Tom Konrad. CFA

A "bonus" stock pick this year.  Also, notes on New Flyer Industries and Finavera Wind Energy.

Maybe it was because Seeking Alpha did not carry my annual list of 10 Clean Energy Stocks for 2012 this year, but no one seems to have noticed that there were actually 11 stocks in the list.  Call it the Spinal Tap of top-ten lists.

If anyone did notice the extra pick, they didn't leave a comment.  What happened was that I have two number 8 stocks, but there is enough text between them that neither I nor most of my readers could see both 8's at once on the same screen.  Oops!

I had 10 originally, but my messed up numbering led me to think I did not have enough, and so I went back and added Honeywell (HON) at the last minute, choosing to play it safe with a large cap energy efficiency company.  So far this year, Honeywell has produced the expected safe results, but because clean energy stocks (especially solar) have been on a tear,  Honeywell's 10.5% return has dragged down the portfolio's average a little.  But who's complaining?

Performance

I'll be complaining if including Honeywell makes my list not beat PBW, my clean energy benchmark for the first time in 2012.  As of February 3rd, PBW is up 20.7% and my broad market benchmark IWM is up 12.3%.  Meanwhile, my (ahem) eleven stocks are up an average of 15.0%, with New Flyer's monthly dividend payment bringing the portfolio's total return to 15.1%.  Readers who hedged their portfolios by buying a put on SPY as I suggested did worse (since the market was up in January), slightly under-performing even the broad benchmark with a total return of 12.0%.  But the year is still young.

Solar

The main reason this portfolio has underperformed broader clean energy was my decision not to include any solar stocks.  Solar stocks have been rapidly making large percentage gains from the miserable lows they hit at the end of last year.  The Guggenheim Solar ETF TAN is up 32% so far this year, and solar stocks are prominent among PBW's holdings.

I toyed with including a solar stock or two in the list, for similar reasons to those I discussed last October, but I decided to hold off simply because I don't follow solar closely enough to make informed selections. 

Finavera Wind Blows Back

In truth, the portfolio was doing considerably worse only a week ago, but recently got a boost from a couple stocks which had been lagging.  First, Finavera Wind Energy (FNVRF.PK)
 updated investors on progress towards environmental permitting of its projects, highlighting the fact that two of their projects are within months or receiving final permits:

Regularly published power industry data provides some context for the valuation of wind energy projects. The data illustrates the average multiples paid for projects in 2011. Early stage projects have sold for more than $60,000/MW. Projects that are fully permitted and have a power purchase agreement have sold for more than $500,000/MW. The jump in value from the early stage to the next stage is significant. Finavera currently finds itself at this inflection point. Our projects are being valued in the public markets as early stage, yet we are a few short months away from being fully permitted on our first two projects. We believe Finavera is on the cusp of a significant asset re-valuation.

At $0.43, Finavera is now up only 5% for the year, but if those permits are granted it has a lot farther to go.  Investors who bought the stock last month when it was trading in the $0.25-$0.30 range are already feeling smug (I added to my positions, but mostly between $0.35 and $0.40.)

New Flyer Puts the Pedal to the Metal

Second, New Flyer Industries (NFYEF.PK/NFI.TO) stock has been accelerating since January 19th.  The unusual action prompted regulators to ask New Flyer to disclose that New Flyer has been in discussions "regarding a potential commercial and strategic relationship."  But company CEO Paul Soubry says there are no deals closing, and several analysts agree.

The stock has been incredibly under-priced since last summer.  North American transit bus orders have been slow for the past two years, and New Flyer has been reducing its backlog as a result.  But the flip side of the slow bus market has been a rapidly aging bus fleet and increasing pressure on transit operators to replace aging buses. 

The share price run-up is most likely the result of investors realizing that this is a massively under-priced stock in a cyclical market which is about to enter an expansionary phase.

Conclusion

Although my stocks are suffering this year from my long-term decision to mostly avoid solar, I'm not complaining about the returns, and I'm very happy to see Clean Energy stocks finally heading in the right direction after a gruesome year in 2011.

DISCLOSURE: Long NFYEF, FNVRF, and puts on IWM and SPY.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:22 AM | Permalink | Comments (6)

Tom Konrad, CFA

There is a silver lining to the horrible year clean energy stocks had in 2011: the opportunity to buy clean energy stocks (often considered a growth sector) at prices one would expect from value stocks.

Each year since 2008 I have published an annual list of ten clean energy stocks I thought were good buys at the beginning of the year.  While the 2008 list was not really intended as an investment portfolio, my annual lists quickly evolved into a mini-portfolio of stock intended for hands-off investors who did not want to pay the high fees of clean energy mutual funds, but who, like me, saw shortcomings in the available clean energy exchange traded funds.  In particular, the clean energy exchange traded funds (ETFs) and most clean energy mutual funds) are far too focused on high profile sectors like solar and have hardly any exposure to the most economic clean energy sectors, such as energy efficiency, alternative transportation, and biomass.  Most clean energy ETFs come with relatively high costs for ETFs (usually around 0.6% to 0.7%), which is expensive enough that a small portfolio of clean energy stocks can be acquired for less over a modest holding period.

With that in mind, I now focus my annual list on the most economic clean energy sectors.  Within those sectors, I include stocks I currently consider relatively good values, similar to the clean energy model portfolio I wrote about in late 2009.

The relative results have been good, when compared to the returns investors would have gotten if they had invested in the clean energy ETFs I use as a benchmark.  (I've currently settled on the Powershares Wilderhill Clean Energy ETF (PBW) as a benchmark, because it is the most widely held of all clean energy ETFs, but I used GEX and ICLN in the early years.)  Over the past four years, my picks have outperformed the benchmark by 12% in 2008, 45% in 2009, 10% in 2010, and most recently by 4% in 2011, despite company-specific bad news for three of the stocks in the portfolio.

The Best Opportunity Since Early 2009

Despite the good relative performance, the last four years have been so bad for clean energy in general that someone who had been following the portfolio since 2008 would still be down because of large losses in 2008 and 2011.  The upside of this poor performance is that now is the best time to buy clean energy stocks since the start of 2009. 

In both 2010 and 2011, I cautioned readers that the stocks I listed were only good values relative to clean energy stocks in general.  This year, as in 2009, I have the pleasure of bringing you a list of ten clean energy stocks I think are good values at current prices.   This does not mean that my current crop of clean energy names can't fall, but it does mean that they have much more upside potential than they did in either of the last two years.  If this portfolio ends 2012 lower than it is now, I'm confident the decline will have been caused by a fall of the stock market as a whole: Bad news specific to clean energy seems to be more than adequately reflected in the current prices of clean energy stocks.

That said, the fragile economy and political paralysis in both the US and Europe hold many risks for the stock market in general in 2012, so investors in these stocks would probably be wise to hedge their positions with puts on broad market ETFs such as SPY and IWM.

The Picks

Energy Efficiency

A dimmable LED downlight. Photo by author

Energy Efficiency has long been a staple of my annual lists, because energy efficiency measures make sense in both good times and bad, both as a way to save money, and to stimulate the economy.  Because energy efficiency measures cost less than conventional energy, they stimulate economic activity twice: first when they are installed (as would any investment) and then for years to come, as the energy cost savings are spent on other goods.

My energy efficiency picks are:

 1.Waterfurance Renewable Energy (WFIFF.PK $15.3455, WFI.TO), a perennial favorite because of their profitable business selling geothermal heat pumps.  Waterfurnace recently increased their quarterly dividend to $0.24, for a 6% annual yield.

