Tom Konrad Ph.D., CFA
In the two months since my last “monthly” update, the stock market has been in turmoil. At the end of June, I was pleased report that my Ten Clean Energy Stocks for 2015 model portfolio was not only up for the year, it was comfortably ahead of its benchmarks. At the end of August, the report is of a more win-the-battle-lose-the-war variety. The portfolio is still ahead of its benchmarks, but it’s now down 1% for the year to date.
The portfolio lost 4.8% in July and 5.7% in August, to end down 1.0% for the year to date. This decline was entirely due to the strong dollar: without the relative decline of the Canadian dollar, Euro and South African Rand, the portfolio would have been up 5.5%. In contrast, its broad market benchmark, IWM, was down 1.1% in July, down 6.3% in August, and down 3.7% year to date. Its clean energy benchmark was down 8.4% in July, down 10.7% in August, and down 21.3% year to date.
The clean energy benchmark is a 60/40 weighted average of the income and growth benchmarks discussed below.
I feel that the recent volatility presents a great buying opportunity for many of the stocks I follow, especially the income stocks.
On Wednesday last week (the day of the market low), I persuaded a client to add some cash to her account. The money reached the account on Thursday, one day after the market’s low, but I was still able to buy a number of stocks for her at very compelling prices on Thursday and Friday as the market began to rebound. I also invested all available cash in the other accounts which I manage, including funds freed up by reducing positions in PFB Corporation (TSX:PFB; OTC:PFBOF), which was a stock from my 2014 model portfolio. As I wrote at the time, I dropped the stock not because I did not like its prospects, but because I felt few readers had bought it because of the foreign listing and low liquidity. I suggested that readers hold the stock last December when it was in the low C$4 range. Now that the stock is up significantly (around C$9) and there are many other attractive income stocks to choose from, it’s time to take some or all of our profits.
Value/Growth and Income Sub-Portfolio Performance
The six stock income sub-portfolio continues to hold up despite the turmoil and strong dollar. It fell only 0.7% in July and 0.9% in August, for a still strong 13.6% return year to date. This performance is even more remarkable given that Yieldcos, the best known clean energy income investments, fell 8.1% in July and 10.7% in August, as measured by the Global X YieldCo Index ETF (NASD:YLCO), which I also use as a benchmark for the income sub-portfolio. Year to date, the benchmark (which began the year as JXI, until YLCO was launched at the end of May) is down 21.3%.
The Green Alpha Global Equity Income Portfolio (GAGEIP) strategy which I manage with Green Alpha Advisors also fared well despite the market turbulence. It was flat in July, and fell only 2.3% in August. For the year to date, it is up 5.6%.
The four stock value and growth sub-portfolio continues to fare poorly. It was down 11.0% in July and 12.8% in August, for a decline of 23.0% year to date. Its benchmark, the Powershares Wilderhill Clean Energy ETF (NASD: PBW), also fell 8.9% in July and 10.6% in August, but these smaller declines left PBW well ahead, with a 16.7% fall year to date.
Individual Stock News and Returns
The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of the month’s news for each stock.
The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.
1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23. Annual Dividend: $1.04. Beta: 0.81. Low Target: $13.50. High Target: $17.
8/31/15 Price: $18.99. YTD Dividend: $0.52 YTD Total Return: 37.1%.
Sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong announced second quarter earnings, with a 19% increase in core earnings per share for $0.26. The company originated $455 million in transactions during the quarter, bringing its investment portfolio to $1.1 billion, 30% of which were energy efficiency investments and 67% of which were in renewable energy, with the balance in other sustainable infrastructure.
2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90. Annual Dividend: $0.72. Beta: 1.54. Low Target: $10. High Target: $30.
8/31/15 Price: $14.55. YTD Dividend: $0.36 YTD Total Return: 0.01%.
International manufacturer of electrical and fiber optic cable General Cable Corp. fell, most likely because the investors are no longer chasing rumors that the company might be acquired by European competitor Prysmian (OTC:PRYMF), as well as the general market decline. Second quarter results were strong, with adjusted earnings per share of $0.36 coming in well ahead of analysts’ average estimate of $0.26 per share. The company also completed the sale of its operations in Thailand on August 31st, which was part of the restructuring that is already improving profitability.
