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June 30, 2017

Stock Picks for US Energy Dominance

Tom Konrad, Ph.D. CFA

Thursday night (Friday morning in Sinapore) CNBC Asia's Street Signs program must have had an interview cancellation, because they needed someone to give them 3 energy stock picks in response the Trump's "Energy Dominance" speech on last minute notice.  They sent me (and probably a bunch of other people) an email two and a half hours before air.  I did not see it until 20 minutes before the actual interview.  I warned them that I do clean energy, not fossil fuels, but apparently they had no other takers who were awake and able to give energy stock picks at 11:23pm ET on a moment's notice.

I think they found me because I was on Capital Connection Asia in late January.  

I don't think I was quite what the host, Martin Soong was looking for.  He improvised well by turning from the Trump clip saying "if you want to do something entirely different, you might invest in alternative energy..."

I'm still trying to get video, but here's my memory of the interview.

MS: How is clean energy doing under Trump?
TK:  Great.  There was a little stumble after he was elected, but then the market figured out that he's living in the 20th century while the economy has moved on to the 21st.  Clean energy has turned the corner, and is now the cheapest source of new electricity. The market is realizing that, even if Trump doesn't.

MS: Do you have stock picks?

TK:  Atlantica Yield (ABY), Covanta Holding Co (CVA), and General Cable (BGC).  
I went on to describe why I like Atlantica - you can read about that and Covanta in my last 10 Clean Energy Stocks for 2017 update.
General Cable was a last minute add for me.  I'm very nervous about the market right now, so there are not many stocks I'm enthusiastic about.  I was tempted to mention Seaspan (SSW) Preferred shares (SSW-PRG), but they'd asked for energy stocks, not efficient transportation.  You can read about Seaspan Preferred in my recent update as well.  

My picks in January had been Pattern Energy Group (PEGI), and Hannon Armstrong (HASI.) Both have gained significantly (17% and 22%) since then, and so they're still top holdings, but not the most likely to make further large gains in the near term.
     
I picked General Cable instead.  It's a bit of a stretch to call it an energy stock, but at least the connection between the manufacturer of electric and communication cables and the energy sector is obvious.  Given more than 20 minutes, I might have picked something else, or just stuck with the two I'm most enthusiastic about.  

Martin Soong wanted to talk about ETFs, we did not talk about Covanta or General Cable at all.

MS: What about clean energy ETFs?  I've looked at six that are up about 10% for the year.

TK: ETFs are okay if you're unwilling to pick stocks, but clean energy is such a new sector, pricing is not yet efficient, and there is a lot of room for stock pickers to get an edge.

MS: But the ETFs are up 10% for the year.  Why not just invest in those?

TK: My Green Global Equity Income Portfolio is up 17%.

MS: I have to admit, that's good performance.

And he ended the interview.

Unfortunately, I had misstated my performance.  I don't spend much time thinking about past performance: Future performance and how I can improve it is much more interesting.  For the record, my Green Global Equity Income Portfolio (GGEIP) was up 13.5% for the year to date.... not as good as I'd thought, but still ahead of the alternative energy ETFs he was looking at.  

Despite my mistake on my track record, I stick to my assertion that clean energy remains a stock picker's market.  Until clean energy investing becomes main stream, there will be a lot of room for stock pickers like me to beat the indexes.  Perhaps I should have mentioned that GGEIP was  up 30.5% in 2016, although I achieved that using options and other strategies not available in clean energy ETFs, not just stock picking.

DISCLOSURE: Tom Konrad has long positions in ABY, CVA, BGC, PEGI, HASI, and SSW-PRG, and own puts on SSW (an effective short position.)

June 22, 2017

Power REIT: No News Is Good News

Tom Konrad Ph.D., CFA

I first wrote about Power REIT (NYSE MKT:PW) in 2012, when the tiny real estate investment trust unveiled its plans to become what would have been the first Yieldco by investing in the land underlying solar and wind farms... before the term 'Yieldco' had even been invented.  In the years since, the company made some progress buying land under solar farms.  According to the most recent shareholder presentation, they now own land under seven solar farms totaling 601 acres and 108 MW, in addition to their legacy railroad asset. 

These assets produce Core Funds From Operations (FFO, a cash flow metric commonly used in among REITs as a measure of the company's ability to pay a dividend) of $0.60 per share. When the dividend is reinstated (more on that below) we can expect that it will be between 70% and 100% of Core FFO, or $0.40 to $0.60 per share.  As a microcap REIT, I would expect the yield of be in the 7 to 8 percent range, justifying a stock price of between $5 and $8.50.  The stock has recently been trading at the low end of this range, or $6.50 to $7.00.

Other Yieldcos (the mostly non-REIT companies that invest in solar and wind farms and use the cash flow to pay dividends) currently have yields between 4% (NextEra Energy Partners (NYSE:NEP)) and 7.5% (8point3 Energy Partners (CAFD)). As I recently wrote, I believe CAFD's dividend is unsustainable, so 7.5% is a good high end estimate for the yield on a microcap Yieldco.  When PW resumes its dividend, it should be worth $6 to $8 a share if valued as a Yieldco.

A Yieldco Wrapped in a Legal Enigma

Based on its potential to pay a dividend, Power REIT seems fairly valued or mildly undervalued. 

But nobody is looking just at the potential dividend.  The big story about Power REIT is its appeal in a civil case against the lessees of its railroad asset.  I'm not going to spill any more ink about this legal case, as I'm not a lawyer and I have no idea what the chance of a successful outcome might be.  What I do know is that, if the appeal fails, Power REIT is reasonably valued today.  I also know that if Power REIT were to prevail in any way, the benefits to shareholders could be enormous.  The debt that the lessees owe Power REIT (but which they claim is not payable) is worth more than Power REIT itself.  Add in legal fees and back interest, and it's easy to see the stock price tripling.  You can read about the details of the case in one of my articles here, or a more recent piece by an attorney (Al Speisman) who thinks Power REIT has a good chance of winning, here.

Why No Ruling Yet?

There is no set time frame for an appellate court ruling, but the case has now been under consideration for five months.  To me, that means that there are at least some aspects of the case that Third Circuit Court of Appeals finds hard to decide.  If the case were simple, the Court could have ruled already.

A case that is hard to decide must have a chance of going either way.  That means the judges must be considering overturning at least part of the District Court's ruling (which went almost entirely against Power REIT.)

The debt (settlement account) is worth about $9/share.  Legal costs (which Power REIT argues are reimbursable under the lease are another dollar or two per share.  Back interest could dwarf everything else, but I consider the chance of Power REIT being awarded any back interest to be low.  There is also the possibility that PW will have an opportunity to sign a new lease for the railroad, which could also benefit the company.