2. Lime Energy (LIME, $3.18) was one of my two top picks in the energy services sector, the other being Ameresco (AMRC.) I chose to include LIME in this list rather than AMRC because AMRC is already up 35% since I recommended it.  While I still like AMRC at current prices, I think LIME has better potential upside.

3. Honeywell (HON, $54.35) has a strong business providing building controls and efficient heating and cooling equipment, as well as a performance contracting arm.  I currently like the company's relatively modest trailing and forward P/E's of 16 and 12, respectively, strong cash flow, low debt, and 2.7% annual dividend yield.

4. Rockwool International (RKWBF.PK $82.29, ROCK-B.CO 473 DKK10) is an international insulation manufacturer whose share price has fallen because of the EU crisis along with many other Eutopean stocks.  Yet with only 43% of 2010 revenues originating in Europe and headquarters outside the Euro zone, the company seems relatively insulated from the full effects of a Euro crisis.  Rockwool pays an annual dividend, and has a yield of 2% based on the most recent dividend payment.

Biomass

By S. Müller (Own work) [CC-BY-2.5], via Wikimedia Commons

I think one of the best ways to play cellulosic biofuels is to buy the companies which control the cheapest potential feedstocks.  I'm not sure that the best use of trash is to make biofuel, but whether it is recycled, composted, digested, incinerated, or converted in to biofuel, I see trash as a future source of revenue in a resource constrained world, and who better to profit from trash than the companies that collect it?

Last summer, I highlighted environmental services companies as a way to invest in biomass in my article Trash Stocks Trashed: An Income Opportunity? 

5. Waste Management (WM, $32.71) was my top pick at the time.  Since then, the stock has since risen over $2 while continuing to pay its $0.34 quarterly dividend.

6. Veolia Environnement SA (VE, $11.05) was then trading around $16, and I was cautious about the compnay.  Today, Veolia seems too cheap to pass up, despite the fact that I expect its 2012 annual dividend to be significantly lower than the $1.47 (13.3%) paid in 2011.

Alternative Transport

By Steve Morgan (Own work) [CC-BY-SA-3.0 or GFDL], via Wikimedia Commons

Electric vehicles (EVs) may be cool and appeal to early-adopter techies and some conspicuously consuming greens, but I think EV adoption will be a long, hard slog.  The technologies which are likely to advance faster are those that are already economic, but also save transportation fuel.  Alternative transportation such as biking, light rail, and buses top my list.

7. Accell Group (ACCEL.AS, €14.15/$18.33) is a Netherlands based bicycle maker which I recently highlighted as a peak oil investment to buy now, because the  company has been battered by the EU crisis.  Accell is up 11% since then, although the stock still has significant Europe risk.

8. New Flyer Industries (NFYEF.PK $5.6492, NFI.TO) is the largest North American manufacturer of heavy duty transit buses, and currently looks like a steal, despite the fact that the cyclical bus industry is in a downturn, undermining profits. 

Both alternative transportation stocks pay healthy dividends, with Accell's over 6%, and New Flyer's expected to fall next year to a still healthy 8% to 9% at the current stock price.

Renewable Energy Developers

Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

With overcapacity among solar module and wind turbine manufacturers, the consumers solar modules and wind turbines seem best placed to benefit.  Low prices are not only good if you are a homeowner looking to put a small PV system on your roof, they are also good for renewable energy developers.

Government subsidies may be cut, but manufacturers still have product to sell, and they'll continue to do so as long as the price exceeds their marginal cost of production... even if that means they'll never recoup the capital invested in their factories.

This is good news for renewable project developers who have projects locked in with the current subsidy regime, and who have the financing to build them.  The improved economics of owning solar farms can not be more aptly demonstrated by the purchase of a second solar farm by Warren Buffett controlled MidAmerican Energy Holdings.

While selling renewable energy equipment can be an extremely competitive business with constantly eroding margins, power production is one of the most defensive businesses there is, with electricity usually sold under long term (15-20 years) contracts at pre-determined prices.  Nevertheless, small renewable energy power producers are looking cheap compared to their future discounted cash flows. 

8. Finavera Wind Energy (FNVRF.PK, $0.409) is a wind project developer in Ireland and British Columbia.  Although the company is small, risk is much reduced by joint development agreements with industry heavyweight like GE Energy (GE), which will be providing the equity needed to develop the company's first 77 MW project in British Columbia, and has indicated interest in additional projects on similar terms.  This outside financial muscle is good, since the company's balance sheet is weak, but the company is working to rectify that:  Finavera just closed a $442M private placement at $0.45 a unit (1 share plus half a 12 month $0.55 warrant.)

9. Western Wind Energy Corp (WNDEF.PK, $1.96) just completed its 120 MW Windstar project in time to qualify for the 30% federal cash grant before it expired at the end of 2011.  Based just on the company's completed and advanced projects, I think the discounted cash flow value of Western Wind is now approximately $6, making the company a safe bet with an easy 2-3x upside.

10. Alterra Power Corp. (MGMXF.PK $0.40, AXY.TO), formed by the merger of Magma Energy and Plutonic Power Corp, Alterra has a solid cash position and a diversified base of producing assets across both technologies and geographies.  As the company continues to develop projects in-house and bulk up through mergers and acquisitions, I expect the stock price to increase towards the value of its assets, leading to outsize gains for investors who buy at the currently depressed price, which is currently half of book value, and includes $0.10 a share in cash.

Hedge

As discussed above, I think 2012 is a good year to hedge against a broad market decline, and buying puts is the simplest and safest way to do this. 

SPY ($125.50) tracks the S&P 500 and has a fairly liquid options.  In order to be able to hedge ten stocks with an equal investment in puts, we'll need to buy significantly out-of-the money puts.  For a complete hedge, we'd want the notional value of the underlying shares of SPY to be equal to the value of the hedged portfolio times the portfolio's beta.  Since I don't put a lot of faith in such calcualtions because betas and other correlations tend to change during market crises, so I'll just guess and use:

SPY January 2013 $110 Put (SPY130119P00110000, $7.81).  For every $781 put contract, the notional value of the underlyng is $11000.  If we assume our portfolio's beta is 1.1, each such put contract would be sufficient to hedge a $10,000 portfolio.  The beta of 1.1 is just a guess, but it makes for round numbers.  Betas are generally near 1, and are usually higher for riskier stocks.

This hedge not only provides us with some insurance against a large (greater than 13.4% = 1-110/125.5) decline in the S&P 500, it also makes the hedged portfolio greener than the unhedged one.  Puts and shorts are effectively dis-investments in the underlying stock or ETF, and to the extent that companies in the S&P 500 index reflect the generally "brown" economy, the hedged portfolio is greener than the unhedged one.

What will 2012 Bring?

I'm optimistic about 2012.  Unless we see a total economic meltdown (for which I suggest readers hedge their portfolios, as discussed above), I expect strong appreciation of this portfolio of undervalued clean energy stocks in 2012.

As usual, I'll track the performance with quarterly updates, with the stock picks benchmarked against PBW.

DISCLOSURE: Long WFIFF, LIME, AMRC, RKWBF, WM, VE, ACCEL, NFYEF, FNVRF, WNDEF, MGMXF, and puts on IWM and SPY.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:19 PM | Permalink | Comments (13)

Tom Konrad CFA

My clean energy portfolio outperformed again in 2011, but it was a Pyrrhic victory.

