Rafael Coven

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)   Coven’s three picks are MiX Telematics (NASD:MIXT), Opus Group (Stockholm:OPUS), and Control4 (NASD:CTRL).  Due to some extensive back and forth in my initial request for picks, I originally included Trimble Navigation (NASD:TRMB) and Kurita Water (JP:6370, OTC:KTWIF) which I kept in the list because they conveniently brought the total picks up to a nice fourteen for the year 2014.

MiX Telematics (NASD:MIXT)

Coven thinks the main thing keeping MiX’s stock back is that currently emerging markets are greatly out of favor, including MiX’s home base, South Africa. Despite this, company’s fundamentals are good, and the company should benefit from its aggressive global expansion but particularly in fast-growing Africa, where the company is well established and faces little competition.

This is an orphan stock – mostly unknown outside South Africa, with a small float, It only recently listed in the US and has little analyst coverage other than from the banks that underwrote the offering. What it needs is a few more big contract wins and to keep meeting earnings estimates.” He expects most surprises to be on the upside, given management’s conservative projections.

The main risk he sees is that the company is trying to expand rapidly in a variety of markets Brazil, the US, Gulf Region, and Europe simultaneously. Its Software-as-a-Service model allows it to expand into new areas with relatively little capital, but it could still prove to be a strain on management resources.

Even without an upside surprise, Coven expects the company to grow earnings at 15% to 25% for at least the next five years.

Trimble Navigation (NASD:TRMB)

Trimble has been going from strength to strength this year, with new products, strategic acquisitions, and growing cash flow, and this has been reflected in the stock price up over 20% in last 3 months and 700% over 5 years. It’s not a cheap stock, but I think it’s a quality company that will continue to reward long-term investors. I think that there are a lot of strategic acquisitions to be had and that we’ll likely see a dividend established within the next 12-24 months, too. Over the longer term, the company should continue to grow at 12% to 15% annually.

Kurita Water (JP:6370, OTC:KTWIF):

Kurita was a potential turnaround play which Coven had not initially intended to put in his top three, and he has since cooled on it further.  He says,

I thought that this stock was only attractive as turnaround play, stock was up about 10%, but as long as Japan is mired in its economic malaise, I don’t think there’s more to Kurita than the 2% yield and to pray for a pick up in Japan’s economy. Kurita certainly hasn’t been able to capitalize on booming Asian markets for clean water – or at least sufficiently so to offset its heavy exposure to the Japanese market.

Opus Group (Stockholm:OPUS)

He has also cooled somewhat on Opus Group, but still thinks it’s a good long term pick.

Opus was up 20% within a month of selection: a trader should take his profits, but an investor is better holding on to Opus. While I don’t expect a repeat of 2013 when Opus stock rose 50%, I think it it’s going to steadily year after year by taking share from weaker competitors and realizing cost savings from the recent merger. Opus has the best, most experienced management in the business who has a significant equity stake.

From a macro viewpoint, Opus also benefits from overall market growth as governments increasingly outsource non-core services, emissions regulations are increasingly enforced as the growth in the vehicle fleets in developing nations goes hand-in-hand with higher pollutions levels. It’s a major drag on their economies and I don’t see gasoline or diesel engines going away anytime soon. We may also see more on-board diagnostics and emissions testing of off-road vehicles and power boats which would be great given their disproportionately high emissions levels. Long term, I think Opus will be acquired by an industry heavyweight like SGS SA (Swiss:SGS) or a company like Veolia (NYSE:VE). The inspection and certification business is very attractive to a lot of players, and the Europeans tend to dominate it.

Jan Schalkwijk

Jan Schalkwijk CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.  I co-manage his JPS Green Economy Fund.

Alter NRG Corp (TSX:NRG, OTC:ANGRF) So far, I am pleased with the 2014 performance of AlterNRG. True to its character as a volatile stock, it has a beta of 3.17, but the good news is that it is up 21% in 2014. The company recently reached a $15 million equipment & services agreement with BGE Limited, who is developing a large scale Waste to Energy project in China. If executed on time, the company would meet its stated goal of turning cash flow positive in 2014.

Accell Group NV  (Amsterdam:ACCEL, OTC:ACGPF) So far this year Accell Group has not disappointed with a 12% return, of which 3% came from euro appreciation. E-bikes continue to be the high growth product line, though it is mostly concentrated in Northern Europe. For those hoping for an explosion of e-bikes in the US, I would not hold my breath. I believe biking is still mostly an athletic pursuit in our country, even for those who ride their bike to work, judging by the speed of riding and the tight clothing I witness during my Portland morning commute. E-bikes are inherently less athletic and require a different ridership, which is not yet present in significant numbers. Luckily, Accell has enough going for it absent US e-bikers.

Companhia de Saneamento Basico do Estado de Sao Paolo (NYSE:SBS) Down 18% year-to-date, owning SBS has been somewhat frustrating. About 8% of that decline can be chalked up to the fact that Brazilian stocks as group are in the red. It’s P/E ratio is half of that of its peers at 6.9x and its ROE is 50% higher than its peers at 17.6%. A positive news flow with regards to its rate case would be a much welcomed tail wind for SBS. Expect some news on that front in the next month or two.”

My Thoughts

Part of the reason I go through the exercise of asking my panel for their stock picks is probably the same reason you’re reading this article: They are a great source of investing ideas.

Not all great ideas are equal, however.  Also, as Coven pointed out in his comments about Meyer Berger, timing of both buying and selling can be very important.  I like to buy stocks when they’ve taken a hit due to market sentiment or short term results that don’t detract from the long term story.

Kravetz clearly thinks his 100% gains in Meyer Burger are enough, and has sold his fund’s holdings.  Readers should take that as a signal that it’s too late to get in on this ride.  Readers who did get in should probably take profits as well.  Hopefully some of you also took profits in Opus Group at €14.60, as Coven says he would have done.  (Coven’s Cleantech Index and the ETF tracker PZD would not have sold, since he only updates the index on a quarterly basis.) Although Coven says he would have sold, I’m keeping it in the portfolio because he also says he would have re-bought after a dip.

I’m currently increasing my positions in SBS and MIXT, both of which are down from their highs because of the market’s increasing nervousness about emerging market stocks.  As Coven notes, this nervousness is misplaced with regard to MIXT, since the company has truly global revenues and a dropping South African Rand lowers the company’s expenses more than it hurts its sales.

As a Brazilian water utility, SBS is truly an emerging market stock, but its low price to earnings ratio (6.4) shows that a lot of emerging market risk is well priced in.

I don’t yet own DGII, but because of Jabusch’s comments, I plan to give it another look.

This article was first published on the author's Forbes.com blog, Green Stocks on March 13th.



was posted on AltEnergyStocks.com.


       

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