What are the chances of Power REIT winning anything in its appeal?  We don't know, but those chances seem to be rising the longer the Court of Appeals takes to rule.  Denying Power REIT's appeal might have been an easy decision.  Overturning part or all of the District Court's ruling requires more deliberation.  The Federal judges are still deliberating.

No news is good news. 

The upside is measured in stock price multiples.  Should we expect a double?  A triple?  Or "just" a 50% increase?  The chances of upside are increasing.  At the current price, the downside is minimal.  There could even be some upside from increased certainty around the company's future and tax write-offs in the case of a loss.

What's not to like?

Disclosure: Long PW, PW-PA, NEP.  Short calls on CAFD.

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.

June 19, 2017

China Everbright Greentech

by Debra Fiakas CFA

Investors based in the U.S. need to look far and wide for new stock issues from renewable energy companies.  Capital markets activity has slowed in the last couple of years, in part to due to their own success.  In reaching new efficiency in energy production, renewable energy companies are generating their own internal capital and are not as dependent upon the capital markets.  The Hong Kong market has come to the rescue of U.S. investors with a ‘green’ offering

China Everbright Greentech Ltd
. is now trading on the Hong Kong Exchange with the stock code 1257 following a successful offering of 560 million shares in April 2017.  The company raised $385.6 million (HK$3.0 billion) in new capital that will be used to develop business in the People’s Republic of China as well as research and development in advanced technologies.

A spin-off of parent China Everbright International, the waste-to-energy and water treatment developer, China Everbright Greentech invests in a variety of renewable energy projects.  These projects are capital-hungry and sometimes deliver volatile returns.  The spin out should help the parent to present more stable financial results.  Investors in the spinout are getting a more speculative play at a more compelling valuation.
China Everbright Greentech is a self-described “specialty environmental protection service provider.”  Its portfolio includes biomass, solar and wind energy production as well as hazardous waste treatment facilities.  Total energy product at the time of the IPO was 125.9 megawatts from solar and wind facilities and another 810 megawatts from biomass projects currently in the planning and construction stages.  Current hazardous waste treatment capacity is in excess of 500,000 tons per year.

Management has wasted no time in deploying new capital.  In late May 2017, the company announced definitive agreements for three new hazardous waste treatment projects in mainland China.  The total investment of US$102 million (RMB680 million) will add 120,000 tons per year in waste processing capacity after all construction phases are completed.

The company’s public offering document provides details on revenue and profits.  Sales value has increased in each of the last three years, with profits following.  In 2016, the company delivered HK$629.5 million (US$81.8 million) in profit on HK$3.0 billion (US$390.0 million) in total sales, representing a profit margin of 21%.  Operations generated HK$886.2 million (US$115.2 million) in cash flow.

China Everbright International remains the controlling shareholder in its greentech spin-off.  However, the offering makes room for investors of all stripes to participate in what appears to be a successful formula for growth and income.

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.

June 14, 2017

Should I Sell My Mutual Fund To Go Solar?

by Tom Konrad Ph.D., CFA

An enthusiastic solar volunteer recently asked me: “What can I invest in to prepare for the next financial crisis?”

The situation made the question deeply ironic. The woman asking me was trying to help people invest in solar systems through Solarize, a nonprofit, community-sponsored group buying and discount program. Our town of Marbletown, New York and the neighboring towns of Rochester and Olive have just launched Solarize Rondout Valley, a campaign open to residential and commercial building owners in Ulster County.

Solarize campaigns are designed to make it easier and cheaper to go solar. While defensive stock market investments are my specialty, I can't think of a single financial investment that combines the expected high returns and relatively low risk of a home solar system. 

Just like buying value stocks when they are cheap, buying your solar system at a discount through Solarize or a similar program only increases the expected returns while lowering the risk. Solarize Rondout Valley offers a 14 percent discount compared to installers' standard prices. The installers can afford this discount because volunteers help them reach new customers.

Customer acquisition costs make up nearly 17 percent of the cost of a typical home solar system. The customers benefit because it boosts their returns. Even New York state and the federal government benefit, because lower prices reduce the size of tax credits, which are currently 25 percent and 30 percent of the purchase price of the solar system, respectively (capped at $5,000 for the state credit).

It turned out that my fellow volunteer had a roof she thought would be great for solar, but was hesitant about signing up herself. I told her solar was one of the best investments I know of for a financial crisis, because it will still be generating the same amount of electricity and savings, no matter what the markets do. And I asked her what sort of payback she thought she was getting from her mutual funds.

Two minutes later, she was our next signup for a free home solar assessment.

If you finish this article, live in Ulster County and own a home without solar, I'm betting you will be our next registrant. But even if you don't have a Solarize campaign going on near you, this article should give you the tools you need to evaluate any installer's bid as a financial investment.

Investment criteria

When considering any investment, most professional investors focus on these criteria:

 1.    Expected return, or how much you expect to make on your investment.

 2.    Risk, which has two components:

 a)    The likelihood of things going wrong

 b)    The expected losses if things go wrong

 3.    Liquidity/cash flow: Can you get your money back when you need it?

Many professional investors, including myself, also focus on the moral aspect of our investments, but I will not focus on that variable here. If you think it's important to promote your local economy or reduce carbon emissions, it's clear to just about everyone that a home solar installation is the best choice. The financial comparison is a lot less readily discernible, so that is what I will focus on here.

A note on mutual funds

There are more mutual funds than anyone can count, so, for simplicity, I will focus on two that readers are most likely to own. According to Investopedia, the two biggest mutual funds this year are the Vanguard 500 Index Fund Admiral Shares (VFIAX) and Fidelity Government Cash Reserves (FDRXX). These funds hold more investor money than any other mutual funds. Even if you do not own either of these funds, most investors own something similar.

VFIAX is a stock market index fund, designed to mimic the return of buying a proportionate share of the entire market. For the purposes of this analysis, most funds that contain the words “stock market index” in their name will have substantially similar investment characteristics. If it makes sense for you to sell VFIAX to invest in home solar, it will make sense to sell any of these other stock market index funds for the same reasons.

FDRXX is a money market fund, and almost every investor owns some money market or short-term bond fund in their portfolio. If it makes sense for you to sell FDRXX to invest in home solar, it will make sense to sell any of these other money market or short term bond funds for the same purpose.

Example home solar installations

The economics of home solar vary widely depending on local and state incentives, future local electricity prices, installation cost, local climate and the angle and degree of shading of your roof. In my experience, a reputable local installer is likely to give you reliable estimates for all of these except for future electricity prices. 

