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January 30, 2017

Insider View on REGI

by Debra Fiakas CFA

Insider buying is not one of my regular screening criteria in selecting long plays in the small cap sector.  However, to learn a chief executive officer has taken out his/her check book to buy shares in their company is influential.  In November 2016, the CEO of biofuel producer Renewable Energy Group (REGI:  Nasdaq) reported an increase in his stake in the company in recent months.

With REGI shares just above the prices paid by the CEO just three months ago, it is timely to look more closely from the outside.

In the most recently reported twelve months, Renewable Energy Group produced $1.87 billion in total sales of renewable diesel and chemicals, resulting in a net loss of $71.9 million or $1.70 per share.  Those two metrics are only part of the story as the company also reported generating $52.2 million in operating cash flow in the same period.   Using its typically low-cost feedstock such as inedible corn oil and used cooking oil, the company lays claim to being a low cost biofuel producer.  Nonetheless, the company has come through a particularly tough period in 2015, when thin margins failed to deliver enough profit to cover fixed costs.  Yet even during this difficult period, operating cash flows remained positive.

Free cash flow, that is operating cash flows net of investment requirements, may be a more helpful metric to evaluate a renewable energy producer.  REG operates a dozen biorefineries in North America with total nameplate capacity just over 450 million gallons per year.  The company is moving aggressively to expand its footprint.  In November 2016, management trooped out to Iowa to stage a showy groundbreaking ceremony with Iowa’s high profile governor, Terry Branstad.  The group turned over first shovels on a project to expand its Ralston biorefinery capacity from 12 million to 30 million gallons.

The price tag for the Ralston expansion is estimated at $24 million.  This is easily fit into the company’s regular budget.  Renewable Energy invested $42.8 million into its plants in the first nine months of 2016.  Indeed, capital investment has averaged $54.6 million per year over the last three years.  Operating cash flows have been more than ample to cover capital investments into existing plant and equipment, leaving $29.5 million in average annual free cash flow.

REG management has had no difficulty in finding places to use that extra cash.  Approximately $84.4 million in cash has been used to acquire new operations since the beginning of 2013.  The most recent deal in March 2016, was the acquisition of a biodiesel refinery in Wisconsin owned by Sanimax Energy.  REG paid a total of $21.1 million for 20-million gallons in nameplate capacity in a combination of cash and stock.
A more significant deal was struck in August 2015, for a facility in Grays Harbor, Washington that added 100 million gallons to the company’s total capacity.  A total of $36.7 million in cash and stock valued at $15.3 million were paid up front.  An additional $5.0 million was promised contingent upon achievement of milestones in renewable diesel production in 2016 and 2017.

A growing, profitable operation should be of interest for most investors.  The one reservation that investors should have regarding REGI, is the possible fall out of favor for renewable energy producers.  REG management has come out in support of a recent proposal for the 2017 standard set by the Environmental Protection Agency for Advanced Biofuel Renewable Volume Obligation from 4.0 billion gallons to 4.28 billion gallons.  Biomass-based diesel is a direct beneficiary of the standard.  Given the antipathy expressed by the incoming occupant of the Oval Office toward the environment and climate, renewable energy may not be a particular priority.  Indeed, petroleum-based energy is most often the lips of Trump and his surrogates.  Hopefully, REG management made a good impression on Branstad while they were in Iowa to put a good word in for renewable diesel.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

January 23, 2017

Sustainable Investment Opportunity In 2017

by Garvin Jabusch

Lord Nicholas Stern recently said, “Strong investment in sustainable infrastructure—that’s the growth story of the future. This will set off innovation, discovery, much more creative ways of doing things. This is the story of growth, which is the only one available because any attempt at high-carbon growth would self-destruct [emphasis added].” More pointedly, the Investment Bank division at Morgan Stanley in 2016 advised clients that long-term investment in fossil fuels may be a bad financial decision, writing, “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels."

What both Lord Stern and Morgan Stanley understand is that the world has changed and our approaches to investment need to change with it. This is at the heart of what I do working in Next Economics and Next Economy Portfolio Theory.

In thinking about Next Economics and investing, then, it’s worth asking two questions. ”What will the world’s economy look like in 10 and 20 years?” And,” What would I like it to look like by then?”

Our answers should, at a high level, inform where we invest. In arriving at a well-informed thesis hinged on the economy’s ongoing evolution—rather than on the economy of the past—we can position ourselves to take advantage of high-growth areas, and we can have the effect of advancing a far more efficient economy, one with a better chance of thriving indefinitely. As a pop star once wrote (not the one who won a Nobel Prize), “If it's a future world we fear, we have tomorrow's seeds right here.”

Every year since founding Green Alpha, we’ve observed innovations emerge and compound like a fast-rolling snowball. Each innovation, improvement, and tool in the economy is smarter than the last and is immediately put to work in the development of a new generation of smart tools, evidently ad infinitum. I'd write a book with a title like Special Topics in Next Economics 2017, but the pace of innovation is so fast that it would be out of date before I could get it done. Still, there are a few trends that I think merit our attention, and our optimism.

Renewable energies.

They’re cheap and getting cheaper. In 2016, we saw the price of solar-generated electricity fall below that of wind, making it the least expensive source of power generation available, half the price of new coal. Wind and solar, being tech-based (as opposed to commodity-based), will continue getting cheaper, and will generate more and more of the world’s energy until they ultimately have most of the energy market share. At some point, markets will understand solar for what it is and begin to value it appropriately. Companies like First Solar, Inc., and Canadian Solar Inc. are leading the transition in world energy, and if they continue to work on innovation, growth, and maintaining strong fundamentals, they could find themselves among the world’s leading power companies.

Is renewable energy adoption at scale for real? President Obama just wrote about the “irreversible momentum of clean energy” in Science, and many of the world’s largest companies are on the same page, working toward running all operations on wind and solar. The poster firm for this is Google Alphabet, which says it will hit its goal of 100% renewable power for all operations this year. The company is a huge consumer of power, and its transition to wind and solar is resulting in large emissions cuts for the economy, as well as business stability and cost controls for their business. Cities are getting in on this, too, with San Francisco, San Diego and others planning to run entirely on renewables by 2035 or sooner. What about arguments that solar makes electricity rates go up? Well, in some places that use the most solar, the opposite is happening, and utility customers are seeing rates fall.

Inevitably, all this adds up to jobs in renewables. Though coal jobs were a focus of the 2016 presidential election, renewables are where more paychecks are. Wind power supports 88,000 jobs, while close to 373,807 U.S. workers are currently employed in solar, a 25% rise in 2016—and that number is predicted to rise to 420,000 workers by 2020. Wind power employs 101,738 workers, a 32% increase over 2015. As of October, coal employed fewer than 54,000, according to the Bureau of Labor Statistics. It has been surprising to many observers, like Jigar Shah, that these remarkable economic changes don’t yet get more recognition.

Across the country, wind power has become the “new corn” for Red State farmers, providing a steady source of income in low-income, rural areas. In fact, the 10 congressional districts that produce the most wind energy are represented by Republicans.   California and other states, meanwhile, vow to push ahead in the fight against climate change—with or without President Trump's blessing.

China is doing more to develop and install renewable energies than any nation. Already the world leader in wind and solar capacity, China now says it will “plow $361B into renewable power generation by 2020, and create more than 13 million jobs” (via Reuters), leaving the U.S. in the dust. According to The Guardian, “China now owns five of the world’s six largest solar-module manufacturing firms and the largest wind-turbine manufacturer.” It’s also far and away the world’s leader in electric vehicle production and sales. Also, China is spending over $500 billion to expand high-speed rail. Its war on pollution and commitments to mitigating global warming are real, and China clearly is happy (and even excited) to accept the leadership mantle in sustainable economics, a title many perceive the U.S. has abdicated. Having taken the reins on renewable energy and technology leadership, China is now shoring up the case for its moral leadership as well, made apparent by Beijing’s recent announcement that it will now ban all imports of ivory.

Renewable energyadoption, transportation, storage.

What about renewable energy adoption, plus zero-emissions transportation, plus energy storage? Well, Tesla. I don’t mention this company particularly as a stock recommendation but rather as a primary catalyst and the firm at the nexus of the Next Economy. It’s close to impossible to overestimate Tesla’s importance. Tesla re-introduced, made sexy, and popularized electric cars at a time when major automakers and oil companies were trying to prevent that from ever happening. Tesla’s ambitious approach to battery storage for cars and renewable energy has resulted in their Gigafactory, capable of doubling the world’s current annual output of lithium-ion batteries and lowering costs commensurately. Don’t think storage is a particularly big deal? Consider just one example: After the massive Porter Ranch natural gas leak, the City of Los Angeles decided to invest in battery backup for its electricity supply instead of gas, and has hired Tesla to provide some systems. LA has been among the first big cities to make this move, but then, it was among the first to be bitten by the risks of overreliance on a fossil fuels.

What of Tesla’s and others’ plan to scale up mass-market electric cars? Will that become huge or remain niche?  Consider these developments: Germany, Holland, and Norway have all taken steps to ban internal combustion engine-driven passenger vehicles between 2025 and 2030; more major economies surely will follow. India, for example, is now considering a similar move. Yes, these are ambitious goals that could easily be missed, but even if these nations get only halfway to their targets, it is not only incredibly bullish for any carmaker selling electric vehicles but also bearish for oil, since ground transportation is its primary source of demand.

Farming.