The company will pay its second quarter dividend of $0.18 to shareholders of record as of August 17th. I only added small amounts of BGC to my managed portfolios, but that was more because it rebounded from its $13 low extremely quickly.
3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48. Annual Dividend: C$0.84. Low Target: C$10. High Target: C$15.
8/31/15 Price: C$11.02. YTD Dividend: C$0.53 YTD Total C$ Return: 0.0%. YTD Total US$ Return: -11.6%.
Yieldco TransAlta Renewables reported its second quarter results. On a per share basis, Funds From Operations (FFO) and earnings both increased significantly because of the drop-down of its parent’s (TransAlta (NYSE:TAC)) Australian assets on May 7th. Cash Available For Distribution (CAFD) per share increased to C$0.24 for the quarter from the same period in 2014.
Despite these strong fundamentals and a 7.6% yield, the stock fell 14% in July and August, most likely dragged down by the poor performance of other (mostly lower yield) Yieldcos and the 5% decline in the Canadian dollar. (The Yieldco ETF YLCO was down 18% over the same period.) I thought it was already a great value befo
re the recent decline, and have been adding to my position in several managed portfolios.
4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. Annual Dividend C$0.30. Low Target: C$3. High Target: C$5.
8/31/15 Price: C$3.24. YTD Dividend: C$0.15 YTD Total C$ Return: 5.9%. YTD Total US$ Return: -6.4%.
Canadian power producer and developer (Yieldco) Capstone Infrastructure bucked the Yieldco and Canadian currency declines with a 3% gain in July and August. The gain was most likely due to provisional findings in the UK Competition and Markets Authority’s (CMA) evaluation of Capstone’s UK water subsidiary’s appeal in a regulatory matter against its regulator, OfWat. While Capstone seems likely to only get part of what it wants in the case, investors seemed to have been assuming that Capstone would get nothing at all. The market took the provisional findings as good news. This may have been because the CMA later stated that its evaluation would be extended by up to two months. If the CMA did not think that Capstone had strong grounds for appeal, it seems likely that it would not have felt the need for more time to evaluate the case.
Capstone also received an excellent in-depth write up by Spy Hill Research on Seeking Alpha. I recommend it highly to anyone who wants to become familiar with Capstone’s business.
I have not been adding significantly to my positions in Capstone in the last two months, but only because they are already quite large.
New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/31/2014 Price: C$13.48. Annual Dividend: C$0.62. Low Target: C$10. High Target: C$20.
8/31/15 Price: C$19.11. YTD Dividend: C$0.40 YTD Total C$ Return: 44.4%. YTD Total US$ Return: 27.6%.
Leading North American bus manufacturer New Flyer reported excellent results for the second quarter, well ahead of most analysts’ expectations. The company is reaping the benefits of consolidating its lead and streamlining its operations during the industry downturn over the last 5-7 years. CIBC, Cannacord Genuity, and National Bank Financial all increased their price targets or ratings in the days following the earnings announcement.
6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. Annual Dividend: €0.61. Low Target: €12. High Target: €20.
8/31/15 Price: €19.14. YTD Dividend: €0.61 YTD Total € Return: 45.2%. YTD Total US$ Return: 34.6%.
European bicycle manufacturer Accell Group reported that its first half net profit was up 21% compared to the first half of 2014 in July, and the stock took off, rising 20% in Euro terms and 18% in dollar terms for the month. The entire bike sector has been enjoying a strong tail-wind, outperforming other transportation industries (carmakers, automotive suppliers, truck manufacturers, and aerospace) for the first half of 2015.
SNS Securities increased its price target for Accell from Accumulate to Buy on September 1st, citing its relative undervaluation compared to other bicycle stocks.
7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02. Annual Dividend: $0.24. Beta 0.36. Low Target: $10. High Target: $20.
8/31/15 Price: $10.08 YTD Dividend: $0.12. YTD Total Return: -21.7%.
Biodiesel and specialty chemicals producer FutureFuel reported strong revenues but weaker profits in the second quarter. The decline in profitability was driven mostly by low oil prices (which determine the price of biodiesel.) Falling profits caused shares to fall as well, but insiders remain bullish, with two directors making substantial stock purchases in August and no insider selling.
8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35. Annual Dividend: $0. Beta: 0.52. Low Target: $5. High Target: $20.