As examples, I will use two fairly typical installations using prices from Solarize Rondout Valley. The first system is a best-case scenario, installed on a house with a large, open section of roof with moderate tilt oriented at least a little south and with limited shading. A 5-kilowatt installation using 18 panels and 320 square feet of roof space will cost $3 per watt ($15,000) before state and federal tax incentives at the discounted Solarize price. The New York state tax incentive is 25 percent of installation cost up to $5,000, while the federal Investment Tax Credit is 30 percent, so the net cost after incentives for this installation will be $6,750. Because of the orientation and limited shading, this array will produce about 1,300 kilowatt-hours per year, per installed kilowatt (6,500 kilowatt-hours total) in Ulster County. Call this System A.

On the other end of the spectrum, consider a 7-kilowatt array on two sides of a building with the panels facing due east and west, and with some shading. The customer has high electricity usage and wants to get as much production out of the given roof space as possible, and so opts to use 19 of SunPower's (SPWR) highly efficient 360-watt AC panels using only 340 square feet of roof space. Each of these panels has its own microinverter to best handle the shading. While this installation will probably still produce 7,000 kilowatt-hours per year (1,000 kilowatt-hours per year, per installed kilowatt) despite the less-than-optimal conditions, the premium SunPower panels will cost $4 per watt, or $28,000 before tax incentives. After tax, the system will cost $14,600. Call this System B.

To find out the financial returns, we also have to make assumptions about the price of electricity saved. I will use 14 cents per kilowatt-hour, increasing at a rate of 1 percent for the next 25 years. This is more conservative than most installers' assumptions of annual electricity price increases of 3 percent or more, but I find it pays to be conservative when making investment decisions.

Calculations

With these assumptions, we can use an online return calculator such as PVCalc. Below are the assumptions for System A, as I entered them into PVCalc.

I assumed a 25-year life, 1,300 kilowatt-hours produced and skipped the “own consumption," as well as "feed-in tariffs" and "tax" sections -- which do not apply in New York state. Setup cost is the cost per kilowatt after tax incentives ($6,750 for 5 kilowatts), and financing is 100 percent the customer's funds, because we are considering selling a mutual fund to pay for the system.

(Note that the euro '€' symbol is displayed by default in this European calculator under levelized cost, even though the levelized energy cost displayed is actually $0.076, not €0.076.)

PVCalc gives the following results for System A.

System A Results

I think the most useful factors here are “levelized energy cost" and internal rate of return (IRR). 

The levelized energy cost of 7.6 cents per kilowatt-hour is far below the price we pay for retail electricity in New York. IRR is a financial measure that allows us to compare the system on an apples-to-apples basis with fixed price investments that bear interest, such as CDs, bonds and money market funds like FDRXX. An IRR of 12.7 percent is a better return by far than you can find on any investment available to the retail public.

The economics of System B are less attractive because we're paying for an additional panel and more expensive panels in order to produce only a little more electricity than System A on a suboptimal roof.

Still, System B may be a better bet than many mutual funds. Here are the results from PVCalc.

System B results
You will note that the levelized energy cost is close to break-even at 14.9 cents compared to the 14 cents, plus the 1 percent annual increase I used for this scenario. That said, the IRR is 4.3 percent, meaning that it is still worth considering selling a money market mutual fund like FDRXX to buy this system. FDRXX has a yield of just 0.1 percent. So as long as the risks and limited liquidity of a home solar system (discussed below) are acceptable to you, it will make financial sense to sell a money market mutual fund like FDRXX to buy System B.

It is more difficult to gauge the expected return of a stock market mutual fund like VFIAX, but over 25 years, it is possible to come up with some reasonable estimates. Since we are looking at a 25-year life of the solar system, we should consider a similar time period for our mutual funds. Historically, long-term stock market returns have been driven by the valuation of the stock market at the beginning of the period. One widely used valuation measure is Robert Shiller's cyclically adjusted price-to-earnings ratio (CAPE). The CAPE is currently high by historical standards, meaning that stock market and VFIAX returns for the next 25 years are likely to be below par. 

Extremely long-term stock market returns have been in the 9 percent to 10 percent range, but a CAPE this high has usually preceded long periods where returns have much lower, like in 1929 and 1966. The CAPE was even higher in 2000, and stock market annual returns have been around 3 percent over the past 17 years. With these past results as a guide, we can expect long-term stock market returns to be between 3 percent and 8 percent over the next 25 years.

From this we should subtract the expense ratio of a mutual fund, which is a negligible 0.1 percent for VFIAX, but could be much higher for other stock market mutual funds. We should also reduce the return to reflect the expected tax on dividends and capital gains of about 15 percent. All together, the expected return for VFIAX is between 2.5 percent and 7.5 percent. People in high income-tax brackets should reduce these expected returns even further.

If you are worried about future stock market returns, even the mediocre 4.3 percent expected annual return from System B looks good against a 2.5 percent after tax return for VFIAX. If you are a stock market optimist, you should jump at the chance to sell VFIAX if you can get the expected 12.7 percent annual return from System A, but you will probably find System B less enticing.

Risks

Risks for mutual funds

Expected return is not the only consideration; we also need to consider risk. Stock market mutual funds like VFIAX are known to be risky, and in the next 25 years, we can reasonably expect to have one or two financial crises like we saw in 2001 and 2008. Given the high CAPE ratio discussed above, a bear market in the next few years seems more likely than not. 

Over long periods, the stock market does tend to make up for past losses, so a 2.5 percent annual return for VFIAX over the next 25 years is a reasonable worst-case scenario. 

The attraction of a money market mutual fund like FDRXX is the limited downside. The fund should be able to pay its 0.1 percent interest without losing value (at least before inflation) over the next 25 years. The biggest risk for FDRXX is actually inflation itself. If inflation accelerates, and short term interest rates do not keep up, the real value of FDRXX will fall faster than the dividends it pays can make up for. Even if dividend payments rise to keep up with higher inflation, these are taxable, and they are very likely to continue to fall short of inflation after tax.

Given the the country's high debt, and the Trump administration's stimulus plans, rising inflation is quite possible. If it does rise, the interest paid to holders of FDRXX should rise with it.  Since that interest is taxable, rising inflation will lead to small net losses for holders of FDRXX.

Risks for solar

Unlike FDRXX, a solar installation should benefit in the high-inflation scenario, since electricity prices and savings should rise with inflation. Nor should a prolonged stock market downturn hurt the returns from a solar installation. Another way to put this is that, as investments, solar installations have the attractive property of holding their value when financial investments are falling. This makes investing in even a relatively unattractive solar installation like System B a good way to diversify a larger investment portfolio.