A New Yorker article said it best, “Vertical farming can allow former cropland to go back to nature and reverse the plundering of the earth.” Vertical farms are revolutionary for a number of reasons:

  • They uses a fraction of the water required for traditional farming,
  • They’re close to or within urban centers meaning no need for long-haul transport,
  • Their indoor location eliminates need for pesticides and herbicides, thereby mitigating multiple systemic risks (e.g., ocean pollution from agricultural runoff),
  • They can be maintained at a lower cost than conventional farming,
  • And they’re more resilient to climate change.

No question, vertical farming is what’s next. Business Insider has posted a nifty photo essay of an indoor farm in Brooklyn if you’re interested in how it looks.

Additional key areas…

Computing power. It’s becoming so massive that our collective ability to assimilate data is now and will increasingly be unprecedented. The question will become, what can we do with this amazing ability?  And let us not forget the key related areas of cybersecurity and fast-emerging artificial intelligence and robotics, all of which are ushering in an era of heretofore unimagined economic efficiencies. What about the Internet of Things? After a slow start, it is coming into its own: “The falling cost of sensors and connectivity means the internet of things is finally a reality.” Lots of opportunity there. In medicine? Don’t get me started on CRISPR-Cas9, a technique to edit genomes, thus opening up endless possibilities in medicine and biology, with equally endless humanitarian, ecological, and commercial applications.

Okay, enough. We’re overwhelmed with innovations and breakthrough after breakthrough. We get it. For those of us trying to assimilate these changes and find the best path forward, the most important point is this: It’s in seeing the world for what it is becoming and not for what it was that investors and markets are going to allocate capital to manage risks and profit from new opportunities. This all leads, not incidentally, in the opposite direction from fossil fuels.

It is funny and yet poignant that some astrophysicists classify we humans as constituting merely a Level Zero Civilization, with nearly infinite scientific and technological prowess yet to be realized. Well, I’m not qualified to evaluate that theory, but what I do know is that so much progress is being made in so many areas, that I wake up every day excited to think about the world anew and uncover its opportunities.

An earlier version of this post originally appeared on worth.com.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha Next Economy Index, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club's green economics blog, "Green Alpha's Next Economy."

January 16, 2017

Power REIT: Why David Should Defeat Goliath

by Al Speisman, Esq.
Al Speisman
Al Speisman, Esq.

Power REIT1 (NYSE MKT:PW) is a micro-cap Real Estate Investment Trust with assets generating consistent, secure cash flow.  Power REIT’s assets consist of long-term railroad infrastructure as well as 600 acres of land leased to solar farms. Power REIT’S current underlying value of $11.07 per share is delineated in a shareholder presentation on Power REIT’S Web-Site. This valuation does not factor in potential success in Power REIT’s pending Federal Appeal.

A recent article appearing in Value Investors Club lists Power REIT’s Net Asset Value at $10.62 per share plus a “lawsuit optionality value” of $1.09 or a total current valuation of $11.71 per share.  The Value Investors Club analysis assumes a 15% probability of success in the appellate litigation.  I believe this greatly under-estimates Power REIT's chance of success, and the company has a strong chance of prevailing on its appeal.  The potential damage recoveries should it succeed are huge.

The Case

Power REIT has a CEO with vision, persistence and patience: David Lesser.  Mr. Lesser has been involved for several years in pursuing Norfolk Southern on potential lease violations and defaults. The Power REIT/Pittsburgh & West Virginia Railroad (PWV) litigation with Norfolk/Wheeling has been going on for five years. The Appellant Brief (PW), the Appellee Brief (Norfolk/Wheeling), and Appellant Reply Brief (PW) have been filed with the Third Circuit Court of Appeals (Federal Court).

Power REIT’s appeal with Norfolk Southern and Wheeling & Lake Erie Railway (Case No 16-1195) is ripe for a decision. The case “will be submitted on the briefs” to an Appellate panel of three justices on Thursday, January 19, 2017.  As is the norm in the vast majority of 3rd Circuit cases, “there will be no oral argument.”  It is reasonable to believe that the appellate decision should be forthcoming during the First Quarter of 2017.

My summary of Power REIT’s position on the appeal follows.  My primary source is Attorney  Steven A. Hirsch ’s Amended Appellant Brief and Reply Brief.  It is enlightening to review both of these in conjunction with the original lease document.  Mr. Hirsch's background and the outstanding job he has done preparing the appeal both lead me to believe it has an excellent chance of success.

The Lease

My overall assessment is that the lease itself is the key to this case, and the lease is the “blueprint of the deal.” 

Power REIT’s subsidiary, Pittsburgh and West Virginia Railway (PWV), owns 111.21 miles of rail line going between Pennsylvania and Ohio.  It also owns 5 short branch lines comprising an additional 20.38 miles.

In 1962, PWV entered into a 99-year renewable lease with Norfolk Southern (hereinafter “Norfolk”) with a fixed base rental of $915,000 per year plus “Additional Rent.”  Additional Rent includes, among other things, “deduction-based additional rental.” (Federal tax deductions for depreciation, amortization, etc.)  Norfolk is also obligated to pay all expenses Pittsburgh & West Virginia Railroad incurs when they come due and assumes “all obligations” Pittsburgh & West Virginia Railroad incurs relating to Pittsburgh & West Virginia Railroad performing its legal duties and protecting its rights under the terms of the lease.

Key lease provisions include:
  • Leasing of Pittsburgh and West Virginia Railway’s property including the 111 mile stretch of Railroad and the 5 short branch lines (limited exceptions excluded). (See Section 1.)
  •   Pittsburgh and West Virginia Railway property that Norfolk Southern determines to be not “necessary or useful” may be sold, leased or otherwise disposed of” by Norfolk Southern and shall be an indebtedness to Pittsburgh and West Virginia Railway. (See Section 9.)
  • When lease terminates, whether by failure to renew or by default, leased property “shall be returned to Lessor in the same condition as it (was) in at the commencement of the term of this lease, reasonable wear and tear excepted….” (See Section 11.)
  •  Norfolk Southern shall return enough property at the termination of the lease to run the railroad for one year with such property being in unchanged condition. (See Section 11.)
  • A default under the Lease requires Pittsburgh and West Virginia Railway to provide 60-day written notice to cure. Upon determination of default, Pittsburgh and West Virginia Railway is entitled to the return of its property. (See Section 12b.)
  •  Damages from a default of the lease include Interest at 6% from date of default, reasonable attorneys’ fees and expenses. Also, all remaining indebtedness becomes due when the lease is terminated. (See Section 11.)
  •  Indebtedness between Norfolk Southern and Pittsburgh and West Virginia Railway is capped at 5% of the value of Pittsburgh and West Virginia Railway’s total assets “as long as any of the obligations of lessor (Pittsburgh and West Virginia Railway) which have been assumed by lessee (Norfolk Southern) remain outstanding and unpaid.” (See Section 16a.)
During 2011, David Lesser became CEO of Pittsburgh and West Virginia Railway.  He pinpointed the injustices involved in the Norfolk Southern transactions.

Norfolk Southern attempted to sell certain property and Power REIT challenged Norfolk Southern, alleging among other things, that it was entitled to attorney fees for reviewing and acting upon the proposed sale.  Norfolk Southern, trying to avoid a “default” under the lease terms, filed a Declaratory Judgment action in Federal District Court.  The District Court determined by summary judgment that Norfolk Southern had not defaulted.

A key aspect of the case, which goes to the extent of the damages recoverable by Power REIT, is whether Norfolk Southern and/or its sub-lessee, Wheeling & Lake Erie Railway Company, defaulted on the lease.

Four (4) potential defaults under the lease are being appealed by Power REIT:
1. Norfolk Southern violated Section 9 of the lease by failing to pay or record as an indebtedness almost $14 Million from “dispositions” of Pittsburgh and West Virginia Railway’s Property.

2. Norfolk Southern violated Section 11 by allowing resource extraction from these unrecorded dispositions, thus permanently altering Pittsburgh and West Virginia Railway property.  Each time resource extraction occurs it should be construed as a “permanent transfer”.

3. Norfolk Southern violated Section 4(b)6 by failing to pay Pittsburgh and West Virginia Railway’s attorney fees and litigation costs.

4. Norfolk Southern violated Section 16(a) which imposes a 5% cap based upon the assets of Pittsburgh and West Virginia Railway.  The section requires Norfolk Southern to pay any excess indebtedness in the Transactions/Settlement Account beyond the 5% cap to Pittsburgh and West Virginia Railway.  Confirmation of the indebtedness is evidenced by Norfolk Southern’s course of performance with the IRS.  Norfolk Southern prepared Pittsburgh and West Virginia Railway’s tax returns through 2012. Norfolk Southern’s tax returns, as well as the tax returns prepared by Norfolk Southern on behalf of Pittsburgh and West Virginia Railway, acknowledge and affirm the outstanding indebtedness in the Transaction/Settlement Account. (For greater detail and analysis of the tax treatment involved, see the Alpern Rosenthal expert report dated 3/29/13 concluding the Settlement Account on Norfolk Southern’s financials is an indebtedness/liability to PWV.)  Based upon that report, the Settlement Account balance exceeded five percent (5%) of the value of the assets on a market capitalization basis, of each year ending December 31, 1983 through December 31, 2012.  By December 31, 2012, the balance of the Settlement Account, per Norfolk Southern, was $16.66 Million and exceeded five percent (5%) of the value of Pittsburgh and West Virginia Railway’s assets by $15.91 Million.
Potential Damages include:
1. Recovery of Power REIT/ Pittsburgh and West Virginia Railway Attorney Fees: approaching $4 Million.