Without a doubt, 2011 was a horrible year for Clean Energy stocks, nearly as bad as 2008.  The difference was that, in 2008, the entire stock market was crushed, while this year, the broad market ended with only modest declines compared to clean energy stocks.

Based on 2010 and 2011 closing prices, the broad market (as measured by the performance of the Russell 2000 index), was down 10%, while clean energy stocks were down 52%, as measured by the most widely held clean energy ETF, the Powershares Wilderhill Clean Energy ETF (PBW), which I use as a benchmark for the sector.   For the fourth year running since I began publishing an annual list of picks, my portfolio again beat my clean energy benchmark, but only because of the miserable performance of PBW.  The portfolio as a whole lost 48% after taking into account the effect of dividends.  (My portfolio exceeded its benchmark by 12% in 2008, 45% in 2009, and 10% in 2010.)  You can find the original article introducing 2011's clean energy picks here.

What Happened?

I attribute my superior performance in previous years to better sub-sector selection.  I generally avoid solar stocks because I have long felt that the solar sector was too popular among people who should know better and too competitive for companies to retain consistent long term margins.  Declining solar manufacturing margins arrived with a vengeance in 2011, causing an implosion of solar stock prices, including a couple high-profile bankruptcies.

Energy Efficiency stocks are usually central to my portfolios, since energy efficiency has better economics that other energy technologies (including fossil fuels), although this year I chose to include two demand-response stocks EnerNOC (ENOC) and Comverge (COMV) among the energy efficiency picks and got badly burned, as demand-response seems to be becoming commoditized as well.

Despite the fact that I managed to squeak out a win over PBW, I consider 2011 my worst year to date.  Not only did I make the inauspicious choice to bet on demand response, but I also picked two geothermal developers, in the expectation that 2011 would be a good year for geothermal stocks.  In fact, not only did geothermal stocks fall even further out of favor in 2011, but both of my picks suffered from nasty surprises early in the year, with Ram Power (RAMPF.PK) reporting large cost overruns in the company's flagship San Jacinto-Tizate project in Nicaragua, followed by the resignation of the company's CEO Hezy Ram.  Ram later told me that he left over "Irreconcilable differences with the board and controlling shareholders, about the future course of the company and how to get there."

The news at Nevada Geothermal Power (NGPLF.OB) was even worse.  In May, the company announced a power production shortfall and forecast a gradual temperature (and output) decline at their flagship Faulkner 1 geothermal plant at Blue Mountain.  According to Nevada Geothermal CEO Brian Fairbank in a personal conversation, the problem was that fractured rock at Blue Mountain allows water from reinjection wells to travel much more quickly than anticipated to the production wells, which has the effect of cooling the produced water over time.

Bad news for specific stocks did not stop with these.  In April, American Superconductor, now renamed AMSC (AMSC) admitted that their major customer had refused shipments and had not paid for some previous shipments.  As details emerged, the news only got worse.  Sinovel had been helping to set up a Chinese supplier whose products competed with AMSC's, with some of the new rival's technology stolen from AMSC by a former employee.  AMSC is now pursuing Sinovel in Chinese courts, but Chinese courts are not known for their diligence in the protection of international intellectual property.

For stock-by-stock performance, see the chart and table below:

	Q1 change	Q1 div	Q2 change	Q2 div	Q3 change	Q3 div	Q4 change	Q4 div	Total Return
WFIFF	7%	0.9%	-12%	0.9%	-29%	0.9%	-9%	1.0%	-39%
COMV	-36%		-22%		-2%		-12%		-72%
ENOC	-19%		-15%		-19%		10%		-44%
CVTPF	10%		-17%		-26%		-8%		-41%
TLVT/NFYEF	9%		41%		-47%	5.5%	-7%	3.9%	6%
PCH	20%	1.6%	-10%	1.6%	-30%	1.6%	-1%	1.0%	-16%
NGLPF	-11%		-66%		-9%		-4%		-89%
RAMPF	-35%		-43%		-4%		4%		-78%
AMSC	-18%		-51%		-15%		-1%		-84%
VE	4%		-1%	5.8%	-55%		-12%		-58%
Portfolio	-6%	0.2%	-20%	0.8%	-19%	0.8%	-5%	0.6%	-48%
PBW	1%		-14%		-35%		-4%		-52%
Russell 2K	4%		1%		-27%		12%		-10%

Outlook for 2012

With fully 30% of the companies in my list suffering from unanticipated bad news, I'm a bit shocked that the portfolio still managed to beat its benchmark.  But with my portfolio down by almost half, this is a victory of the "Win the battle, lose the war" variety, and not one I care to repeat.  Fortunately, I don't think I'll have to. 

With so many clean energy stocks having fallen so far, I have been finding stocks which I consider good values for much of the last 6 months.  While 2011 felt a lot like 2008, I think 2012 has the potential to be a lot more like 2009 than any other year since I started this series.  In 2009, my picks were up 57%, while PBW was up 27%. 

Expect to see my new list for 2012 in the next few days.

DISCLOSURE: Long VE, RAMPF, NFYEF, WFIFF, CVTPF, and calls on AMSC.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:52 PM | Permalink | Comments (0)

Tom Konrad CFA

Three stocks I sold recently, and why.

Three years later, I'm still kicking myself that the severity of the 2008 financial crisis and stock market collapse took me by surprise. 

Not that I wasn't in good company.  If a majority of investors had been prepared for the crisis, it would never have happened in the first place: The overpriced CDOs and other securities which were a large part of the cause would never have become overpriced. 

But making excuses for past mistakes is not useful.  Learning from them is.  This time around, when the market began to again look overvalued in the latter half of 2009, I began hedging my portfolio, increasing that hedge as the overvaluation became more extreme over the last two years.  This has enabled me to opportunistically buy fundamentally sound, high yielding stocks among waste management companies, energy efficiency companies,  renewable energy power producers, and a solar balance of systems play over the last two months, because my hedges produced liquidity as the market fell.

I expect that the market has farther to fall, so my hedges are still in place, although I have not increased them to reflect my recent purchases. 

Despite the success of my hedging strategy (at least so far), last week I realized I was making one of the same mistakes I made in 2008: I had money tied up in companies that require functional financial markets to succeed. 

Any company which needs to raise money over the next year or two will almost certainly face significant share dilution in order to attract new capital.  Hence, I've taken the opportunity of this week's mini-rally to sell the companies I was holding that will need to raise new capital in the near future.  Even though these companies are already trading significantly below the value of their assets, shareholders are not likely to be able to realize the value of those assets if the companies cannot raise new funds and outside buyers do not appear. 

These companies are Comverge (COMV), EnerNOC (ENOC), and Nevada Geothermal Power (NGLPF.OB, NGP.V), which I said I was holding in my quarterly review of my ten clean energy stocks for 2011.  The parallels between 2008 and 2011 which I noted in writing that article, as well as some similar parallels noted by the Economist got me thinking about other parallels between the two years. That thought, in turn, led me to decide to dump these three stocks despite their current cheap valuations.
There's no law that says a cheap stock can't get cheaper, and when funding dries up, cheap companies that have to rely on external funding almost invariably get cheaper.  That's why I called 2009 the "Year of the Balance Sheet."  I now expect 2011 will also be a year of the balance sheet, and probably 2012 as well.  Which is why I've decided to grit my teeth and take my rather significant losses in these three stocks. 