The main risks for solar installations are falling electricity prices, the chance that the system breaks down, and the chance it is damaged in a house fire and insurance does not cover its replacement. There is also regulatory risk: the chance that regulators may change the way solar owners are paid for the electricity they generate.

The breakdown of solar risks

Falling electricity prices

Lower electricity prices equate to lower savings from solar. Most people assume that electricity prices will continue to rise over the long term, as they always have in the past, but this may not be a valid assumption. The falling prices for renewables and, perhaps most importantly, natural gas have been causing electricity prices to fall in recent years, and renewable energy technologies like wind and solar are almost certain to continue their price declines. These price declines are likely to be at least partially offset by the need to repair and expand our aging electric transmission and distribution infrastructure. How these two trends will balance is hard to predict. 

A scenario where we see electricity prices continue to fall as fast as 1 percent per year seems quite possible. If we put this 1 percent annual decline into PVCalc, the IRR of each system falls by 2 percent. The IRR for System A becomes 10.7 percent, which is still pretty hard to beat. The IRR for System B falls to an unattractive 2.2 percent, but this is still better than we can expect from a money market mutual fund like FDRXX.

Repairs

Most home solar systems come with warranties. Solar panels usually have a 25-year power warranty that guarantees that electricity generation will not fall too much faster than expected. The expected return calculations already account for some degradation, the rate of which is specified in the “degradation” field of PVCalc. The rest of the system usually carries a 10- to 12-year product warranty, and the electricity produced in the first years of a solar system is the most important in determining the expected return. 

If, for instance, in the highly unlikely case that System A were to break down and be completely worthless after 15 years, we can see the effect on return by putting 15 into the “useful life” field. In this case, the IRR of System A falls only to 10.2 percent from the initial 12.7 percent, still a far better return than we should expect from a stock market mutual fund over the next 15 years.

Part of the reason System B was more expensive was that it was made with SunPower AC panels, which come with a comprehensive 25-year warranty on all of the expensive system components. Hence, if System B were to fail during the 25-year useful life I assumed (and it will likely last longer), it could be fixed under warranty.

House fires

Including an annual insurance premium of 0.5 percent of the initial system cost reduces the expected return for System A to 11.2 percent. In that scenario, the expected return for System B changes to to 4.0 percent from 4.3 percent, so the cost of insuring against property damage to a solar system is manageable. Such insurance makes sense if the solar system is accounts for a significant portion of your net assets.

Regulatory risk

In the stock market, companies often deal with regulatory risk. Large importers like Walmart are worried about President Trump's proposal for a “border adjustment tax,” because it would increase their costs. A recent petition filed by bankrupt Suniva with the International Trade Commission could result in a 40 cents per watt tariff levied on solar cells imported into the U.S. This worries solar financiers and residential solar installers.

The recent rise of stock market index mutual funds like VFIAX since the election also has to do with regulation, namely, the anticipation that regulations will be reduced and businesses will become more profitable. If those reforms fail to happen or the profits fail to materialize, the market and mutual funds will fall.

Regulatory risk can also affect the value of a home solar system by changing the expected future payments. Net metering and other payment structures to compensate homeowners for the power they send to the grid are created by state regulators, and what regulators give, regulators can take away. Although state utility commissions have a great deal of power to change rates, they are generally appointed by elected state officials. As such, they are subject to political pressure, and usually avoid actions that will be unpopular with a large number of voters. Yet they also have a mandate to ensure the financial stability of the utilities they oversee. This can lead to unpleasant surprises for solar customers if utilities persuade regulators that their financial health is at risk.

The most stark example of regulatory risk for solar was when the Nevada Public Utilities Commission reduced solar customers' payment for net excess generation by three-quarters in December 2015. The commission also tripled fixed charges -- and retroactively applied all of these changes to existing solar customers. For someone considering investing in home solar today, it is the fact that the change was retroactive which should be most disconcerting, since the possibility of a future retroactive change makes it impossible to accurately estimate the future returns for solar.

Any possibility for a retroactive change should concern homeowners considering going solar, but the Nevada example should be comforting to many. This is because it is the exception that proves the rule: No other state regulator has ever retroactively reduced payments for existing solar customers. Moreover, the public outcry was such that the retroactive aspects of the ruling were eventually reversed.

Although regulatory risk is generally low for home solar, it does vary from state to state. The safest states are those like New York that have recently reached decisions regarding the compensation for home solar.  The New York PSC recently ruled that existing residential solar customers could keep net metering for the life of their systems, while homeowners who install solar over the next five years would benefit from net metering for 20 years. The certainty of receiving net metering rates for 20 years should be sufficient for New York homeowners to make an informed investment decision.

Most homeowners should be fairly confident that whatever rules apply to their system at the time it is installed will last (at least for them) a long time. But there is still some chance of retroactive changes. The reason the Nevada regulators' action was so drastic was that the rapid growth of solar caught them by surprise. State regulators that are currently planning ahead for the time when solar takes off in their state should be able to manage a more orderly transition to new rules that adequately address both the costs and benefits of adding large amounts of residential solar on the grid.

All told, regulatory risk should be less of a worry for home solar customers than for owners of stock market mutual funds like VFIAX. Money market funds like FDRXX have minimal regulatory risk; however, it is even less than that of solar.  

Opportunity cost and timing

If you are considering selling a mutual fund, opportunity cost is the risk that it will go up in price after you sell. Nobody likes to sell today, only to find that they could have sold for a lot more at a later date.  Conversely, the opportunity cost of not selling a mutual fund is that the price of the fund may fall before it is sold.

For a homeowner installing solar, opportunity cost is the risk that the cost of home solar installations will fall after they sign the contract. The opportunity costs of not installing solar are that the cost to install a solar system might go up, or that the compensation and incentives may fall.

Although the costs of solar installations have been declining over the long term, in the shorter term, prices seem more likely to rise than fall. The Suniva petition mentioned above could add 40 cents per watt to the cost of solar cells manufactured outside of the U.S. within the next year. Since the U.S. no longer has a significant manufacturing base, that cost will directly increase the cost of a solar installation. 

The Trump administration and Congress are also planning on tax reform in the near term. The largest solar incentive, the 30 percent Investment Tax Credit (ITC), could be a target for cuts in order to pay for Republicans' tax priorities. It is very unlikely that tax reform will be retroactive, so solar installations completed in 2017 should still be able to benefit from the ITC. Even if the ITC is not cut as part of tax reform, it is currently scheduled to phase out between 2019 and 2021.