2. Recovery of Interest:  Section 11, (Termination of Lease) provides for interest at 6% per annum from date of default.

3. The Transactions Account reflects an admitted indebtedness of approximately $17 Million as of 2012. Of that amount, approximately $16 Million exceeds the 5% cap.  No updates of the current Transactions Account balance have been provided by Norfolk Southern to Pittsburgh and West Virginia Railway.

4. An additional $14 Million in dispositions have been identified by Pittsburgh and West Virginia Railway but have not been recorded by Norfolk Southern in the Transactions Account.

5. If the Court determines a Norfolk Southern default has occurred, under Section 11, Pittsburgh and West Virginia Railway is also entitled terminate the Lease and to “such machinery, equipment, supplies, motive power, rolling stock and cash as will be sufficient to enable Lessor to operate the demised property for a period of one year after the return thereof….”. A key variable in determining the amount owed to Pittsburgh and West Virginia Railway would require analysis of Wheeling & Lake Erie Railway Company’s detailed financial statements.

6. If the Court rules Norfolk Southern has defaulted, the entire property reverts back to Pittsburgh and West Virginia Railway.  The rental established of $915,000 per year was established in 1962 and does not escalate and is likely significantly below the current market value.

7. What Pittsburgh and West Virginia Railway could actually lease the property for in today’s market is speculative. Norfolk Southern and Wheeling & Lake Erie Railway have refused to provide operational and income data to Pittsburgh and West Virginia Railway (also a potential default based on a failure to comply with a contractual right contained in the lease that allows Pittsburgh and West Virginia Railway to inspect the  books and records of Norfolk Southern).  However, based upon discussions with railroad consultants, a generic valuation range may be in the range of $1 Million per track mile. Pittsburgh and West Virginia Railway has a total of 131.59 track miles. Note that in recent years, Wheeling & Lake Erie Railway has experienced significant traffic growth as a result of Marcellus Shale activity.

8. One could speculatively project that with either a new or renewed lease, annual revenues to Pittsburgh and West Virginia Railway would be between $5 Million to $10 Million per annum.  That projected valuation does not include potential mineral rights on Pittsburgh and West Virginia Railway land.

Summary

Litigation, especially Appellate Litigation, can have a life of its own. Recent articles written on Power REIT have predicted a probability of success in the area of 10 to 15 percent. However, after extensive review of the ongoing litigation, including in depth review and analysis of the facts and pending appellate briefs before the 3rd Circuit Court of appeals, I sincerely belief that David (Pittsburgh and West Virginia Railway) should defeat Goliath (Norfolk Southern) based on the merits of the case. Ultimately there is no way to know if the appeal will be successful….

Endnote

1) Price (1/13/17):  $6.88.  Shares Outstanding (in M) 1.78 Million.  Market Cap:  12.28 Million. Core Funds from Operations Annualized (FFO) .50 to .60.  Net Asset Value (NAV):  $10.62 to $11.07 (assumes Power REIT loses appeal)

ABOUT THE AUTHOR: Al Speisman is the principal of Speisman Law, LLC. As an investor, he focuses on undervalued, micro-cap companies. He received his M.B.A. from Northwestern University’s Kellogg Graduate School of Management with concentrations in finance and accounting. Mr. Speisman earned his Juris Doctorate degree from The John Marshall Law School.

DISCLOSURE: Al Speisman is a significant shareholder in Power REIT.  On January 3, 2017, he filed an Amended 13G.

DISCLAIMER:  Al Speisman is not employed with Power REIT.  Nor is he a Board Member. The above article should not be construed as legal or financial advice.  It’s strictly the opinion of the author.  For specifics regarding Pittsburgh and West Virginia Railway’s legal position on the appeal, Power REIT’s appellant briefs should be reviewed in detail in conjunction with the lease. The appellee brief filed on behalf of Norfolk Southern/Wheeling should also be reviewed. These, as well as other documents, are readily available on Power REIT’s website: www.pwreit.com. Go to PWV Litigation Update under the “Investor Relations” tab.

Other sources of articles online to consider reviewing when evaluating Power REIT as an investment include, but should not be limited to, the most recent Power REIT Investor Presentation on Power REIT’s website: www.pwreit.com, Tom Konrad’s numerous articles on Power REIT, several articles published with Seeking Alpha, Forbes On Line, AltEnergyStocks.com, and most recently Value Investors Club (VIC).
Investors are also encouraged to participate in dialogue on this article via http://investorshub.advfn.com/Pittsburgh-&-West-Virginia-Railroad-PW-20486/ as well as via the Seeking Alpha post of this article.


January 15, 2017

Corn Ethanol Emissions Savings Skyrocket

Jim Lane

In Washington, an explosive new peer-reviewed report from ICF found that greenhouse gas emission reductions from typical corn-based ethanol production have soared to 43 percent compared to 2005-era gasoline. The report projects that by 2022, corn-based ethanol will achieve a 50 percent reduction, and could reach “76 percent in 2022 if there is more widespread adoption of optimal crop production and biorefinery efficiency.”

The report, issued by the U.S. Department of Agriculture, based its revolutionary emissions math on a November 2014 study by researchers at Iowa State University, which found that farmers around the world have responded to higher crop prices by using available land resources more efficiently, rather than expanding the amount of land brought into production.

Indirect land-use change modeling had suggested for years that higher crop prices would lead to rampant land conversion and result potentially in a massive loss of Amazonian rainforest — but the study found that the hard data revealed that farmers acted quite differently. In addition, ethanol production has become more sustainable through modern practices such as generating process heat via natural gas or biogas instead of burning coal, and through higher product yields.

We have the key visual highlights of the report in our Multi-Slide Guide, here.

To view a copy of the USDA analysis, click here.

Reaction from stakeholders

Growth Energy CEO, Emily Skor

“This USDA report clearly demonstrates what we have known for years – that biofuels like ethanol are the most effective alternative to fossil fuel and a critical tool for reducing greenhouse gas emissions and improving air quality. Ethanol is an earth-friendly biofuel produced in America that not only significantly reduces greenhouse gas emissions, but also improves engine performance and saves consumers money at the pump.

“As the report notes, corn ethanol has the potential to reduce greenhouse gas emissions by up to 76 percent when accounting for advancements in production efficiency techniques and sustainable agricultural practices. The ethanol industry works every day to improve production processes, ensuring that ethanol will continue to provide even greater benefits well into the future. The ethanol industry is proud to provide a product that helps clean our air, improves engine performance, and saves consumers money when they fill up their tank.”

Renewable Fuels Association President and CEO Bob Dinneen

“We are pleased that USDA’s analysis reflects the tremendous efficiency gains our industry has made and continues to make. This is not your grandfather’s ethanol industry. Today’s farmers and ethanol producers use less energy than ever before, have lowered costs with new value-added markets and technologies, and evolved into the most cost-effective, cleanest-burning source of octane on the planet. Moreover, as this study proves, concerns about land use change were terribly overblown, and U.S.-produced corn ethanol is a stone-cold winner for the environment, providing dramatic reductions in greenhouse gas emissions.”

“USDA and Secretary Vilsack have done a tremendous service by releasing this study after such a comprehensive and thorough analysis, using real world data and peer-reviewed assumptions. This should answer the critics who have repeated Big Oil’s polemic that renewable biofuels somehow increase carbon emissions.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 08, 2017

Ten Clean Energy Stocks For 2016: Year In Review

Tom Konrad, Ph.D., CFA

2016 was generally a good year for the stock market, but the average clean energy investor did not share in the gains.  Clean energy investors naturally gravitate toward exciting stocks developing solar and, more recently, electric vehicles.  These technologies are bringing great benefits to the planet and customers (including me- I installed a solar array on my home in in 2014, and my wife and I just bought a Toyota Prius Prime plug-in.) 

Investors' lousy returns are due to a common problem in sectors with rapidly improving technology: Competition within the industry constantly undermines profitability.  I've been warning about this problem since 2009, and I believe that this awareness is a large part of the reason that my "10 Clean Energy Stocks" model portfolios have outperformed the most widely held clean energy ETF, PBW, in every year except 2013.  Over the nine model portfolios (2008 to 2016) have had positive returns in six of those years, compared to just two (2009 and 2013) for PBW.

2016 was no exception to this trend, with the Ten Clean Energy Stocks for 2016 model portfolio up 20%, while PBW fell 22%.  Again, the culprit was solar, with the industry suffering from overcapacity and rapidly falling module prices.  These low solar module prices are great for the planet and have made new solar farms able to compete with fossil generation purely on price, but they lead to non-existent profits for solar companies and investors.

With this backdrop, the list has increasingly featured a new class of stocks, Yieldcos.  Yieldcos are the customers of wind and solar manufacturers because they invest in wind and solar farms.  As an added bonus, they pay out most of their cash flow in the form of dividends to investors.  Given my focus on Yieldcos and other green income stocks, using the beleaguered PBW as a benchmark for my list is increasingly unfair.  Fortunately, a Yieldco ETF (YLCO), launched in May 2015.  In 2016, I used YLCO as a benchmark for the seven income stocks in the list, and PBW as the benchmark for the remaining three.  The benchmark for the whole model portfolio was a 70/30 weighted average of the returns of the two.
2016 review composites
As you can see in the chart above, the change in benchmark did not prevent my model portfolio from producing a total return that was a full 24% ahead of its benchmark, but at least the comparison was fair.