I initially included Comverge and EnerNOC in my ten picks for 2011 because I was looking for smart grid stocks for the portfolio, and I did not see many others which looked like good values.  These two companies had fallen in late 2010, so they seemed relatively attractive.  When they continued to fall in early 2011, I began to buy them myself.  Nevada Geothermal was included because I thought a small rally in geothermal stocks starting in late 2010 was the start of something bigger.  The opposite turned out to be true, partly because of a raft of bad news at geothermal companies, not least at Nevada Geothermal.

In short, I let my enthusiasm for particular industries lure me into investments in particular companies.  Letting our enthusiasm for an industry or technology cloud our judgment about individual companies is also a common mistake in investing, especially among those of us drawn to clean energy. 

Lesson learned, I hope that admitting that mistake to myself (and you) will keep me from letting my enthusiasm for clean energy from doing my stock picking for me again.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:27 PM | Permalink | Comments (4)

Tom Konrad CFA

Few investors have good memories of 2008, but when it comes to the performance of my annual model portfolio of ten clean energy stocks, I'm finding the resemblance to 2008 remarkably striking. 

The good part of that memory is that my picks are once again out-performing my clean energy benchmark, the PowerShares Clean Energy ETF (PBW).  The bad news is that "out-performance" means down 44% for the portfolio, compared to down 48% for PBW: a Pyrrhic victory.  Over the same period, the broad market Russell 2000 index was down 22%.  For 2008, the results were down 55% for the whole portfolio, compared to down 67% for PBW and down 42% for the S&P 500.  (I have used the Russell 2000 as my broad market benchmark for the last few years because I think it is a better match for the types of stocks I pick for the portfolio.)


Four Nasty Surprises

This year has been a rough one for my ten clean energy stocks for 2011.  Not only has the clean energy sector greatly underperformed the broad market, but three of my picks have revealed bad news which sent their shares tumbling.  Ram Power (RPG.TO, RAMPF.PK) revealed drilling cost overruns at their flagship geothermal project in Nicaragua, while Nevada Geothermal Power (NGLPF.OB, NGP.V) revealed problems at Nevada Geothermal's flagship Blue Mountain property.

If that was not bad enough, American Superconductor Corporation (AMSC) keeps going from bad news to worse.  In Q1, they reported problems with their main customer Sinovel Wind Group (601558.SS).  I discussed this situation in detail in a series of three articles, the first exploring what Sinovel's action might mean, the second looking into Sinovel's motivations and speculating as to Sinovel's future actions, and the third an attempt to value AMSC given all the uncertainty in the midst of a delayed annual report filing.  Most recently, we learned that AMSC was the victim of cut-price industrial espionage and that the company is suing Sinovel.  All this is happening while the company's eponymous high temperature superconductor business seems to be on the cusp of rapid growth, but I have to wonder if the ongoing fallout from the Sinovel saga won't overwhelm this much smaller part of AMSC's business.

Also since my last update, one of the companies I had expected to add some stability to a portfolio with several risky stocks, Veolia Environnement SA (VE) gave us its own nasty surprise with lower guidance related to restructuring because of declining trash volumes, plans to downsize, and an accounting fraud in its US division. 

One bit of good news in Q2 was that energy management leader Schneider Electric (SBGSF.PK) made a buyout offer for IT solutions provider Telvent Git S.A. (TLVT).  Since this list is not meant to be an actively managed portfolio, I decided to substitute bus manufacturer New Flyer (NFI.TO/NFYEF.PK) for Telvent during my last update.  So far, that has turned out to be a bad move, since New Flyer fell with other clean energy stocks in Q3, while Telvent stayed flat at a few cents below the buyout price.

Strategy Going Forward

These annual model portfolios are not meant to be actively traded; I intend them for the use of investors who prefer to fire and forget.  That said, many readers, like me, prefer a more active approach, so what follows is my current trading stance on each of the stocks in the portfolio.

Hold

The two Demand Response stocks Comverge (COMV), and EnerNOC (ENOC), as well as the two geothermal stocks Ram Power (RPG.TO, RAMPF.PK) and Nevada Geothermal Power (NGLPF.OB, NGP.V) have all fallen to levels where they are trading considerably below their book value.  Any and all of these could be buyout targets at current prices.  Since the market decline began in late July, however, I have turned my attention to buying possible income opportunities on the cheap rather than distressed companies such as most these.  While I have not sold my stake in any of these stocks, I am not looking to buy anymore, either.

I have not looked closely at Potlatch Corp. (PCH) recently.  The company was initially included in the portfolio as an income-style investment, but given the large decline in other stocks, I have seen plenty of other income style investments at similar yields recently, so I have not been tempted to revisit this one.

Hold or Speculate

American Superconductor Corporation (AMSC) is a similar case although I have a much harder time determining what the company's value actually is.  As such, in July I bought some $10 Calls on the stock expiring in January 2013, a position which limits my downside but gives me a possible payoff if all the bad news is replaced by some good.  Since the stock has fallen considerably since the lawsuit news, I would be more likely to buy calls with a strike price of $7.50 than $10 if I were again in a speculative mood.

Buy

I currently am heavily overweight in Waterfurance Renewable Energy (WFI.TO/WFIFF.PK) and New Flyer (NFI.TO/NFYEF.PK).  I recently added significantly to my position in Waterfurnace at $15.50 and wrote about it here.  With the stock now trading around $17.60, I think it's worth buying if you don't yet have any, but investors who already have decent sized positions should probably hold off and see if the ongoing market turbulence creates another such opportunity below $16.

I last added to my New Flyer position at $0.61 (re-organization-adjusted).  Since it's still trading around there and pays a very healthy dividend, I'd be filling up a bus with this stock if I had not already.  New Flyer recently announced that their planned 10 for 1 share consolidation has been approved by shareholders, so the stock should be trading in the low $6 range after October 5, rather than the low 60 cent range.

Veolia Environnement SA (VE) looks attractive below $15 because of the large dividend yield and relatively stable waste management and environmental services business.  Recent problems seem well-reflected in the price of the stock, and I have orders in to buy more on any share declines.  I bought at $13.38 on Tuesday.

CVTech Group's (CVT.TO/CVTPF.PK) electric power maintenance and construction business continues to win contracts, but the stock has fallen because of a big drop in profits and revenues last quarter which management ascribes to the current climate of financial uncertainty.  I think investor fears are overblown since the company still has a large backlog, and the company's bread and butter business of power line maintenance cannot be delayed forever.   CVTech is currently trading under book value at $0.90 and a yield of over 2% which is well covered by both earnings and cash flow (the payout ratio is only 14%.)  I think this stock is vastly under-appreciated because of its small size and low trading volumes, and management seems to agree, since they initiated a normal course tender offer to buy back stock in August.  This is a non-distressed company trading at distressed prices.

Conclusion

Now is an excellent time to be acquiring stakes in dividend paying businesses with depressed stock prices due to the current financial uncertainty.  I think the crisis is far from over, however, so continue to keep some powder dry as more opportunities continue to emerge.

DISCLOSURE: Long NFYEF, RAMPF, NGLPF, WFIFF, CVTPF, COMV, ENOC, VE, 2013 AMSC $10 Calls

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

Posted by Tom Konrad at 10:37 AM | Permalink | Comments (10)

Tom Konrad CFA

Corrected version 8/11/2011

Apologies to readers who have been missing my articles recently.  I've had little time to write as I have been too busy trading.  Long-time readers know that I've been bearish since the summer of 2009, and it has been a painful two years as I maintained my short positions and puts in the face of a generally rising market. 