State incentives for solar may also decline in the near term. In New York, the NY-Sun state incentive for solar installers is set to decline from its current 40 cents per watt to 20 cents sometime this summer. Your solar installer should be able to tell you what is happening with incentives in your state, although what they say should be taken with a grain of salt, since they have an incentive to exaggerate any upcoming declines. There are also other resources. DSIRE, for instance, offers a comprehensive database for both state and federal renewable energy and energy efficiency incentives.

Finally, for people in my home Ulster County or nearby Orange County who are currently or about to sponsor group buying discount campaigns like Solarize, these campaigns only run for three months. The discount will end on July 31 in Ulster County and September 1 in Orange County.

All told, the medium-term trend for the cost of a home solar installation is likely to be up.

While the price of a money market mutual fund like FDRXX does not change over time, the price of a stock market fund like VFIAX will rise or fall with the market as a whole. Two widely used methods for evaluating the near-term risk/reward of the stock market are the CAPE ratio discussed in the expected return section and the VIX, or Volatility Index. 

The CAPE ratio is currently high by historical standards, meaning that the risk of a stock market decline is greater than usual, while the chance of the stock market going up in the near term is lower than usual.

Conversely, the VIX is usually high when stock prices are low, and low when stock prices are high. In mid-June, the VIX was trading around $10.50, which is lower than it has been at any time in the last 10 years. It is currently lower than it was at any time since before the financial crisis in 2008. As the VIX fell to its recent low from a 2008 high, VFIAX has risen 167 percent, or a compounded 12 percent per year for the last eight and a half years.

In terms of timing and opportunity cost, taking money out of mutual funds and putting it into solar seems like an excellent risk/reward tradeoff in June 2017.

Liquidity

The biggest downside for a home solar installation is liquidity. The only way to get your money out of a solar system is to sell your home, or wait for it to come back to you over time in utility bill savings. The great virtue of mutual funds is that you can sell them and get cash within 24 hours. If you expect to need the money you have in mutual funds in the next few years, you are better off using some other sort of financing such as a loan to pay for your solar system than selling your mutual funds.

Conclusion

For a homeowner looking for a long-term investment, or one with money in mutual funds looking for more attractive investments, home solar is an excellent choice. For many homeowners, it offers very attractive returns compared to almost any mutual fund. Since every solar installation is different, finding that expected return is best done using a dedicated solar or other financial calculator, such as PVCalc. 

While a higher expected return is often a good reason to invest in solar, there are usually other important considerations. People who expect to need the money they are investing in the next few years should avoid difficult-to-sell investments like solar. 

Most other considerations favor a solar investment over most mutual funds:

  • Stock or equity mutual funds are generally considered much more risky than a home solar installation.
  • Gains from mutual funds are taxable, while electricity bill savings from solar are not.
  • Current stock market indicators show greater-than-usual risks and lower-than-usual potential rewards.
  • While the price of solar is likely to decline over the long term, recent sharp declines and political and regulatory risks mean that solar installations could easily become more expensive over the next few months or years.

You may not own a home, or your roof may be shaded, in need of replacement, or otherwise unsuitable for solar. If it is, a reputable solar installer will tell you so. 

If your roof is right for solar, there may never be a better time to sell your risky mutual fund and put it in something that is as safe as houses: a home solar system.

Tom Konrad Ph.D., CFA is the editor of AltEnergyStocks.com and an investment analyst specializing in environmentally responsible dividend income investing. He is Chair of the Environmental Conservation Commission for the Town of Marbletown , New York.

June 12, 2017

Electrovaya's Battery Bargain

by Debra Fiakas CFA

Last week management of Electrovaya Inc. (EFL: TSX; EFLVF:  OTC/QB) were forced to issue a statement stating there were no fundamental developments to explain a dramatic decline in its share price.  The stock was trimmed back by 30% in two days under exceptional trading volume.  Electrovaya has developed proprietary lithium ion polymer batteries for grid storage and transportation applications.  Other than financial results for the quarter ending March 2017, the Company has had little to tell investors about the batteries, its customers or any other topic.

Electrovaya distinguishes its lithium ion batteries among competitors with a ceramic separator that improves battery safety.  Zero hazardous accidents have been reported for the batteries with this innovation used in smart cars.  Competitors have reported battery failures some of which have resulted in car fires.  Inadequate insulation of electrodes is often cited as a reason for such ‘thermal runaway’ in batteries.

The company’s business pipeline appears to be gaining volume.  During the last earnings conference call management reported new orders in the materials handling sector.  Additionally, one of its battery modules in being tested for residential energy storage applications in the U.S., Europe and Asia.

Management has characterized the year 2017 as a transition year for Electrovaya.  The company reported CDN$19.5 million in total sales in the fiscal year ending September 2016.    At this level of production, gross profit was 25% of sale and not large enough to cover operating costs.  Nonetheless, greater efficiency is expected as the company increases utilization of new production capacity recently acquired in Germany.
The company used CDN$8.1 million in cash to support operations in the 2016 fiscal year.  Cash resources were dangerously depleted at the end of September 2016, at CDN$668,000.  A new loan of $17 million has fortified the coffers.  We estimate the company has sufficient resources to support operations for at least another year, longer if the pace of business picks up.  An expansion in order volume could lead to greater production efficiency is and higher gross margin.

For investors with confidence in Electrovaya management to deliver on its strategic plan, the dramatic decline in price represents a compelling opportunity to pick up shares at a bargain price.  The company recently appointed a new director of sales for the U.S. materials handling market.  The plan is to build on recent new relationship with a Fortune 100 company with a fleet of forklifts.

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.

June 08, 2017

From Paris to Drawdown

by John Fullerton

Yes, it was a shameful poke in the world’s eye by the dangerously narcissistic, temporary occupant of the White House.

Like other unconscionable and unfathomable acts of the early 21st century—a period of historic great change already—Trump’s pulling out of the Paris Climate Agreement has sent me searching for the deeper meaning of it all, while the pundits flail away.  

The attack on the World Trade Center, an iconic symbol of globalization if there ever was one, triggered for me a period of introspection and a personal existential crisis as it opened up a possible dark side of my previously unquestioned Wall Street-influenced worldview.  Then the financial crisis drove a stake in the heart of our failed neoliberal economics and finance ideology, leaving in its wake profound and still unanswered questions.  Brexit shined a light on the flawed architecture and economic assumptions underlying the European Union, while Trump’s unimaginable election should force America’s self-anointed elites, in particular, to face their own shadow.