8/31/15 Price: $4.60. YTD Total Return: -44.9%.
Solar and rail Real Estate Investment Trust Power REIT’s continued to decline slowly in July and August. I expect that investors are frustrated that the judge in the REIT’s civil case with its rail tenants Norfolk Southern Corp and Wheeling and Lake Erie will not make his ruling until the fourth quarter of this year.
Power REIT’s preferred shares, PW-PA have also been trading down. As I’ve said before, the 7.75% coupon is not in my opinion at risk and should be treated as return of capital due to the lawsuit. Because of this, I’ve been adding to my positions.
9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00. Annual Dividend: $0. Beta: 1.36. Low Target: $6. High Target: $16.
8/31/15 Price: $5.67. YTD Total Return: -19.0%.
The EPA’s Clean Power Plan should provide a good boost to energy service contractors like Ameresco, but investors seemed unimpressed. The stock also fell despite strong second quarter results, which exceeded analysts’ expectations for the fourth quarter in a row. My best guess as to why the stock remains in the doldrums is that it has been down for so long that investors have given up and stopped paying attention. If they were paying attention, the stock would almost certainly be advancing instead.
Two people who are paying attention are Director Francis Wiseski and President and CEO George Sakellar
is. Both have been making large and regular purchases of AMRC stock (and no insiders have sold) in the last year.
10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $6.50. Annual Dividend: ZAR 0.08 or $0.15 Beta: 0.78. Low Target: $5. High Target: $20.
8/31/15 Price: $6.08. YTD Dividend: $0. YTD Total South African Rand Return: 7.6%. YTD Total US$ Return: -6.5%.
Vehicle and fleet management software-as-a-service provider MiX Telematics announced earnings for the quarter ended June 30th, meeting analyst expectations and continuing the company’s trend of 15% annual subscription growth. However, the stock fell substantially over the two last months in part because of the general market decline, but also because it concluded its strategic review process without the sale of the company that many speculators had been betting on. The company stated that there had been “significant interest from prospective buyers,” so we can only assume that the offers were not at a price that management found attractive.
I believe MIXT is worth at least two or three times its current price, based on its rivals’ valuations. The lack of sale came as a bit of a relief to me: I had been worried that the company might agree to a sale below what I think it is worth. Instead, it resumed its dividend of 8 South African cents per year, and will pay dividends for the preceding 5 quarters (ZAR 0.10 or $0.19 per share) on September 18th. This resulting 2.5% annual dividend from a company that is growing earnings at over 15% per year underscores MIXT as a compelling value proposition.
Two months ago, I called TransAlta Renewables and Capstone Infrastructure the best buys in the list. Capstone was a good call, but TransAlta Renewables disappointed again, albeit not as much as most Yieldcos. I suppose I should not complain about getting one winner out of two in the market turmoil of the last two months. On average, my two picks were flat in Canadian dollar terms, but down 5.5% in US currency.
Right now, I see many excellent buying opportunities, and I don’t want to limit them to this list. On this list, I’ve currently very enthusiastic about TransAlta Renewables, Ameresco, and MiX Telematics. Elsewhere, I have been aggressively buying Enviva Partners, LP (NYSE: EVA), Innergex Renewable Energy (TSX:INE, OTC:INGXF), Pattern Energy Group (NASD:PEGI), and Abengoa Yield (NYSE:ABY).
It’s no coincidence that almost all of these picks have high yields. The market correction has been mostly due to overvaluation combined with worries of a worldwide economic slowdown. If that slowdown materializes, it will put downward pressure on interest rates, which in turn helps income stocks. The market turmoil itself is also reducing the pressure for the Federal Reserve to raise rates soon or quickly, and this also increases the value of long term income streams.
Although it’s been a tough couple of months in the stock market, a correction has been long overdue. The reminder that stocks can go down as well as up is likely to make investors pay more attention to the risks of the stocks that they buy. Portfolios like this one, which have a bias towards low risk stocks, should be relative beneficiaries over time.
That said, there is no guarantee that the correction is over, and so while there are currently a large number of very compelling investment opportunities, investors should also be looking at potential ways to free up capital if the opportunities become even more compelling in the near future.
Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF, REGI. I am the co-manager of the GAGEIP strategy.
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.