The Green Global Equity Income Portfolio

Also shown in the chart is the Green Global Equity Income Portfolio, a private strategy I have been managing in separate accounts since the end of 2013.  I've been exploring options for bringing this strategy to the public for the last year.  Despite an excellent track record (annualized returns of 10.6% since inception) I have not yet found a mutual fund company willing to take it public. There is also a hedge fund style version of the strategy which can use shorting, uncovered put selling, and leverage.  This version of the strategy has produced a 13.4% annualized return over three years.

While GGEIP is not yet available as a mutual fund, I created a long-only version on the Motif platform, the Green Equity Income Motif 2016 last year.  Since GGEIP is an active strategy, I plan to launch a new version to reflect portfolio changes at least once a year. 
If you're interested in trying Motif , you can get 3 months of free trading at this link.


 


Investment Advisor Jan Schalkwijk, CFA at JPS Global Investments now offers a more frequently re-balanced version of GGEIP to his clients.  The Folio version now has a year's track record, and it is performing in line with the other versions of GGEIP. 
FolioFN Green Income model
So far, this is just a model without client money, so the track record does not include trading costs or fees, both of which are likely to reduce real-world performance.  When trading real money, the actual trade prices can be materially different from those of a model portfolio... just as people's results following my model portfolio will be significantly different from the numbers you find here.  And, of course, past performance is no guarantee of anything, let alone future results.

If you're interested in investing in the 10 Clean Energy Stocks for 2017 model portfolio (whatever the fture results may be), I just made it available on the Motif platform as well (or you can buy the stocks individually through your broker.)
 

How The Stocks Fared

The following chart (click for full-size version) shows how the individual stocks fared.  The green (yellow) bars show the High (Low) Target I gave for each at the start of the year.  A few green bars are missing where the high target is off the scale of the chart.  I predicted that most of the stocks would end the year between the high and low targets.  Only Enviva ended outside the range, finishing about 1% above the high target.

10 for 16 Full Year Stock
Performance

In the discussion below, I'll look at how each stock performed for the year, and why.  For those stocks not included in 10 Clean Energy Stocks for 2017, I'll talk discuss my outlook and why they were dropped.  My outlook for stocks included in the 2017 list can be found here.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  12/31/15 Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
12/31/16 Price:  $18.99.  2016 Dividend (Yield): $1.58 (7.55%).
Current Yield: 8.6%. 2016 Total Return: -2.0%

Wind Yieldco Pattern Energy was hurt early in the year due to low wind production because of El Nino weather conditions, and late in the year because management realized that internal accounting controls had become inadequate as the company grew.  Management does not believe that any of its numbers were actually misstated and is working to correct the problem.  I'm wildly enthusiastic about the stock at the current price, and it is my top pick in the 2017 list.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  12/31/15 Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
12/31/16 Price:  $26.80.  2016 Dividend (Yield): $2.025 (11.2%). Current Yield: 7.9%. 2016 Total Return: 60.7%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners was the biggest winner for the year.  Although a 7.9% current yield is still decent, I expect higher yields from MLPs than other stocks because of the higher and more complicated taxes on distributions. 

I also worry that if Donald Trump chooses to ignore the United States' obligations under the Paris agreement (as it looks very likely that he will), Europeans may also slow down their efforts to reduce greenhouse gas emissions from electricity generation.  This would affect Enviva's potential long term growth because its biggest customers are European coal plants which have been converted to burn wood pellets instead.  I also expected that states plans to comply with Obama's Clean Power plan would have led to some US coal plants also being converted to burn wood pellets.  That prospect is also less likely with Trump as President.

No matter what happens in Europe, existing contracts are long term and unlikely to be at risk.  In fact, the European Commission recently approved a subsidy to help Enviva's customer, Drax, pay for wood pellets produced by Enviva and burned in a converted coal power station in North Yorkshire, in the UK.

The combination of less attractive valuation and diminished growth prospects led me to drop Enviva from the 2017 list and sell my position.  I will continue to watch the stock and buy again if it falls to more attractive levels.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
12/31/15 Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
12/31/16 Price:  $19.80.  2016 Dividend (Yield): $1.638 (10.1%). Current Yield: 8.5%.  2016 Total Return: 35.1%

Ethanol production MLP and Yieldco Green Plains Partners also faces risks from a Trump administration.  The oil industry hates the EPA's Renewable Fuel Standard (RFS), which requires a minimum volume of ethanol to be blended with gasoline, and Trump has strong ties and large investments in the industry.  His likely cabinet is also filled with oil men.

This uncertainty, along with a less attractive valuation due to gains in 2016 have led me to drop GPP from the 2017 list and sell my stake.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  12/31/15 Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
12/31/16 Price:  $15.36.  2016 Dividend (Yield): $0.95 (6.8%). Current Yield: 6.5%. 2016 Total Return: 17.8%

Yieldco NRG Yield's (NYLD and NYLD/A) seems likely to remain largely unaffected by a Trump administration.  Since its valuation remains attractive, it is in the 2017 list.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  12/31/15 Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
12/31/16 Price:  $3.95.  2016 Dividend (Yield): $0.275 (4.9%). Current Yield: N/A.   2016 Total Return: -21.2%

Yieldco Terraform Global struggled with its former sponsor Sun Edison's (SUNEQ) bankruptcy.  This impacted its ability to file timely financial reports, and led to significant uncertainly about the company's true value.

The company has begun to release financial data and regain compliance with NASDAQ listing requirements.  I expect the company to be bought by a large company in 2017, possibly in the next few months.  I expect the sale price will be between $4 and $6 per share, most likely between $4 and $5.  Given the relatively modest expected gain, and the fact that I might need to find a replacement early in the year, I have dropped GLBL from the 2017 list.  I maintain my personal position in the stock and in GGEIP.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  12/31/15 Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
12/31/16 Price:  $18.99.  2016 Dividend (Yield): $0.93 (6.5%).  Current Yield: 6.3%  2016 Total Return: 6.5%

Clean energy financier and REIT Hannon Armstrong has fallen over the last two months due to rising interest rates and concern that it might lose its status as a REIT.  I feel the risk of a potential loss of REIT status has been overblown. 

Hannon Armstrong remains in the 2017 list.  I have been adding to my position, which I had reduced for re-balancing when the stock was in the $22 to $25 range.

I almost dropped Hannon Armstrong from the list last year given the plethora of highly attractive Yieldcos at great valuations at the time.  This year, keeping it was a very easy decision.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  12/31/15 Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
12/31/16 Price:  C$14.34.  2016 Dividend (Yield): C$0.88 (8.5%). Current Yield: 6.0% 2016 Total Return (US$): 52.6%

Canadian listed Yieldco TransAlta Renewables' prospects are unaffected by political developments in the United States, but its large gains in 2016 have given it a less attractive valuation.  It also owns significant natural gas assets, making it less green than most of the Yieldcos.

Although the RNW is not in the 2017 list, I maintain a reduced position, and might increase my stake if the price falls.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
12/31/16 Price:  $9.70.    2016 Total Return: 4.4%

Advanced biofuel producer Renewable Energy Group, like ethanol producers (see the Green Plains Partners discussion above), is potentially more vulnerable to action by an administration skeptical of renewable energy than are Yieldcos.  

If the EPA's incentives for biodiesel and renewable diesel remain unchanged, the company's profits and stock price have the potential for explosive gains.  That prospect is far from certain, however, so I have dropped the company from the 2017 list and greatly reduced my personal holdings.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. 12/31/15 Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
12/31/16 Price:  $6.19 / R3.20.  2016 Dividend (Yield): R0.08/$0.138 (3.3%) Current Yield: 2.4%  2016 Total Return: 51.1%

Software as a service fleet management provider MiX Telematics is a significant potential beneficiary of a Trump administration.  Many of MiX's largest clients are part of the global oil and gas industry.  The drilling revival that Trump hopes to bring about should lead these customers to buy more vehicles, and they pay MiX for fleet management on a per-vehicle basis.

Despite MiX's significant gains in 2015, a low priced stock buyback and the improving economic backdrop return the company keep MiX Telematics in the 10 Clean Energy Stocks list and my portfolio for the third year in a row.  I liked MiX at $6.50 at the start of 2015, liked it more at $4.22 a year ago, and still like back at $6.50 today.  The share price does not reflect the advances the company has made over the last two years, nor does it reflect MiX's underlying value.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
12/31/16 Price:  $5.50.  2016 Total Return: -9.2%

Energy service contractor Ameresco looked to be recovering from a long slump before the November election.  This recovery was at least in part driven by the Obama administration's efforts to improve the energy efficiency of government operations.  Although the Republicans and Trump are not openly hostile towards energy efficiency in the way they are towards renewables, it seems unlikely that it will be a priority for them. 

At worst, President Trump could remove many of Obama's energy efficiency targets for government operations with the stroke of a pen, cutting into Ameresco's future business.  With these risks in mind, I dropped Ameresco from the 2017 list and sold all my personal holdings.

Final Thoughts

The incoming President and Congress are skeptical of climate change and have yet to recognize that clean energy is far more effective at creating good paying domestic jobs than traditional fossil fuels.  Trump himself is highly unpredictable and many of his election promises, if implemented, are more likely to harm than help the US and world economy.  In particular, promises of increased spending and tax cuts could send the deficit and interest rates soaring.  Promises to talk tough and renegotiate trade deals might even lead to a global trade war, with crippling effects on the world economy.