Is there not a deeper message being offered up to us as we undergo the shock therapy that is the Trump phenomenon, with his extraordinary ignorance, egotism, and moral ineptitude, most recently evidenced by his unconscionable withdrawal from Paris?  It’s worth our reflection: Trump as cosmic messenger, the wake-up call we deserve.

Consider the reality. The Paris Agreement is not an enforceable treaty with binding emissions limits.  Nor is it even an adequate statement of intention, since even if all signatories live up to their promises, the best scientific projections suggest we will not stay below the intended 2-degree warming ceiling.  And, we know we actually need to stay below 1.5 degrees warming, a radically different proposition.  Finally, nothing in the Agreement addresses the existential threat it poses to all Petro States since the math implies that 80% of existing fossil fuel reserves, the lifeblood of these societies, must remain in the ground, demanding unprecedented economic transitions requiring a new development paradigm, and that it will that take decades of investment and hard work.  See Venezuela for a preview of the challenges to come.

Russia is such a Petro-State.  Hmm…Calling Jared?

So perhaps the first deeper message we need to hear, disguised below Trump’s disgraceful act is: “The Paris Agreement amounts to little more than appeasement; get serious, people.”  

So far, the initial response within the United States and globally is actually quite hopeful.  States led by California, cities led by Pittsburgh, and a vast cross-section of the business community have been emboldened to show the world (and ourselves) that the “current occupant” does not get to decide for its people on a matter of such grave importance.  “We’re still in!”  Perhaps the sleeping bear – we, the people – has finally been poked?

Second, one primary reason the Agreement was not a binding treaty is that all participants understood that Obama could never deliver the dysfunctional U.S. Congress.  So the deeper message we must confront is that many of the leading global institutions of governance, from the United Nations to the United States, to the European Union, are all incapable of addressing the urgent and interconnected global governance crises of the 21st century.  Where are the serious plans to address this reality, while at the same time reacting to the unending crises of the day?

Third, despite decades of scientific analysis and diplomacy around climate change, we are still working off a horribly inadequate playbook that reduces the complex challenge of restoring balance to the earth’s carbon cycle to simply a call by nations to “cut fossil fuel emissions” by some seemingly random, politically negotiated amount based on what each nation was willing to commit to, that collectively is grossly inadequate to the task at hand.

Just in time, Paul Hawken and colleagues have recently published Drawdown. The name calls out the real goal we must embrace: “drawdown” of the concentration of greenhouse gasses in the atmosphere, rather than the insufficient objective of reducing emissions.  We are at 402 PPM today and need to get below 350 in the face of a growing population and rising standards of living for the majority of humanity.  That’s the task.  It demands an integrated, multi-dimensional, rigorous plan.  Drawdown provides the analytical foundation for such a plan, documenting the 100 top viable solutions using available technology, and conservative assumptions about their realistic scale-up rates and economics over a thirty-year period between 2020 and 2050.  

Good news:  the math says we can do this!  It identifies 1000 Giga Tons reduction in atmospheric CO2 (or equivalent), and requires collectively a highly diversified investment of $30 trillion over thirty years, generating economic savings (in the aggregate) of two and half times that amount, on top of avoiding the worst-case consequences of climate change.  To be clear, this represents a profound and unprecedented shift in the allocation of resources from business as usual.  That’s the deal.

The results from the Drawdown analysis are not what most will expect.  First of all, the single largest solution is not solar or wind.  It’s refrigerant management.  HFCs, the “solution” to the ozone layer problem of the past, turns out to have somewhere between 1,000 and 9,000 times the greenhouse effect of CO2.  We must simply swap out the AC, which will have nine times the impact of converting to electric vehicles (only number 26 on the Drawdown list).  Who will be the Elon Musk of AC?

Perhaps more revealing is the combined impact of family planning and educating women, which, when looked at together, would move to the top, exceeding onshore and offshore wind combined.  Population is often a taboo subject.  But an extra billion people all desiring to live a middle-class lifestyle makes a massive difference, so we need to be able to talk about it as part of a comprehensive plan.

And perhaps most hopeful, the report rightly turns our attention to the amazing natural “technology” we take for granted: photosynthesis, the basis of all life on this planet.  Drawdown demands we focus on the massive carbon sinks where carbon is safely stored, in addition to reducing emissions.  Remarkably, few realize that our soils are the second largest carbon sink after the oceans, comparable to the world’s forests.  Small, achievable percentage changes in the stock of carbon held in our soils, through profitable regenerative agriculture hold massive potential for drawdown, without even factoring in all the ancillary benefits to human health and, therefore, our healthcare crisis, water retention, desertification, and species loss.  The role of regenerative agriculture and land use of all varieties, from no-till crop farming to holistic grazing accounts for fifteen of the top twenty-five drawdown solutions.

So the message we need to hear underlying Trump’s Paris fiasco:  The current occupant will be judged by history; but so will we:  wake-up call.  The U.S Congress and the Trump enablers in his Administration have a chance to restore their integrity, but no one is depending on it.  National leadership on climate has long been outside the U.S. federal government and that’s OK, but it’s a lost opportunity.  U.S. states, cities, the U.S. military, and the private sector are already mobilized and that will now only accelerate.  

We must shift our attention from grand diplomatic gestures by institutions of governance designed for a different time to a rigorous, empowering plan where there is no silver bullet but unlimited and empowering opportunities where the real leaders are already defining our future.  Those leaders are us.

The goal is simple: drawdown.  It’s no easy feat, and time is not on our side.  Let’s roll, people.

John Fullerton is the founder and president of Capital Institute, a collaborative working to illuminate how our economy and financial system can operate to promote a more just, regenerative, and thus sustainable way of living on this earth. He is the author of “Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy.” Through the work of Capital Institute, regular public speaking engagements, and university lectures, John has become a recognized thought leader, exploring the future of Capitalism. John is also a recognized “impact investment” practitioner as the principal of Level 3 Capital Advisors, LLC.

June 04, 2017

Ten Clean Energy Stocks For 2017: First Quarter Earnings

Tom Konrad Ph.D., CFA

In the two months since the last update, most of the stocks in my Ten Clean Energy Stocks model portfolio have reported first quarter earnings.  There were few surprises, and those were mostly pleasant ones, allowing the model portfolio to add to its gains, and pull a little farther ahead of its benchmark. 

For the year to the end of May, the model portfolio is up 13.8%, 2% ahead of its benchmark.  The benchmark is an 80/20 blend of the clean energy income benchmark (the Yieldco ETF YLCO) and the clean energy growth benchmark (Clean Energy ETF PBW), with the ratio matching the 80/20 mix of income and growth stocks in the model portfolio.