Market Outlook

In my opinion, we are still a good distance from the bottom.  The rise of the stock market over the last two years has been predicated on stimulus spending at the Federal level and Quantitative Easing (QE) from the Federal Reserve (Fed).  Today, not only has stimulus spending ended, the recent debt limit deal sets the Federal government on a decidedly contractionary path.  While reducing government spending is prudent in the long term, it is bound to have negative effects in the short term. 

On the monetary side, rumors were circulating that the Fed  might announce a third round of QE at their meeting on Tuesday, but instead the chose to keep interest rates at record low levels into 2013.  As Chris Gaffney, CFA wrote in the Daily Pfennig, "the Fed was basically admitting the US economy will be stuck in a rut for the foreseeable future."  While low interest rates generally do provide a stimulus to the economy, that stimulus acts by stimulating borrowing.  But both taxpayers and governments are borrowing less in an attempt to get out of debt, meaning the stimulative effect of continued low interest rates is likely to be muted.

With that backdrop, and business confidence undermined by the current decline in the stock market, a double-dip recession seems likely, assuming you believe we ever left the recession.  This should lead to further market declines over the coming quarters, so I don't think that we have reached a bottom by any means. 

Buying Opportunities

On the other hand, the rapid declines over the last two weeks have lead to a combination of panic selling and forced selling due to margin calls, which is pushing many stocks out of their fair value range.  Further clean energy stocks had already been pummeled by significant declines over the last two years, even as the broad market was rising.

I now believe that selected clean energy stocks are trading at prices that we are unlikely to see again because of indiscriminate selling to meet margin calls.  What follows is a list of stocks I've purchased over the last couple weeks, and why I think they represent good values now.

New Flyer Industries (NFYIF.PK/NFI.TO)
New Flyer is currently going through a conversion from its former unusual stapled security structure to a more traditional structure (see here and here.) After conversion, management says that the stock will pay a dividend of approximately half the current level, or about C$0.48 annually.  With the stock trading at C$6.59 as I write, that's an annual dividend yield of 7.3%, which should be well covered by earnings.   I most recently bought shares for US$6.66 on Wednesday.

Note: If you plan to buy before the conversion deadline of Aug 18th, make sure that your broker has not set an earlier deadline.  Unconverted IDS's will be worth less than the exchanged shares.  However, if you can buy IDS's for C$6.50 or less, I think they will still be a excellent value even after the dilution caused when other New Flyer IDS shareholders exchange their notes for additional shares.

Beacon Power Corporation (BCON)
Beacon has been operating their first commercial scale 20MW flywheel energy storage plant  since early this year without mishap, achieving full capacity in June.  They are set to begin construction of their second 20MW plant later this year, 54% of the $53 million cost of which will be covered by state and federal grants, making the funding of the plant practical even for a company with a high cost of capital like Beacon.  If both plants continue the relatively trouble-free operation seen so far, that experience will pave the way for less capital-intensive turn-key sales for flywheel energy storage plants worldwide.  I most recently bought shares of BCON for $0.85 on Tuesday.

CORRECTION: There was a "mishap" at Beacon's Stephentown plant on July 27.  Since this undermines my thesis for buying the stock, and there are many other opportunities, I have sold my positions.  The fact that this was not mentioned in management's discussion and analysis section of the most recent quarterly report is troubling, in that it shows a lack of commitment to full transparency.  I did find it in Item 1A. Risk factors: "In July 2011, one of the 200 flywheels in Stephentown failed.  We are currently investigating the root cause and the appropriate corrective action for this failure. Our system operated as designed, and no other equipment was damaged.  However, over the life of the plant, if we incur significantly higher than anticipated repair and maintenance costs, it could have a materially adverse effect on our business."

Thanks to the commenter who brought this to my attention.

UPDATE 8/18/11: An in-depth look at the implications of the Stephentown "mishap."

Great Lakes Dredge and Dock (GLDD)
When I wrote about GLDD last year as part of my Peak Oil investments series, I said it seemed like a bargain at $4.50.  The combination of disappointing second quarter results due to equipment downtime and the general market decline dropped the stock back below $4.50 on Aug 8th, when I made my most recent purchase.  I'm not sure where the bottom for this stock lies, so that was a small purchase which I expect to add to if the stock continues to decline. 

Waste Management (WM)
Last week, I wrote about trash stocks as possible income investments on Forbes, just as the market was beginning the current downward leg of its decline.  My top pick at the time was WM due to a low debt to equity ratio and a relatively high dividend reasonably well covered by cash flow and income.  I bought some at $29.60 on August 8th, and plan to buy more if the stock declines further.

Conclusion

Market panics are always a good time to pick up solid income investments at discounted prices, a description which applies to both New Flyer and Waste Management.  Great Lakes Dredge recently raised their dividend to $0.08 annually, for a 2% yield at $4.50, and the dividend is very well covered by last year's earnings of $0.59 and even this year's expected earnings of $0.35, which does not make it an income stock, but does make it look like a good value bet.

The sole speculative company is Beacon, which is currently trading well below its book value of $1.19, and is in the process of rapidly increasing revenues, which give it significant upside potential.

In the current market climate, any of these stocks could fall significantly lower: panic selling and margin calls pay no attention to valuation.  But if they do fall farther, I will be buying more, at even better values than today.

DISCLOSURE: Long NFYIF, WM, BCON, GLDD.

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.

Posted by Tom Konrad at 04:37 PM | Permalink | Comments (5)

Tom Konrad CFA

Some investors buy clean energy stocks because it's the right thing to do, others because we know that the diminishing availability and increasing environmental impacts of traditional fuels will eventually force society to adopt more sustainable solutions.  Cartoonist Scott Adams says we're all wrong, and we should invest in companies we hate. 

Although Adams' column is meant to amuse, rather than as investment advice, it's funny because he touches on two very important truths about investing.

1. Although a few investors can outperform the market over the long run, the vast majority can't, and no one consistently produces superior results, year in and year out.  (One exception was Bernie Madoff, who was known for his unusually steady returns. We all know how that ended.)
2. Investing because it makes you feel good is a fairly reliable way to get into trouble in the stock market.  If you are buying a stock because it makes you feel good, you're probably not alone.  All those investors buying to make themselves feel good are probably driving the stock price up beyond what the company is worth, which will be a long term drag on returns.

Both those truths are on display as I look back on the first half performance of my annual list of ten clean energy stocks.  After three years in a row of outperforming my clean energy benchmark, my winning streak seems likely to end in 2011.  So far this year, my benchmark PowerShares Clean Energy (PBW) ETF is down 13.4% for the year, while my ten picks are down considerably more, at 25.2%.  Meanwhile, the broad market was up 5.2%, as reflected in the Russell 2000 index.

The pattern of losses, while in part due to bad luck, also comes from ignoring principle #2: I included too many stocks I liked, despite the fact that they were fairly expensive on conventional measures. 

The Good
 
The top performing stock in the list is IT solutions provider Telvent Git S.A. (TLVT), which I included in the list because of its smart grid and smart transportation solutions.  Energy management leader Schneider Electric (SBGSF.PK) has made an offer of $40 per share for Telvent which looks likely to go through.  For the second half of 2011, I will be replacing Telvent in the list with bus manufacturer New Flyer (NFI-UN.TO/NFYIF.PK) which is currently quite cheap because of investor uncertainty surrounding a change in the company's structure.  Although I thought New Flyer was too expensive (at $11.34) to include in this list at the end of last year, I now think it's a steal at $8.  Hence, for every share of Telvent in my model portfolio, I will replace each share of Telvent with 4.84 shares of New Flyer.  (4.96 = $38.90/$8.03, the ratio of the closing prices of New Flyer and Telvent on 6/30/11.)