Against this uncertain and potentially volatile backdrop, the valuations of many defensive clean energy stocks remain attractive.  A significant allocation to cash seems prudent, but investments in defensive, attractively valued companies such as my 10 Clean Energy Stocks for 2017 could still pay significant rewards.

Disclosure: Long HASI, MIXT, RNW/TRSWF, PEGI, NYLD/A, REGI, GLBL.  I get $1 when someone buys any of my created Motifs.

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.

January 05, 2017

Carbon Negative Impacts from Biomass Conversion

By Andrew Grant, Biomass Power Projects, LLC, Lee Enterprises Consulting

Canada, New England, and California all have Carbon Credit programs to achieve GHG reduction goals. Several forms of biomass diversion from landfills, farms, and other biomass – dependent GHG sources are already in operation to support significant GHG reductions. Examples of GHG reductions are given, and the carbon impact of the different commercially available biomass to GHG reduction processes are described.

The three groups of commercially guaranteed biomass conversion processes are:

1. Power Generation, Steam Generation, and CHP: from the combustion of biomass wastes. This industry, with about 100 independent units in operation in the US, is based upon pulp mill technology and includes fluid beds, pulverized fuels, and suspension grate technologies matched to well-proven emissions controls. High pressure steam is generated and drives turbines to make power.

While fluid beds can use fuels up to 65 % water, e.g. sludges, most units use waste woody biomass from a variety of sources, and provide an important regional waste disposal service in the Circular Economy. The GHG reduction is site specific – landfill diversion of biomass is strongly GHG Negative, while 100 % forestry waste fuel is approximately GHG neutral.

2. Anaerobic Digestion: AD is firmly established as the leading method of converting high moisture content organic wastes first to methane-rich gas, thence to power, pipeline gas, CNG / LNG. AD’s lower conversion efficiency and higher specific capital cost is offset by a consistent GHG reduction due to the sources of its biomass feedstocks, and in many cases by wider socioeconomic benefits in disposing of wastes.

3. Thermal Conversion to Hydrocarbons: This category includes simple pyrolysis, classical and advanced gasification processes, and direct catalytic conversion, with end products ranging from crude distillate oils, synthesis gas for all applications, and catalyst-tailored products. These processes generally have a high conversion efficiency, and their GHG reduction impact is largely a function of their biomass sources.

Power Generation, Steam Generation, and CHP

Over 100 US biomass Independent Power Producers, and our many biomass industrial and municipal Combined Heat and Power generators, do not grow and burn trees – they cannot afford to do so at current power prices. They all use some form of waste biomass fuel, often diverting the wastes from landfills. They cannot afford to plant and harvest either trees or other ‘energy crops’, even though such plantations have been tried.

The range of waste biomass fuels is wide – forestry wastes, including sawmill wastes, wastes from wood products manufacturing, non-recyclable waste paper, recycled paper mill wastes and sludges. In addition, biomass plants use wood waste diverted from municipal landfills to avoid methane generation, clean wood from construction and demolition sites, utility transmission line right-of-way clearance and urban tree removals – a huge volume. Finally, there is process waste from biodiesel and cellulosic fuels and chemicals production, agricultural wastes, straw and husks from grain crops and grain processing.

Some biomass plants, such as municipal Waste-to-Energy plants, combine recycling with power generation. The US has about 80 WtE biomass power plants, operating in compliance with emissions regulations. These third generation WtE plants, like those in Europe and the newer WtE plants being built in China, exhibit high reliability and extremely low emissions as the result of several decades of continuous process improvement.

The carbon footprint of biomass power plants is generally neutral as determined by UE EPA and US Department of Energy. Each location should calculate its own particular carbon footprint. Some biomass power is strongly carbon-negative, owing to the reduction in landfill methane emissions when biomass is diverted, even with landfill gas recovery, as shown below. Additional reductions in carbon footprint can be achieved by the use of biodiesel and renewable LNG or CNG in trucks and equipment – a growing trend.

Carbon Negative – a Simplified Calculation.

Dry wood consists of a mixture of cellulose, hemi-cellulose, and lignin. The ash-free chemical composition of wood can be represented either as C6H(H2O)6, or more simply as CH2O. CH2O is used below for the approximate calculation of the amount of methane, CH4, and carbon dioxide, CO2, that is released from a landfill when woody material undergoes anaerobic decomposition. Anaerobic decomposition is the result of the exclusion of air, the presence of water, and the presence of anaerobic and methane-forming bacteria, similar to the conditions in a swamp where methane, or marsh gas, is generated.

2 CH2O (water, bacteria), 2 x 30 = CH4 ,16, + CO2 , 44

One ton of dry, ash-free, wood in a landfill produces:

0.27 ton CH4

Plus 0.73 ton CO2

The typical 25 MW biomass power plants use from 1.05 to 1.1 dry ton of wood per net MW-hour; using 1.05 tons/ MWhr:

One MWhr of biomass power from diverted biomass avoids the formation of 0.28 tons of methane in a landfill.

As a GHG gas, methane is approximately 21 times as powerful as CO2. So one MWhr of diverted biomass power avoids the release of approximately 6 tons of CO2 equivalent, plus the CO2 also generated for a total of 6.7 tons of CO2 E per biomass MWhr.

However, most landfills practice landfill gas recovery. The EPA model uses a default value of 50 % LFG recovery when calculating emissions, but it is assumed that in southern California – the origin of LFG recovery technology – LFG recovery is approximately 65 %, as advised by SCS Engineers and industry sources. Therefore the net emissions of methane to the atmosphere are approximately:

0.28 tons CH4 / MWhr x 35 % net emitted = 0.1 ton of methane emission avoided per Biomass MWhr, or 2.1 tons of CO2 equivalent.

Wood waste deposited in a C&D landfill will generate LFG more slowly than in an MSW landfill, but typically there will be no LFG recovery at a C&D landfill. Once water accumulates, and oxygen is depleted, anaerobic decomposition will take place, yielding 6 – 7 tons CO2E per biomass MWhr.

Waste paper is lignin-free wood, and decomposes in the same way, but more rapidly than woody material.

If a given facility uses 50 % landfill-diverted biomass, and 50 % carbon-neutral forestry waste, then a pro rata calculation of the negative carbon impact can be used to calculate the Carbon Credits so created.

A typical 25 MW biomass power plant, using 100 % landfill diverted biomass, prevents the emission of about 1.2 MM tons per year of CO2 equivalent.

A typical 60 MW, 2,000 ton MSW/day waste to energy plant, where 100 % of the biomass fraction of the fuel avoids landfill decomposition, prevents the emission of about 2.9 MM tons/yr of CO2 equivalent.

Anaerobic Digestion

Most AD feedstocks would be converted to methane and CO2 if not so processed, therefore the above simplified calculation may be applied, with adjustment for the individual MAF organic analysis. Loss of carbon to digestate affects the overall carbon conversion efficiency of the particular AD process, but does not affect the negative carbon impact due to conversion. Negative carbon impact must be calculated on the MAF content of the feedstock, then converted to wet tons, or to gallons.

The additional socio-economic impact of many AD projects which eliminate the discharge of livestock manures and their consequent damage to rivers, lakes, fisheries and tourist business should be added to their negative carbon impact.

Although the carbon conversion efficiency of most AD processes is significantly lower than that in a combustion boiler, the heat rate of the gas engine gensets used for AD is better than that of a biomass boiler/steam turbine, such that an AD plant has negative carbon impact of about 5 tons of CO2 E per MWhr, compared to the 6.7 tons CO2 E for the solid biomass system. Care must be taken to define the alternative decomposition pathway of each part of the AD feedstock in calculating this value.

A typical 5 MW AD facility, using 100 % feedstock that would otherwise generate methane emissions, prevents the emission of about 200,000 tons per year of CO2 equivalent.

Thermal Conversion to Hydrocarbons

There are about a dozen commercially guaranteeable biomass conversion systems available. Some are equipped to handle MSW, others are limited to less-corrosive forestry wood wastes. In all cases, the negative carbon impact can be calculated from the feedstock analysis and the alternative disposal of that feedstock in the absence of the project.

A good example is the Edmonton, Alberta, Enerkem project which converts 100,000 tons/yr of RDF from MSW into approx 440 bbl/day of hydrocarbon, using a classic oxygen blown gasification process followed by gas clean-up and methanol synthesis.

Gasification processes have excellent carbon conversion efficiencies; if the resulting syngas is used in combined cycle power generation, a very efficient overall system results. But the carbon impact is based upon the feedstock consumption, not the MW output, so a lower negative carbon impact per MWhr than for a conventional boiler/turbine is the result.

The Enerkem Alberta project has a negative carbon impact of about 550,000 tons/year of CO2 equivalent, based upon 100 % of its feedstock being diverted from landfill.

Andrew Grant has a B.A. and M.A. from Cambridge University and over 35 years’ experience as a manager of biomass conversion projects. He has been involved in providing guarantees of performance, environmental impact and cost studies, for coal and biomass conversion technologies, and has performed due diligence studies of technologies and of facilities. Andrew is familiar with a wide range of biomass processing, ranging from wood chips to rice straw to MSW, and is experienced in greenhouse gas reduction and carbon footprinting, in the use of waste biomass, and other emerging technologies.