The 8 income stocks again led the pack, with an average total return of 15.2% for the year to date.  The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage also did well, up 13.5%.  For comparison, the income benchmark YLCO produced a solid 11.4% return.

The two growth stocks recovered from losses early in the year and are now up 9.4%, but still behind PBW at 12.9%.

10 for 17 total return

I

Stock discussion

Income Stocks

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. 
5/31/17 Price: $22.56.  YTD Dividend: $0.408 (2.2%).  Annualized Dividend: $1.655.  YTD Total Return: 21.2%

Wind-focused Yieldco Pattern Energy Group advanced in strongly in April ahead of first quarter earnings.  Earnings did not disappoint, and the Yieldco added to those gains in May.  Guidance for 2017 Cash Flow Available for Distribution (CAFD) is $140 to $165 million, which would be 5% to 24% increase on 2016 CAFD. 

Growth has been slowing for Pattern, mainly because the low share price following the Yieldco bust at the end of 2015 has prevented the company from raising much equity capital.  I expect that the share price will need to rise into the high 20s before we see large equity issuance from Pattern.  With lower growth, they are also lowering their quarterly dividend increases.  Since the IPO in 2014, the average quarterly increase has been 2.7%, but the company only increased its dividend 2% in the fourth quarter of 2016 and 1.4% this quarter.  This lower rate of increases seems prudent, given that CAFD may only grow 5% this year at the low end.

Less prudent in a time when the company needs to be careful with its cash is the Yeildco's consideration of an investment in the early stage projects of its parent, Pattern Development.  In general, I think it is a good idea for Yieldcos to invest in project development with some of their resources, and eventually, as they grow larger, do much of their project development in house.  That said, the time to invest in relatively risky but potentially high return businesses is when the stock is highly valued.  When money is tight, as it is now for Patten and most other Yieldcos, it's best to focus on investments that will increase the dividend in the short term.  The time to invest in Pattern Development will be after the stock price recovers. Even small investments in early stage projects like the one being considered will only delay further stock price recovery.

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.
5/31/17 Price: $13.64.  YTD Dividend: $0.257 (2.0%)  Annualized Dividend: $1.028.  YTD Total Return: 7.1%

I took a deeper look at Solar-only Yieldco 8point3's plans to refinance its company level debt with amortizing debt in March.  The company abandoned these plans April when one of its sponsors, First Solar (FSLR), announced that it was considering selling its stake in the Yieldco.

While I believe the refinancing plans were prudent, I found that they would have reduced 8point3's CAFD below the level needed to sustain its current dividend.  To make matters worse, the Yieldco announced a dividend increase while the refinancing plans were still in place.  This behavior basically meant that 8point3 was hoping that its unsustainable dividend increases would cause investors to buy the stock and drive up the stock price.  This hoped-for stock rebound would allow 8point3 to make new investments and increase cash flow enough to avoid a dividend cut.

In short, 8point3 was acting like it expected a return to the Yieldco bubble of 2014 and early 2015.

The abandonment of 8point3's (prudent) plans to refinance its company-level interest only debt with project-level amortizing debt leaves sufficient cash flow to pay its current dividend, but does not address the reason for that plan in the first place.  8point3's debt matures in 2020, and it is an open question if lenders will be willing to refinance it at comparable terms.  If the stock price recovers, the company will issue new equity and grow itself out of the problem.  If not, the only option open to 8point3 in 2019 may be refinancing with project level, amortizing debt.  That will greatly reduce CAFD, leading to a large dividend cut.  The company's recent dividend increases only make this future problem worse.

This strategy of hoping that the stock market will bail the company out of its financing problems, at the same time as one (if not both) of its sponsors are looking for the exits is, in my opinion, irresponsible corporate management.  While the high yield puts a floor on the stock price in the near term, I believe that long term investors are becoming increasingly skeptical of the company.  This skepticism should also put a ceiling on the share price, and prevent management's hopes of a share price recovery from coming to fruition. 

As the maturity of 8point3's debt moves closer, the consequences of the inevitable refinancing will loom larger in investors' minds.  I don't know when it will happen, but at some point, the stock price will have to drop to reflect 8point3's much lower expected CAFD and dividend after refinancing.

Because of this, I have started selling short calls on the stock, in order to profit from my prediction that the share price is likely to be capped in the near term, and fall in the medium term.

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. 
5/31/17 Price: $21.91.  YTD Dividend: $0.33 (1.7%).  Annualized Dividend: $1.32.  YTD Total Return: 17.1%

In my last update, I said that Hannon Armstrong's recent secondary stock offering had depressed the stock and that the then current price of $19.20 represented a buying opportunity.  The stock of this sustainable infrastructure financier has since risen 14%.  The dividend is still attractive and it still has plenty of room for gains, but is no longer a screaming deal.

The first quarter earnings release was admirably boring, showing steady growth. 

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. 
5/31/17 Price: $17.20.  YTD Dividend: $0.53.  Annualized Dividend: $1.08.  YTD Total Return: 15.5%

Yieldco NRG Yield (NYLD and NYLD/A) had a mixed quarter, with improved availability of its wind and solar assets, offset by unfavorable weather.  It does not matter how well your solar plant is running if it does not stop raining.  The company's conventional fleet also had problems with forced outages, although some of the losses were recovered through insurance.

These problems were mostly offset by new acquisitions.  Although, like many Yieldcos, NRG Yield's share price has been depressed, its stock price has been recovering and it is able to raise some equity capital to accretively invest in new projects.  It also has $144 million in availability from its existing borrowing facilities.  This growth potential means that the Yeildco is still on track to raise its dividend by 15% in 2017 over the previous year. 

Nor should it lack for projects to buy.  In addition to its identified ROFO list, its parent NRG is under pressure to sell its renewable businesses from an activist shareholder.  This might lead to accelerated purchases of some assets at better-than-expected prices.

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.
 
5/31/17 Price: $20.89.  YTD Dividend: $0.25 (2.6%).  Annualized Dividend: $1.00.  YTD Total Return: 10.6%
 

Atlantica Yield continues to impress me, but not the market.  Along with first quarter earnings, the company announced that it had "obtained a waiver in Kaxu which waives any past potential cross-default with Abengoa in the project finance agreement." After Kaxu, the company needs to obtain only one more such waiver in order to free itself from the after-effects of its former parent Abengoa's bankruptcy. 