The Boring

The two other winners are sustainable forestry company Potlatch Corp. (PCH), and environmental services company Veolia Environnement SA (VE).  Both produced modestly positive total returns, and seem excellent examples of how boring companies often do well.

Two companies that are down for the year, but roughly in line with the sector as a whole are Geothermal Heat Pump (GHPs) stock Waterfurance Renewable Energy (WFI.TO/WFIFF.PK), and Electric Transmission and efficient vehicle conglomerate CVTech Group (CVT.TO/CVTPF.PK).  CVTech seems to be down on lower first quarter revenues (despite higher profits.)  The revenue drop seems to be mostly weather-related, and the company's pipeline of work is healthy, with $14 million in new contracts being announced in June.

Waterfurnace stock is down from the start of the year because of narrowing margins despite increased sales in 2010.  Commodity prices have driven up component costs and the competitive marketplace for GHPs did not give Waterfurnace the market power to pass those costs on to customers.  Sales were down in Canada last year because of the end of that country's EcoEnergy Retrofit program.  That program will be re-instated this year, but so far it has only been renewed for one year, so the boost to sales will not be long term unless it is extended again.  The US GHP tax credit is currently slated to expire at the end of 2016, but given the current deficit reduction talks in Washington, this could conceivably be terminated prematurely.

I think all of these seem worth holding on to, and I've been buying more of CVTech and Waterfurnace at the recent lower prices.

The Bad

The two demand response companies, Comverge (COMV) and EnerNOC (ENOC) have been a big disappointment.  I've been trying to get a handle on why the stocks are down so much this year by doing a series of interviews with management of companies in the broader Energy Management industry.  So far I've written articles on World Energy Solutions (XWES) and EnerNOC.  When I interviewed EnerNOC CEO Tim Healy, I asked him what he thought.  He said, "I think people are overlooking the story for the next couple quarters," and that he has tremendous confidence about EnerNOC's medium to long term. 

I'll be talking with Comverge CEO Blake Young next week, and I intend to ask him the same question, but I think Healy got at the real problem: When I added these stocks to the list last December, I (like most investors at the time) was paying too much attention to the story of Demand Response, and not enough attention to the next few quarters.  The pendulum of investor attention tends to swing back and forth between the long term story and short term profitability, and the best time to buy a great story stock is when the company is being valued on current profitability.  So now is probably a good time to buy these two, if you do not already own them.

The Ugly

For my two geothermal picks, the first quarter had bad news for Ram Power (RPG.TO, RAMPF.PK), and Q2 held bad news for Nevada Geothermal Power (NGLPF.OB, NGP.V).  The former was poor drilling results, and the second was worse than expected resource productivity at Nevada Geothermal's flagship Blue Mountain property.  Although geothermal drilling is extremely risky, this was far more than the usual quota of significant bad news for the stock, and both have sold off sharply.  Both events significantly impacted the intrinsic value of the companies, bit I feel that this has been more than reflected in each stock's share price, as I discussed in May.

American Superconductor Corporation (AMSC) also had bad news in Q1, when they reported problems with their main customer Sinovel Wind Group (601558.SS).  I discussed this situation in detail in a series of three articles, the first exploring what Sinovel's action might mean, the second looking into Sinovel's motivations and speculating as to Sinovel's future actions, and the third an attempt to value AMSC given all the uncertainty in the midst of a delayed annual report filing.  At the current price of around $9 AMSC seems cheap, but while I have been tempted at several stages in this process to speculate on the stock, I decided in the end to stay out.  One thing that seems fairly certain was that AMSC management was not being completely frank about their relationship with Sinovel over the last half of 2010 and 2011 in that they were not discussing Sinovel's unwillingness to pay for product in a timely fashion.  Perhaps they were deluding themselves as well as investors, but in any case I've decided to stay away from a stock where I know I can't trust what management is telling me.

At $9, AMSC is so cheap right now that I'm going to leave it in my model portfolio, but I hope any readers who bought it because they were following my annual ten picks sold it around $12, the price at which I suggested getting out in May.

Conclusion

It's been a miserable six months for Clean Energy in general, and my picks in particular, and I don't see many signs of markets reversing the trend yet.  On the other hand, prices of many stocks are starting to look like good values, so patient value investors should seriously consider moving some money into the sector.  These ten stocks (minus American Superconductor) might be a good place to start.  Another would be my recent overlapping list of ten clean energy stocks I'm buying now. 

Sierra Club/Green Alpha Portfolio manager Garvin Jabush thinks Wall Street has irrationally turned its back on solar, so investors might also consider solar, although many companies will find their earnings undermined by the current PV module supply glut.  The question is, is Wall St getting carried away (on the downside) with the PV supply glut and falling subsidies story, and have prices already fallen far enough to discount all the future bad news?

Perhaps the group of investors who should be putting the most money into clean energy right now should be the growing chorus of high-profile Republicans who deny that climate change is even happening.  After all, didn't Scott Adams say that we should invest in what we hate?

DISCLOSURE: Long NFYIF,TLVT,RAMPF,NGLPF,WFIFF,CVTPF,COMV,ENOC

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

Posted by Tom Konrad at 08:38 AM | Permalink | Comments (2)

Tom Konrad CFA

Buying opportunities return to clean energy.

Two years ago I had a problem.  In the universe of clean energy stocks I watch, I could not find any that I thought were good values.  So I wrote an article saying "We're near the peak."

If you had been comparing that call to the performance of the broad stock market since then, you would have to conclude that I was ludicrously wrong.  The S&P 500 is up 40% since then.

If on the other hand, you'd been watching clean energy stocks, you would have found that the overall trend has been flat to down.  The PowerShares Clean Energy (PBW) ETF has basically been flat since then, while solar (TAN) and wind (FAN) ETFs are each down about 20%. 



I mention all this because I notice something new, that hasn't happened for almost two years: I'm again finding clean energy stocks that I think are bargains.  I think the sector and the market as a whole still have a lot of room to fall, but I'm encouraged to finally have companies to write about that I think are worth buying again.

Here are ten I've been buying, in no particular order.

1. New Flyer Industries (NFI-UN.TO) a bus manufacturer.  See article: Questions About Dividend Spook New Flyer Investors. Why I'm Buying.
2. CVTech Group (CVT.TO) a transmission and efficient vehicle company. See article: The Best Peak Oil Investments Meet the Strong Grid.
3-5. Comverge (COMV), EnerNOC (ENOC), which are demand response companies, and Ram Power Corp. (RPG.TO), a geothermal developer.  See article: Ten Clean Energy Stocks for 2011: Buying Opportunities.
6. Alterra Power Corp. (MGMXF.PK)  is a geothermal and hydropower developer, see: The Magma/Plutonic Merger.
7. Axion Power International (AXPW.OB) is a developer and manufacturer of PbC batteries: An Elephant Hunter Explains Market Dynamics
8. Nevada Geothermal Power (NGLPF.OB), another geothermal pick.  See: Blue Mountain Disappoints; Nevada Geothermal Power Looks Like a Takeover Target
9. Ambient Corp. (ABTG.OB) a smart grid stock.  See article: A Profitable Smart Grid Penny Stock Aims for a NASDAQ Listing
10. Rockwool International A/S B (RKWBF.PK) an international insulation company.  No article yet, but it's mentioned here: Canadian Insulation Companies Likely to Benefit from Next Budget.