This article was originally published on Biofuels Digest. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 03, 2017

Ten Clean Energy Stocks For 2017: Finessing Trump

Tom Konrad Ph.D., CFA

The History of the "10 Clean Energy Stocks" Model Portfolios

2017 will be the ninth year I publish a list of ten clean energy stocks I expect to do well in the coming year.  This series has evolved from a simple, off-the-cuff list in 2008, to a full blown model portfolio, with predetermined benchmarks and (mostly) monthly updates on performance and significant news for the 10 stocks. 

While there is much overlap between the model portfolio and my own holdings (both personal and in the Green Global Equity Income Portfolio (GGEIP), a clean energy focused dividend income strategy I manage), the model portfolio is designed to be easily reproduced by a small investor who only spends a few hours a year on his or her investments. Trading is kept to a minimum by retaining many names from each annual list, and only trading in the middle of the year in extreme cases.  There have been only a couple trades in the middle of the year so far, once because one of my picks was bought out, and another because of what I believed to be fraudulent accounting.

Despite (or perhaps because of) the lack of trading, the model portfolio has performed well, and outstandingly well compared to clean energy stocks in general.  It has outperformed its benchmark every year since 2008 except 2013.  That year it returned 25% compared to the benchmark's 60% return. Over the past five years (2012 through 2016) the model portfolio has grown at a compound annual rate of 10%, or a 62% cumulative gain.  Despite the large gain in 2013, its benchmark has  fallen at a compound annual rate of 3% for a total lost over 5 years of 15.3%.  See the chart below (click for a larger version):
annual returns 2012-16.png

I will provide a detailed update on the final performance of the 2016 model portfolio later this month.

In the early years, the model portfolio mirrored the Clean Energy sector's notorious volatility.  More recently, I have attempted to focus the portfolio on less risky stocks, and this has allowed the portfolio to consistently outperform its benchmarks.  I've also been emphasizing more income stocks since I began managing GGEIP at the end of 2013.  GGEIP returned 12.8% in 2016.

How To Finesse Trump

In the game of bridge, "trump" is one suit that's more powerful than all the others; the highest trump card played wins a trick.  There's also a technique called a finesse, which can be used to win a trick even when the opponents hold a more powerful card (including a trump) which they could play potentially play on that trick.

"Finessing Trump" may not be a perfect analogy for picking clean energy stocks which should do well despite a hostile White House under the eponymous President-elect, but I'll run with it.  The relative strength of the cards held by fossil fuel industries are certainly a lot stronger relative to those held by the clean energy industries than they were just a few months ago. 

On the other hand, clean energy's hands are still full of honors (aces and face cards.)  According to the US Energy Information Administration, new coal and nuclear powered power plants are now far more expensive to build than new wind or solar.  Investments in renewable energy create more jobs than the same amount of investment fossil energy, these jobs typically do not require a college education, and are often in rural areas.  This is a perfect combination to deliver on Trump's promises to his core voters.  The rural nature of wind and biofuel jobs also give these technologies solid political support in the Republican controlled Congress.

President-elect Trump and the Republicans have made many grand promises, to deliver jobs, to renegotiate our relationship with allies and opponents alike, to dismantle regulations, and to lower taxes.  They will not be able to deliver on all of them, and many contradict each other.  Given this backdrop of political uncertainty and speculation, the focus of the 10 Clean Energy Stocks for 2017 list will be on companies that rely little on support from the federal government, and which should be relatively unaffected by the possible reversal of President Obama's attempts to encourage Clean energy.

Two of the picks this year are also well positioned to benefit from a revival in oil and gas drilling.  OPEC's recent agreement to limit production has already set the stage for a slow revival in 2017, and Trump's promises to ease environmental restrictions can only push in the same direction.

Benchmarks

Last January, I used a weighted average of  the Global X YieldCo ETF (YLCO) and the Powershares Clean Energy ETF (PBW) as my benchmark.  The 70% weight on the income-focused YLCO reflected the 7 of 10 income stocks in the portfolio, while the 30% weight on PBW matched the three growth stocks.  Given my greater caution this year, the 2017 portfolio contains eight income and only two growth stocks.  Hence the portfolio's benchmark will be a weighted average of 80% YLCO and 20% PBW.

The Making of 10 for 2017

Over the last few decades, stock market research has poked a number a gaping holes in the basic assumption of Modern Portfolio Theory that, other than diversification, there is no reliable way to reduce portfolio risk without sacrificing expected returns.  Several of these potentially counter-intuitive findings have become important to my investment selection process:
  • Selecting high dividend stocks reduces portfolio risk without reducing expected returns.  When the stocks are small and mid-cap stocks, expected returns actually increase. (What Difference Do Dividends Make? C. Mitchell Conover, CFA, CIPM, Gerald R. Jensen, CFA, and Marc W. Simpson, CFA)
  • Selecting stocks with low market correlation (Beta) or low volatility reduces risk without sacrificing returns. (Low-Risk Investing without Industry Bets Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen, and many others.)
  • Small capitalization stocks and stocks with lower liquidity tend to outperform their larger and more liquid counterparts. (Liquidity and Stock Returns, Yakov Amihud and Haim Mendelson)
  • Selecting a portfolio of individual stocks is a more effective way to take advantage of multiple such market anomalies than buying a collection of "Smart Beta" ETFs, which only focus on anomalies individually. (Fundamentals of Efficient Factor Investing, Roger Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA)

You will find that this year's list tilts towards high dividends (average yield 6%), and low Beta (average Beta 0.63 - anything less than 1 is low.).  All are small capitalization stocks, or near that range ($300 million to $2 billion) in market capitalization.  Other factors I consider are traditional value metrics such as EV/EBITDA, Price to Book ratio, and dividend coverage, and trading of the stock by company insiders. This year, I've also added my own estimates of the risks and potential rewards of action by the Republicans in Congress and the White House.

Only Green

I believe that technology continues to advance, and that the world and individual US states will continue confronting our environmental problems no matter what the federal government does.  I'm also a moral investor, with the core belief that the actions taken by companies I invest in are as much my moral responsibility as actions I take myself. 

Hence, I only consider green companies for this list and my managed portfolios.  That does not mean just wind, solar and electric cars.  It means that the company should be doing net good for the environment.  For each company, I ask myself,

"If this company did not exist, would the environment be worse off?"

If the answer is "yes," then I'll consider the company for my portfolio.  This can lead to a few unconventional picks.  In this list are companies involved in energy from waste (Covanta (CVA)) and container shipping (Seaspan SSW-PRG).  Another is an insulation company whose main customers are fossil fuel drillers and refiners.  These companies are, in my opinion, better for the environment than the alternatives (landfills, air transport or less efficient container shipping, and oil refining with less effective insulation.)  You may disagree on these admittedly qualitative judgements.  If you do, you should omit these specific stocks from you portfolio.

Ten Clean Energy Stocks for 2017

Below is Ten Clean Energy Stocks for 2017 list, along with some of the metrics discussed in the stock selection section above.  Data is as of December 31st, 2016.

Company
Ticker
Yield
Beta
Market Cap
Insiders
Pattern Energy Group
PEGI 8.6%
1.1
$1.6B
Some buying
8point3 Energy Partners
CAFD
7.7%
0.6
$368M
None
Hannon Armstrong Sustainable Infrastructure
HASI 7.0%
1.1
$906M
Strong Buying
NRG Yield, A Shares
NYLD/A 6.5%
0.7
$2.2B
Strong Buying
Atlantica Yield
ABY
3.4%
0.4
$1.9B
None
NextEra Energy Partners, LP
NEP
5.3%
0.5
$1.4B
Strong Buying
Covanta Holding Corp. CVA 6.4% 0.9 $2.0B None
Seaspan Corporation, Series G Preferred
SSW-PG
10.3%
0.3
$939M
None
Mix Telematics
MIXT
2.3%
1.0
$136M
Some Selling
Aspen Aerogels, Inc.
ASPN
-
-0.3
$97M
Strong Buying

Stock discussion

Below I describe each of the stocks and groups of stocks in more detail.  I include with each stock "Low" and "High" Targets, which give the range of stock prices within which I expect each stock to end 2017.  In 2016, all but two of the stocks ended the year within these ranges.  One (Terraform Global GLBL) ended the year 1% below my low target, and another (Enviva EVA) ended 3% above my high target.

Yieldcos

Yieldcos are companies with a business focused on the ownership or financing of of operating clean energy assets, and use most of the resulting cash flow to pay dividends to shareholders.  Operating clean energy assets include wind farms, solar farms, biomass and biofuel plants, and other sustainable infrastructure which reduces overall greenhouse gas emissions.  Yieldcos often have a developer "sponsor" which holds a majority of the Yieldco's stock, and gives the Yieldco the first opportunity to buy many of the developer's projects, called a "Right of First Offer" or ROFO.

Because Yieldcos own existing infrastructure and sell renewable energy, they are much less dependent on the continuation of government subsidies for clean energy than many renewable energy companies that have to sell or install products to make a profit. The stability of Yieldco cash flows (and dividends) depend much more on counter-parties (usually investment grade utilities) living up to their obligations than on government policy. 

Even wind farms, which often receive an ongoing tax subsidy in the form of the federal Production Tax Credit (PTC) are relatively safe.  When the PTC has been allowed to lapse in the past, the change has only applied to new wind farms, not wind farms already in production.

This stability and current low valuations led me to include six Yieldcos in the list for 2017.  The current low valuations mean that most Yieldcos cannot now issue new stock to fund acquisitions and grow quickly, but the resulting high dividends mean that there is significant protection against further declines because income investors do not require significant growth prospects to buy high dividend stocks as long as they believe the dividend is safe.

