Tom Konrad CFA
The last two months have not been kind to clean energy stocks. Most commentators attribute the weakness to declining oil prices and the Republicans’ strong showing in the midterm elections. Whatever the cause, my 10 Clean Energy Stocks for 2014 model portfolio was dragged into a loss for the year where it had previously looked to return a small gain. A large part of the decline was in the dollar’s strength. Measured in local currency, the average stock was flat, but the 8% decline in the Canadian dollar, 12% decline in the Euro, and 11% decline in the South African rand combined to pull the portfolio down 4.5% in dollar terms.
My benchmark Powershares Wilderhill Clean Energy Index (PBW) also suffered, ending the year down 14.5%, even though the the broader market of small cap stocks gained 5.4% for the year (as measured by the Russell 2000 index ETF, IWM.)
Long Term Track Record
Clean energy stocks are notoriously volatile. While the broad market long ago recovered from its late 2008/early 2009 lows, my benchmark Clean Energy ETF never has, mainly due to a terrible decline in 2011, while the broad market fell only a little, followed by a further decline in 2012 while the broad market advanced. Two or three blow-out years like 2013 would be needed to erase these huge losses.
Because of these risks, I have become increasingly conservative picking the ten clean energy stocks in my list. I focus on stocks with positive earnings, and often dividend paying companies which appear undervalued. While this caution kept the model portfolio from fully participating in the 60% upside achieved by my benchmark in 2013, it served readers well in 2010, 2012, and 2014, when the model portfolio produced an average gain of 3% to the average loss of 12% of the benchmark. I would say I was not cautious enough with my picks in 2009 or 2011, although the model portfolio did beat its benchmark in both of of those years.
In the six years since 2009, the model portfolio has returned cumulative total return of 10%, which is quite unimpressive if not considered against the benchmark’s cumulative annual loss of 43%. You can find more details in the chart below.
The chart below shows detailed performance for the 10 stocks in the 2014 model portfolio. Most of the year it looked like the portfolio would produce a modest gain, but the strong US dollar and a change in market sentiment which led to rapid declines in many clean energy stocks turned this into a 4% loss. Two growth stocks, Ameresco (NASD:AMRC) and MiX Telematics (NASD:MIXT) were particularly hard hit, despite the lack of negative news. This mirrored the sharp decline of the benchmark Clean Energy ETF PBW, which contains a large number of growth stocks. See the chart below for details.
I discuss the stocks which are also in the 2015 list, Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF), Accell Group (Amsterdam: ACCEL, OTC:ACGPF), New Flyer Industries (TSX:NFI, OTC:NFYEF), Ameresco, Inc. (NASD:AMRC), Power REIT (NYSE:PW), and MiX Telematics Limited (NASD:MIXT) in the article Ten Clean Energy Stocks for 2015, which was published on January first.
The companies I dropped from the list, PFB Corporation (TSX:PFB, OTC:PFBOF), Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF), and Alterra Power Corp. (TSX:AXY, OTC:MGMXF) are discussed here, along with the reasons why. Mostly, they were dropped because the recent declines in clean energy stocks created new attractive opportunities, not because I no longer consider them attractive. All remain in my portfolio, except for Primary Energy, which was bought out.
A year ago, I predicted clean energy stock returns would be modest to down, with my selections providing some protection from the downside risks. The portfolio delivered, although not as well as I would have liked. 2015 is looking a lot more like 2013, when I said, “The abundance of great values among clean energy stocks this year bodes well for the performance of my annual model portfolio in 2013.” The 25% return for that portfolio was good, and the performance of the sector as a whole was stellar.
As in 2013, we enter 2015 with an abundance of clean energy stocks at attractive valuations. Even though the year will not be without risk, I find myself optimistic for clean energy stocks.
Low oil prices are likely to be an economic stimulus as long as they last, and could continue to reduce interest in clean energy. If the oil price remains low, this will be a drag on transportation related clean energy stocks (New Flyer, MiX Telematics, Accell Group, and FutureFuel Corp (NYSE:FF) in the 2015 list), but an oil price recovery could produce a strong tailwind. Other clean energy stocks also seem to be strongly influenced by oil prices, even though there is little or no economic connection between them. If we have not yet seen the lows for oil prices, I expect we will see them soon. This should help both my picks and clean energy stocks in general.
Even with today’s attractive valuations, a broad market decline or continued low oil prices could block a rebound. But low clean energy stock prices today mean that the stage is set for the type of rebound we saw in 2013. Even if that rebound does not materialize, the conservative nature of this portfolio makes another down
year very unlikely.
Disclosure: Long HASI, PFB/PFBOF, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, FF.
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.