Ten Clean Energy Stocks for 2010

Four of these stocks (Comverge, EnerNOC, Ram Power, and Nevada Geothermal) were part of my annual New Year's list of ten clean energy stocks I liked.  At the time, I only owned the two Geothermal stocks, because I was having trouble finding anything I thought was a good value.  That original list has been doing horribly so far this year, in large part because of the dismal performance of these four stocks and that of American Superconductor (AMSC).  I've been following AMSC's very real problems closely, discussing the refusal of their main customer Sinovel (601558.SS) to accept shipments, the likely reasons behind that refusal, and attempting to value the AMSC under the assumption that Sinovel will resume accepting shipments, but not at their former pace and without future growth.

Ram Power and Nevada Geothermal also had real problems at their geothermal projects, but I feel that the market has vastly overreacted to both, making the pair bargains by almost any measure, and also potential takeover targets in my estimation.  If I were picking my ten stocks today, it would be the list above, with the three Geothermal companies underweighted relative to the rest to avoid putting too much money into one tiny sector.

All in all, it feels good not to be sitting on the sidelines anymore.  Blood is on the streets for a lot of decent renewable energy and energy efficiency stocks, and experienced market hands know that it is often the best time to buy. 

But keep some cash on the sidelines.  Right now, I expect the market will get worse before it gets better.  If I'm right, and you'll want to have cash available to take advantage of other opportunities that arise down the road.

DISCLOSURE: Long NFI-UN, CVT, COMV, ENOC, RPG, MGMXF, AXPW, NGLPF, ABTG, RKWBF.
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.

Posted by Tom Konrad at 11:28 PM | Permalink | Comments (5)

Tom Konrad, CFA

The geothermal and demand response stocks in my annual portfolio of ten clean energy stocks for 2011 have fallen significantly since the start of the year, making this an excellent time to buy.

Every year since 2007 I've been publishing a list of ten renewable energy and energy efficiency stocks that I think will do well over the coming year.  For 2008-10, my list outperformed my clean energy benchmark.  This year so far looks like it is going to break my streak, but there is a very bright silver lining: I now think four of my picks are screaming buys. 

When considering clean energy stocks, I try to follow a contrarian strategy of focusing on sectors with relatively mature technology and relatively little investor attention.  This year, I put particular emphasis on the established smart grid technology, Demand Response, as well as one of the most economical but least talked about forms of renewable electricity, geothermal power.  These two sectors are responsible for all of the portfolio's decline this year, but I still like their prospects, and the reduced stock prices have me buying the demand response companies, and expanding my positions in the geothermal power stocks.

Ten Clean Energy Stocks of 2011

The following table and chart show how each of the picks has performed so far in 2011.

Company (Ticker)	Sector	% Change 12/31/10 - 3/18/11	Q1 Dividend
Waterfurance Renewable Energy (WFIFF.PK)	Energy Efficiency	7.4%	0.9%
Comverge (COMV)	Demand Response	-35.6%
EnerNOC (ENOC)	Demand Response	-19.0%
CVTech Group (CVTPF.PK)	Grid/Efficient Vehicles	9.9%
Telvent Git S.A. (TLVT)	Smart grid/Smart Transport	9.3%
Potlatch Corp (PCH)	Biomass	20.1%	1.6%
Nevada Geothermal Power (NGLPF.OB)	Geothermal	-10.5%
Ram Power Corp. (RAMPF.PK)	Geothermal	-34.7%
American Superconductor Corp. (AMSC)	Grid/Wind	-17.5%
Veolia Environnement SA (VE)	Conglomerate	3.9%
Portfolio return		-6.44%	0.25%
PowerShares Clean Energy (PBW)	Benchmark	0.67%
Russell 2000 (^RUT)	Benchmark	4.46%

Demand Response

I'm quite puzzled at the poor performance of demand response companies EnerNOC (ENOC) and Comverge (COMV) so far this year.  Demand response companies make money by helping utilities reduce electricity loads through agreements with electricity customers when the utility has trouble meeting demand with available generation capacity.

The news for Demand Response companies has been quite good, with the Federal Energy Regulatory Commission (FERC) recently establishing a landmark ruling which will require utilities to pay demand response companies as much as electricity generators are paid for power capacity.  Each market operator must implement this rule by July 22nd, and the resulting tariff changes should open up many new opportunities for demand response companies.

Earlier this quarter, EnerNOC was accused by grid operator PJM of market manipulation, but the case was later dismissed by FERC as having no merit, which is the best outcome EnerNOC could have hoped for.

Both companies had negative earnings surprises for the fourth quarter, with Comverge losing 38 cents compared to the 2 cent lost expected by analysts, but this loss was entirely due to one-time charges, most importantly a goodwill impairment charge. 

Regular readers may recall the asset impairment charge that eventually crushed C&D Technologies (CHHPD.PK) last year. The company is now recovering after a massive debt-for equity swap, with some bottom-fishers sitting on healthy profits of up to 100%, but shareholders who bought early in the year remain far underwater.  (I bought too early, but also added to my position at the bottom.  Overall, I'm in the red, but not deeply.) 

The reason Comverge is not likely to follow the same path as C&D is because Comverge has excellent liquidity, with no net debt and enough cash to fund operating losses and investment for a year or two.  EnerNOC is in an even stronger position, being profitable with $6.16 in net cash per share on the balance sheet.

I've purchased shares in both Comverge and EnerNOC since the favorable FERC rulings, and have been pleased to be able to do it at lower, rather than higher, prices.

Geothermal Power

The 35% decline in Ram Power Corp. (RAMPF.PK) is partly explained by large cost overruns in the company's flagship San Jacinto-Tizate project in Nicaragua, and the subsequent resignation of CEO Hezy Ram.  The most recent news for the Nicaraguan project has been good, with positive drilling results under a new drilling contractor, and the $20M in extra costs and project delays seem insufficient to account for knocking over $100M off the company's market cap since the start of the year.

Nevada Geothermal Power (NGLPF.OB) has also seen a decline since the start of the year, but the most significant news was NGP's purchase of geothermal assets in California's Imperial Valley from Iceland America.  I suspect that the decline arises mostly from sympathy with other geothermal stocks.

I'm still optimistic about geothermal power in 2011.  Since the start of the year, I've maintained my already large position in Nevada Geothermal, and added to my positions in Ram Power, US Geothermal (HTM), and Magma Energy Corp. (MGMXF.PK). Magma is no longer a pure-play geothermal company, having recently agreed to purchase run-of-river hydro developer Plutonic Power Corp (PUOPF.PK), but run-of-river hydro also conforms to my strategy of focusing on cost-effective renewable energy sectors that have not yet reached the awareness of most investors.

Conclusion

I've been frustrated with the high valuations of most clean energy companies for well over a year, so it's nice to see several of them coming down to prices where I'm comfortable buying.  If that means that my annual list of ten clean energy stocks does not beat its industry benchmark this year, I'll consider it well worth it (with apologies to anyone who bought the list at the start of the year.) 

The year is still young, and these stocks seem very cheap to me.  Although they're currently trailing my clean energy benchmark (PBW) by 7%, there are still three quarter to reverse that trend. 

DISCLOSURE: Long WFIFF, COMV, ENOC, CVTPF, NGLPF, RAMPF, HTM, MGMXF.

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.

Posted by Tom Konrad at 06:40 PM | Permalink | Comments (6)

Tom Konrad, CFA

My annual mini-portfolio of clean energy stocks which I expect to outperform in 2011.