The biggest risk from a Trump administration for Yieldco investors is the same as the risk borne by every income investor: Increased spending and tax cuts may lead to ballooning federal deficits, which will in turn cause interest rates to rise.  Rising interest rates could make Yieldco stock prices fall in order for the yield to rise along with other interest rates.  I believe that most Yieldco prices have already fallen enough to account for most of this risk.

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99.  Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67.  Low Target: $18.  High Target: $30. 

Pattern is a Yieldco owning mostly wind projects in North America.  While Pattern is smaller than most other Yieldcos, and has a more limited development pipeline from its sponsor, it has historically been able to acquire new projects at higher cash flow yields than its bigger rivals with higher profile sponsors.  This advantage is in large part due to Pattern's focus on the less competitive market for wind farms (as compared to solar farms). 

Wind Yieldcos vs. Solar Yieldcos

Wind farms also tend to have higher returns than solar because wind production varies more from year to year than solar, and the higher cash flow yields are compensation for higher risk.

One other advantage of wind over solar for Yieldcos is very long term.  Wind farms need large scale to be cost competitive, and certain locations such as ridges have much better wind resources than most other locations nearby.  These factors mean that, in 15 or 20 years when utility power purchase agreements (PPAs) expire, the utility will have difficulty replacing the power from an existing wind farm with another next door.  This is much less the case with solar, where my neighbor's solar resource is almost identical to mine.

I believe that wind farms will have higher residual value at the end of their power purchase agreements than will solar farms.  The wind farm location and existing towers should retain more value even in the face of the falling price of wind technology than will the location and other infrastructure of solar farms.

Pattern's stock has sold off since its third quarter earnings call when the company announced that it had discovered a material weakness in its internal controls over financial reporting. As I wrote at the time, a weakness in financial controls means that they believe it would be possible for some financial data to be misreported, not that this has happened.  The weakness arose because the company's systems had not kept up with rising headcount in 2016. 

The company is working to fix this, but it will probably take a couple more quarters.   Unless some material mistakes are found in the meantime, the stock should recover when it reports the problem has been resolved.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98.  Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05.  Low Target: $10.  High Target: $20.

8point3 is a solar-only Yieldco started by joint sponsors, First Solar (FSLR) and SunPower (SPWR.)  Because of recent rapid decline in the price of solar modules, both have recently been struggling to find a way to profitability.

On the sunny side, 8point3 has relatively little debt compared to most Yeildcos, and this relatively low debt give it great flexibility even in the face of weak sponsors.  All of this debt is held at the company level (other Yieldcos use specific projects to back much of their debt.)  Company level debt typically has a slightly lower interest rate than project level debt, and it typically requires only interest payments.  Both of these factors help increase short term Cash Available For Distribution (CAFD, and the reason for 8point3's choice of ticker symbol.)  High current CAFD allows 8point3 to pay a higher dividend than it otherwise would.

On the cloudy side, CAFD's focus on solar and its reliance on non-amortizing company level debt could be storing up trouble for the long term, when PPAs start to expire in 15-20 years.  As I discussed in the Pattern Energy section, I believe that solar farms will have greatly diminished cash flows and residual value when 8point3's current PPAs expire.  While project level debt is paid off over the life of the project PPA, company level debt is not.  Unless 8point3's share price recovers in the next few years, allowing the company to return to growth, 8point3 Partners could face the prospect of greatly diminished income and undiminished debt when PPAs begin to expire in 15-20 years.

Fifteen years is a long time, so it is not yet time to run from the shadow of this possible future, but it does make sense to expect a slightly higher dividend from 8point3 than other Yieldcos in order to compensate for this risk.  7.7% will do the trick for me.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99.  Annual Dividend: $1.32 (7.0%).  Expected 2017 dividend: $1.34 to $1.36.  Low Target: $15.  High Target: $30. 

Hannon Armstrong is a Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure.  It's a leader in the disclosure of the net effect on greenhouse gas emissions caused by its activities.  Hannon Armstrong has been in this list since 2014, the year after it became public.

Hannon Armstrong is unique among Yieldcos in two ways.  First, it invests in senior securities of clean energy projects, meaning that Hannon Armstrong will be paid before equity investors such as the other Yieldcos.  It also has a broader focus, and its expertise in in financing allows it to invest in energy efficiency projects as well as the energy production and transmission infrastructure that other Yieldcos invest in.

When Hannon Armstrong's stock price is strong, it issues new stock in secondary offerings, and uses that money to invest in projects.  This boosts the long term growth of the dividend.

When the stock price is relatively weak, it continues to finance clean energy projects, but it sells the assets to third parties.  This boosts short term earnings, but does not help the dividend in the long term.  The bursting of the 2015 Yieldco bubble kept HASI's stock priced depressed in early 2016, and the company did more than the usual number of third party financings.  It signaled a planned return to investing on its own account in the second half of 2016, but the lower level of investment had the effect of lowering its dividend growth for 2017 to 10%, compared to the 12-15% it had grown in previous years.

The election result, the lower than expected dividend increase, and two negative articles from a short seller on Seeking Alpha have combined to push the stock price down almost to its level at the start of 2016, when it was already cheap.  With a 10% dividend increase since then, this is the best opportunity to buy Hannon Armstrong since early 2015.

Hannon Armstrong unique and relatively low risk business model should make it a core holding for any investor wanting to invest in clean energy.   If you do not already own it, this is an excellent entry point.  


NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36.  Annual Dividend: $1.00 (6.5%). 
Expected 2017 dividend: $1.00 to $1.10.  Low Target: $12.  High Target: $25. 

The term "Yieldco" was first applied to NRG Yield (NYLD and NYLD/A), and the company rode the Yieldco bubble in 2014 and early 2015.  During this period, I was often short the stock, as a hedge against the other, significantly better valued, Yieldcos.  I added NRG Yield to the list last year, and the stock has advanced along with its dividend.

The company's parent, NRG, develops both conventional and renewable energy projects, but remains committed to large scale renewable projects suitable for acquisition by NRG Yield.  Such dropdowns will be limited, however, until the Yieldco's stock price recovers, allowing it to issue new equity to fund the acquisitions. 

NRG Yield remains in the 2017 list because of good traditional valuation measures (Price/Book and EV/EBITDA) and significant insider buying of the stock.

The reason I focus on the less liquid A shares rather than the more liquid and widely held C shares (NYSE:NYLD) is because this list is mostly targeted towards small investors for whom A shares should be sufficiently liquid for unconstrained trading.  Other than liquidity, all the advantages lie with NYLD/A.  Both classes of stock pay the same absolute dividend, but A shares are less expensive and produce a higher yield.  A shares also have more votes, which will make them more valuable in any potential restructuring of the Yieldco. 

Large investors who do face liquidity constraints may consider splitting their purchase between the two share classes.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35.  Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.  High Target: $30.
 

Atlantica Yield was formerly called Abengoa Yield after its now bankrupt sponsor, Abengoa SA.  Over the last year, Atlantica has made substantial progress disentangling itself from its former sponsor.  Most importantly, it has achieved full autonomy and is now responsible for the entirety of its own operations. 

The main remaining obstacle to its divorce from Abengoa are waivers to covenants on certain project debt which were triggered by Abengoa's bankruptcy.  The largest of these are needed from the US Department of Energy due to loan guarantees granted as part of the ARRA financial stimulus package in 2009.  The Yieldco states that these negotiations are "very advanced" and I expect that the DOE will do everything in its power to finalize them before control shifts to the new administration on January 20th. 

If it fails to do so, the likely new Energy secretary Rick Perry has shown himself to be pro-business when it comes to clean energy technologies, despite his denial of the science of climate change.  He had a record of promoting renewable energy as an economic driver in his 14 year term as governor of Texas.  I expect that Secretary Perry will focus on dismantling those parts of the Department of Energy which he believes interfere with companies' ability to go about their business.  I expect that will include granting the necessary waivers to Atlantica.

As Atlantica is able to finalize the necessary waivers, it will increase its dividend accordingly.  If all had been achieved at the end of the third quarter, that would have been an annual dividend of $1.45, or a current yield of 7.5%.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54.  Annual Dividend: $1.36 (5.3%). 
Expected 2017 dividend: $1.38 to $1.50.  Low Target: $20.  High Target: $40. 

NextEra Energy Partners' is the poster boy for the widely held investor belief that Yieldco's with strong sponsors deserve a premium price.  I have long been skeptical of this belief on the grounds that the main constraint on Yieldco growth is not access to quality projects from a sponsor, but access to inexpensive capital from investors.  But Yieldcos with strong sponsors do command a premium, and that can help the Yieldco to grow faster as long as the premium lasts. 

That strength lasted for NRG Yield until NRG ran into trouble in 2015.  Along with the Terraforms (TERP and GLBL) and Atlantica, NRG Yield proved that the sponsor could as easily be a source of Yieldco weakness as a source of strength.  Uniquely among Yieldcos, NEP's sponsor, NextEra (NEE) remains strong. 