The remaining project, ACT, represents 300 MW of conventional power generation in Mexico, and accounted for 13% of revenue in 2016.  The muted reaction of investors to first quarter earnings may have been in response to the company's decision not to raise the dividend until it obtains the final waiver for ACT.  Given ACT's share for revenue and cash flow, the board could have easily justified increasing the quarterly dividend to $0.30.  The fact that they chose to keep the dividend at $0.25 is the exact opposite of the "raise the dividend and hope investors come" strategy that concerns me at 8point3 Energy Partners (see above.) 

Contrasting Atlantica and 8point3

In sharp contrast to 8point3, Atlantica is preserving corporate capital and using it to make small investments which will lead to long term dividend growth, such as the $10 million investment in a California-Arizona transmission line announced in the first quarter. 

Like all income investors, I like dividend increases, but I like prudent uses of capital even more.  With Yieldco stocks still out of favor, it's much better to fund growth with retained cash flow as Atlantica is doing than to squander current resources in the hope that the stock price will recover and shareholders will be willing to fund today's dividend increase after it has already happened.

Another telling point of contrast between Atlantica and 8point3 is Atlantica's stated 3x target for the ratio of corporate level debt to pre-debt service CAFD.  For Atlanica, this ratio stood at a cautious 2.6 at the end of the first quarter.  8point3 does not use (or at least disclose) this ratio, but we can estimate it.  For 2017, 8point3 is projecting approximately $95 million of CAFD and $25 million of debt service.  All $714 million debt is corporate level, so 8point3's outlook puts the same ratio at just below 6- twice Atlantica's target.

The point of a ratio like this is to ensure that changes in the cost of servicing corporate debt will have a limited impact on dividends.  8point3 is currently paying 3.5% per year for debt service.  This must be refinanced by 2020.  If it is all refinanced at the same 5% rate as Atlantica just refinanced some of their corporate level interest-only debt, the annual debt service cost will rise from $25 million to $36 million, reducing annual CAFD to $80 million, or $1 per share. 

Even this is a best-case scenario that assumes no the company can refinance everything with interest only debt.  If 8point3 tried to meet Atlanitca's 3 times target, it would need to refinance more than half of its debt with amortizing project level debt, annual CAFD would fall to $0.88 a share. That puts the current dividend rate of $1.08/year at 123% of 8point3's long term sustainable CAFD.  This ratio of dividends to CAFD is called the payout ratio, and most Yieldcos target payout ratios of 80% to 90%.   Atlantica's target payout ratio is 80%, and its current dividend of $0.25 per quarter is only 56% of CAFD guidance for 2017.  This leaves a lot of room for Atlantica to increase its dividend later this year.

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. 
5/31/17 Price: $34.54.  YTD Dividend: $0.718 (2.8%).  Annualized Dividend: $1.46.  YTD Total Return: 21.9%

NextEra Energy Partners also compares favorably with other Yieldcos on measures such as payout ratio and company level debt.  Its outlook for long term CAFD from its current properties is approximately $310-340 million, or $2 to $2.20 per share, compared to 2017 distributions of $1.58-$1.62 per share.  That gives a payout ratio of around 80%. 

Management does not plan not to issue additional equity until the share price recovers.  If the share price does not recover, the company may have trouble delivering on it 5 year dividend growth target of 12% to 15% per year, but not until at least 2019, and there is no danger of a dividend cut like the one we could see for 8point3 in the same time frame.  And in Nextera Energy Partners' case, the necessary share price recovery is already underway.

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. 
5/31/17 Price: $14.75.  YTD Dividend: $0.25 (1.6%)  Annualized Dividend: $1.00.  YTD Total Return: -3.9%

Along with Atlantica, waste-to-energy developer and operator Covanta continues to suffer because of market weakness in power prices and commodity metals.  Earnings were significantly negative at -$0.41 per share, but like Yieldcos, much of this loss is in the form of depreciation, and so it does not have much bearing on the company's ability to maintain its dividend.  The company's Free Cash Flow guidance for 2017 is $100 million to $150 million, which should be sufficient to maintain its $129 million in annual dividend payments until cash flow increases because of growth investments or recovering commodity markets.

The company's Dublin facility accepted its first waste delivery and remains on track  for commercial operation in the fourth quarter of this year. 

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. 
5/31/17 Price: $21.22.  YTD Dividend: $1.023 (5.1%).  Annualized Dividend: $2.05.  YTD Total Return: 11.3%

Leading independent charter owner of container ships had a very bullish first quarter earnings report, noting that the weakness in pricing container ship leases seemed to have hit bottom.  Other shipping companies, such as Maersk (MAERSK-B.CO) have noted similar improvements.  Despite this, the company's common stock continued to drop in May, and its preferred stock (such as SSW-PRG) has not delivered significant gains.  I think this makes now a particularly good time to buy the company's preferred shares, or even speculate on a sharp recovery of the common stock.  I did both in recent weeks, buying a little of both the preferred E and H series shares, and buying some long dated $7.5 calls on the common stock as it temporarily fell to near $5.

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. 
5/31/17 Price: $7.12.  YTD Dividend: $0.037 (0.6%).  Annualized Dividend: $0.14.  YTD Total Return: 9.5%

Everything seems to be coming together for vehicle and fleet management software as a service provider MiX Telematics.  For the last 2-3 quarters, we've been seeing renewed growth in subscriptions in most of the company's segments.  Subscription revenue came in ahead of guidance for the fourth quarter and fiscal year ending March 31st. 

The recovery of oil prices to around $50 a barrel has led to a rapid increase in activity should lead to renewed growth in subscriptions MiX's oil and gas customers.  This segment was a drag on MiX's results in 2016, but should continue to be a tailwind for the rest of this year.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10. 
5/31/17 Price: $4.52.  YTD Total Return: 9.4%

As I expected, Aspen Aerogels delivered unimpressive first quarter earnings.  What I did not expect was that the stock would rally for no reason I could see other than a good long term valuation even if the near term prospects still seem weak.  When a stock falls for no reason I can determine, I usually buy.  When it rises, as Aspen did, I remain on the sidelines. 

Final Thoughts

Although the world political and economic climate remains volatile, the US stock market has remained calm so far this year.  How long that can continue is anyone's guess, but I think defensive investments like cash, attractively valued income stocks, and real income investments like home solar remain the best places to put your money. 

On home solar, I recently published an article comparing it as an investment to commonly held mutual funds.  Spoiler: the mutual funds did not fare well.  For defensive income stocks, Atlantica Yield, Covanta, and Seaspan Preferred shares are all looking very attractive right now.  As for cash, keep some around.  I suspect we will see some much better valuations in the stock market over the next 6 months to a year.
 
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP.  Long puts on SSW (an effective short position held as a hedge on SSW-PRG.  Short calls on CAFD.)

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.

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