When NextEra was trading at $40-$45 in 2014 and 2015, it topped my list of overvalued Yieldcos.  In early 2016 at the bottom of the Yieldco bust, it traded as low as $23, and I missed a chance to buy it because I was using all the available capital I had (as well as some borrowed money) to buy other massively undervalued Yieldcos I was more familiar with, and which had higher yields.  I took profits on most of those trades last summer and fall.  NEP is now starting to look relatively fairly valued because of a combination of strong dividend growth and a relatively flat stock trajectory.  Unless the stock recovers, even NEP will not be able to achieve its annual 12% to 15% distribution growth targets through 2020, but a 5.3% current yield is high enough that I'm now willing to buy some and wait to see.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60.  Annual Dividend: $1.00 (6.4%).  Expected 2017 dividend: $1.00 to $1.06.  Low Target: $10.  High Target: $30. 

Covanta is the US leader in the construction and operation of waste-to-energy plants.  These plants incinerate trash (often called municipal solid waste or MSW) and use the resulting heat to generate electricity.  Recyclable metals are recovered from the ash.

Waste to energy has a bad name among many environmentalists because it is a less valuable use for recyclable materials, and because improperly operated incineration of waste can lead to toxic emissions, such as dioxins, especially if the combustion temperature is too low.  I include Covanta as a green stock because, as I discussed above, I believe its operations are a net positive for the environment.  The MSW Covanta burns includes some recyclables, but this is also true for any MSW which is headed for landfills.  In a landfill, the organic component of MSW emits methane which is an extremely powerful greenhouse gas, and the incineration allows the recovery of metals which would otherwise be land filled.  Electricity generated from waste displaces electricity which might otherwise be generated from fossil fuels.

When it comes to dangerous pollutants from incineration, Covanta has shown that it has the technical capabilities to operate safely, and emissions from incineration must also be compared to emissions from land filled waste and from the electricity generation that Covanta's operations displace.

Trump and Covanta

In addition to an attractive current valuation, high yield, and strong insider buying, Covanta is well placed to benefit from possible initiatives of a Trump administration. 

First, while Covanta is quite capable of controlling the emissions of its plants, loosening limits on power plant emissions in order to benefit coal are equally likely to benefit Covanta.  Second, any large investment in domestic infrastructure is likely to increase the production of waste going to Covanta's facilities, and to increase the prices of the metals Covanta recycles.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94.  Annual Dividend: $2.05 (10.3%).  Expected 2017 dividend: $2.05.  Low Target: $18.  High Target: $27. 

Seaspan is a leading independent charter owner of container ships.  On the whole, its fleet is newer, has larger capacity, and is more efficient than the worldwide fleet. 

Container shipping is in the depths of a worldwide downturn, leading to massive industry overcapacity and low prices for ships and their leases.  The long term nature of Seaspan's contracts largely insulates it from these prices, but there is some turnover and leases cannot currently be renewed at prices which are anything like the old contracts. 

While the current environment holds some risk for Seaspan, it also presents opportunities.  The company recently scrapped some of its oldest ships and was able to replace them with newer, more efficient ships at close to the scrap price it received for the older ones.  As low prices lead older ships to be scrapped, the overall supply of container ships will fall.  This will in turn lead to higher leasing prices when the industry recovers.

I took an in-depth look at Seaspan and both its common (SSW) and preferred shares in November.  You can read it here.  Since then, the price of the preferred has fallen slightly, while the common had fallen less.  This makes the case for investing in the Preferred even stronger than it was then.  This investment can be done with or without the put hedge I describe in the article.  I don't think the put hedge will actually be needed, and I recommend it only for investors who take very large positions in the preferred relative to the size of their whole portfolio.  This is what I have done: Seaspan Preferred shares are currently my largest holding.

Seaspan has several other classes of preferred stock, as well as exchange-traded notes.  The notes (SSWN) have not fallen nearly as much as the preferred series have, so I find them less interesting.  The different preferred shares are all similar, varying only in maturity date, interest rate, and market price.  Since I wanted to pick one, I chose G because it is the farthest from maturity, but series D, E, and H could easily be substituted.

Trump and Seaspan

A Trump administration presents some risks for the global shipping industry because of the President-elect's negative attitude towards trade.  If his aggressive negotiation tactics lead to a global trade war, it will almost certainly worsen the shipping industry's troubles.  This is part of the reason I strongly prefer SSW-PRG over the company's common shares.  I think it's very unlikely that the company will cease paying dividends on its preferred shares, but a substantial dividend cut on the common shares is very likely.  I may become interested in buying SSW after that cut happens, if the cut is large enough that I become confident there are no further cuts in the future.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19.  Annual Dividend: $0.14 (2.3%).  Expected 2017 dividend: $0.14 to $0.16.  Low Target: $4.  High Target: $15. 

MiX provides vehicle and fleet management solutions to customers in 112 countries. The company's customers benefit from increased safety, efficiency and security.  The company's core customers are large, international corporations with large fleets.  Many of these customers are in the oil and gas industry, and these have been reducing their vehicle fleets during the oil price downturn.  The oil price recovery, which seems to have begun because of OPEC's recent agreement to limit output should contribute to MiX's growth this year.  Despite the oil price headwind, MiX has managed year over year subscription growth of 10% or more in recent quarters.

Many of MiX's other customers are in the logistics and transportation industries.  All customers benefit from reduced fuel usage, better safety, and lower insurance premiums after implementing the company's vehicle management solutions.  Even when fuel prices are low, the increased safety and insurance savings can easily pay for MiX's services.

In August, MiX repurchased 25% of their outstanding stock with cash on hand.  This will lead to a 33% year over year growth in revenue and earnings per share for the next few quarters.

Trump and MiX
If Trump manages to accelerate the oil and gas drilling in the US, it should cause MiX current customers to purchase more vehicles, automatically adding to MiX's subscriber base.  If large industrial companies are involved in promised infrastructure investment or border-wall building, this will also add to the growth of the fleets of MiX's current customers, easily adding to MiX's top line growth without the cost of new sales.

Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10.
 

Aspen Aerogels manufactures one of the highest performing types of insulation available with current technology.  The company's largest markets are in the most demanding industries where aerogel's high R value, moisture resistance, and ability to withstand extreme temperatures command a substantial premium.  The company's largest applications are in refining. petrochemical processing, liquified natural gas (LNG), and power generation.  The company is expanding into building products through a license agreement with Cabot Corporation.

2016 earnings have been disappointing for Aspen because of low oil and gas prices (which affect its refining and subsea markets), and because it has had to pursue patent enforcement actions at the US International trade Commission and in German courts.

The general uncertainty in the energy industry and the slowdown in its subsea markets has led Aspen to delay plans for a new manufacturing plant.  Construction of this plant had previously been planned to begin this year.  Management will commence ordering long lead time items needed for construction when they are again confident that end markets will support the additional supply.

Aspen and Trump

Recovering oil markets and offshore drilling should cause demand for Aspen's products to follow suit, but its status as a supplier to the oil industry means that an oil industry revival is not yet reflected in the stock price.

The disappointments of 2016 give investors the opportunity to purchase this company with its leading energy efficiency technology at a substantial discount to its 2014 IPO price of $11. 

What's Not In The List

I emailed a draft version of this article a day to a number of paying subscribers, and asked for their feedback.  (I'm thinking about launching a premium service, and wanted to get a feel for demand from people who were actually willing to pay.  One common question was about the stocks that did not quite make it, and the changes from the 2016 list.  I will write a Year in Review article discussing the stocks in the 2016 list soon. 

The reason I don't typically mention stocks other stocks that I consider is simply to keep the workload down.  There are five stocks that almost made it and are also in my portfolio.  Here are the tickers: TSX:PIF, TSX:AXY, TSX:PUR, BEP, and AGR.

Final Thoughts

The incoming Trump administration and Republican Congress promise a weakening of federal support for many types of clean energy and stronger support for its fossil fuel competitors.  This has not been lost on investors, who have been selling most well known clean energy stocks since the election.

Despite investors' understandable fear, many if not most clean energy companies are unlikely to be harmed by the actions of a Trump administration.  US support for clean energy has always been tepid, with the Republican Congress blocking most of the Obama administration's efforts for the last eight years.  The US has never given clean energy the support it deserves given the severity of the climate crisis, and coming attempts to withdraw what little support there is and bolster fossil fuel industries will come as advancing clean technology is increasingly making those fossil technologies obsolete.  The transition to a clean energy economy can be slowed, but at this point it is inevitable.

Green minded investment advisors and climate activists I have been speaking to have also noticed another effect of the election.  Voters who understand the challenge of climate change are reacting to frustration at the ballot box by looking for other levers they can pull to create change.  Environmentally responsible investing is one such massively underused lever.  The fossil fuel industry's market cap is gigantic, while the market cap of all clean energy companies is tiny in comparison.  A small shift of investment out of fossil fuels into clean stocks will not do much to hurt fossil fuel companies, but it can do a lot to help their clean energy cousins.

Selecting lower-risk clean energy companies such as most of the ones in this list means that the environmental investment lever can be pulled without increasing the risk of most investors' portfolios.  And it can do a lot for the companies you buy.  Most of the Yieldcos in this list were beginning to issue new shares to acquire more assets and grow last summer, when stock prices had only recovered to a fraction of their losses from the popping of the 2015 Yieldco bubble.  Bringing their stock prices back up to those levels will mean their growth will resume, and continue to finance new wind and solar farms.

It's even harder to predict what will happen to the stock market in 2017 than usual.  Certain market sectors like banking seem overvalued, but when I look at these stocks, I think they are undervalued.  The broad market is overdue for a correction, but Yieldcos have already had one.  With this backdrop, I am buying well valued stock opportunistically, but keeping a large allocation of cash in reserve in case we have a real market crash.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP.  Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)

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.

« December 2016 | Main | February 2017 »




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