This is my fourth annual list of renewable energy and energy efficiency stocks since I began the series in January 2008. 

The Purpose of this List

For myself, these lists serve as a record of my thinking on the market which I can look back on and learn from over the following year.  When I publish the list, I state my reasons for selecting each stock, and then track the portfolio's performance over the following year in quarterly updates.  This allows me to not only track how well the portfolio performed, but to check that performance against what I expected over the previous year.

For the reader, these annual lists are meant as a mini-portfolio of individual stocks that a small investor can buy to get exposure to clean energy without the high expenses of clean energy mutual funds, or the historical poor performance of clean energy Exchange Traded Funds (ETFs).

Each year, I have measured my success at stock picking against two benchmarks: a broad market index, and a clean energy index fund.  My strategy has changed somewhat since the first list in 2008, as I have gained in my understanding of the sector (I have only been following clean energy closely since the end of 2005.) 

Past Performance

The period over which I have been publishing these lists has been a very bad one for clean energy.  All the public clean energy ETFs are down since the start of 2008, and all but one of the clean energy mutual funds are also down. 

In 2008, my ten picks fell 55%, compared to the clean energy index, which fell 67%.  In 2009, my picks were up 57%, compared to the benchmark which was only up 12%, while the most recent list in 2010 was up 3%, compared to the benchmark, which fell 7%.  All told, if you'd invested in the ETF benchmarks, you would still be down 66%, while an investor in my ten picks would only be down 27% over the same period. 

Outlook

As I told Stephen Lacey in a recent Renewable Energy World podcast, if the overall stock market does not collapse and drag clean energy with it, I believe that 2011 has the potential to be an excellent year for clean energy stocks after these three years of heavy selling.  Yet I continue to worry that a broad market decline would hold the sector down or drag it lower.

Clean Energy Sector Selection

As long-time readers know, I favor the less exciting clean energy sectors (and enabling technologies) that make few headlines but have higher current profits.  Chief among these are energy efficiency and conservation (where the greatest short-term potential for reducing the reliance on fossil fuels lies), the electric grid (an enabler for variable renewable resources such as wind and solar), and alternative transportation technologies that can reduce the use of the electric car. 

I prefer the most cost effective renewable energy technologies, which are biomass, wind, and geothermal.  Wind and Geothermal power are particularly interesting this year, because the sectors have fared particularly badly in recent years.  I'm putting more emphasis on renewable energy sectors (as opposed to efficiency and the electric grid) in 2011 than I have in the past because I'm more bullish about clean energy in general.  While not as volatile as renewable energy's poster boy, solar power, Wind and Geothermal tend to be more volatile than the relatively defensive efficiency and supporting technology sectors.

Company Selection

When picking individual stocks, I gravitate towards value stocks with low Price/Earnings and decent dividends, where available.  Since financing is still hard to get in the current climate, I also like companies that can fund their operations and investment plans from internal resources if they are not currently profitable.  Finally, I tend to gravitate towards companies with charts that look like they are bottoming.

Without further ado, here are my picks, with prices as of the 2010 close (December 30.)

Energy Efficiency and Smart Grid Stocks

Waterfurance Renewable Energy (WFI.TO, WFIFF.PK US$24.77) is a long time favorite because it's the only pure-play geothermal heat pump stock I know.  David Gold made the case for geothermal heat pumps as an investment in October, so follow the link if you'd like the details.  This is the third year running that Waterfurnace has been in my list, and while it has not appreciated much in that time, it has consistently paid a dividend over 3% (C$0.22 per quarter, or 3.6% annually) while the business has continued to grow.

Comverge (COMV $6.92) is a leader in providing Demand Side Management solutions to electric utilities, both in the form of Demand Response(DR), and energy efficiency.  Demand Response allows utilities to maintain less peak capacity while still maintaining a stable grid (see Drawing the Right Lessons from the Texas "Wind" Emergency) while Comverge's energy efficiency solutions allow utilities to build less base load capacity.  Both DR and Efficiency can be delivered at much lower cost than new baseload or peaking plants, and have the added advantage of no carbon emissions.

The stock has been badly beaten up since its 2007 IPO and can now be bought for one third of the IPO price, and less than one fifth the smart-grid euphoria induced 2007 peak.  While Comverge is still not profitable, they have enough cash on hand to fund the current level of operations for three years, giving them time to raise future funds while negotiating from a position of strength.

EnerNOC (ENOC $23.91) also provides Demand Response to electric utilities, but unlike Comverge, they are currently (if marginally) profitable.  With no net debt and plenty of cash in the bank, EnerNOC has not been beat up quite as badly as Comverge since they both IPO'd in 2007, so this is a safer pick than Comverge with somewhat less upside potential. 

Electric Grid and Clean Transportation Stocks

CVTech Group (CVT.TO, CVTPF.PK $1.30) provides electricity system construction and maintenance to electric utilities, as well as efficient continuously variable vehicle transmission systems for small vehicles such as the Tata Nano.  The company is profitable and pays a C$0.02 annual dividend, for a yield of 1.5%. 

Telvent Git S.A. (TLVT, $26.42) provides management solutions to infrastructure markets including electric utilities, pipeline operators, and transportation authorities.  Better management in these sectors has great potential to lead to large cost and energy savings.

I covered both of these stocks in considerable detail in my Best Peak Oil Investments series.  The article about CVTech is here, and the article about Telvent is here.  The reason neither of these stocks made my list of four top peak oil stocks but are included here is that most of those four have since risen considerably, and I also wanted to limit this list to stocks that are easily purchased by a North American investor.

Biomass Stock
Potlatch Corp (PCH, $32.55) is a US Timber REIT which is a leader in seeking stringent FSC sustainability certification for its timberland.  I wrote about Potlatch in late 2009 in an article highlighting the role of forestry in a clean energy portfolio. Potlatch has a 6.3% forward annual dividend yield.

Geothermal Stocks

Geothermal exploration and production stocks seem to have bottomed in the fall of 2010, but they have not yet really taken off.  I think that could easily happen in 2011, so I include two of my favorites here: Nevada Geothermal Power (NGP.V, NGLPF.OB $0.76) and Ram Power Corp. (RPG.TO, RAMPF,PK $2.22.)  I've recently written about both of these companies in my
Geothermal Stocks Overview and in Three Top Geothermal E&P Companies.

Wind

American Superconductor Corporation (AMSC, $28.59), despite its name, is largely a wind component supplier to Chinese wind manufacturers.  Yet it also has an intriguing electricity transmission business based on its eponymous superconducting cables.  The company is profitable, although it trades at a fairly hefty multiple of 45x trailing earnings based on widespread expectations of continued high growth.

Others

Veolia Environnement SA (VE, $29.36) is a global conglomerate providing water, waste water, energy systems (including renewable energy), and transportation system management.  As such Veolia provides services in a wide variety of clean energy sectors, and is a good balance to the usual volatility of a clean energy portfolio with its relatively stable earnings and high 4.1% dividend yield.

As usual, I'll provide quarterly updates on this list throughout 2011.

DISCLOSURE: Long WFIFF.PK, CVTPF.PK, RAMPF.PK, NGLPF.OB.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:47 AM | Permalink | Comments (0)

Tom Konrad CFA

My ten annual stock picks have outperformed their clean energy benchmark for the third year running.

Each year, I publish a list of ten renewable energy, energy efficiency, and cleantech stocks that I feel will outperform their peers in the coming year.  In both 2008 and 2009, my picks have beaten their industry benchmark, the PowerShares Wilderhill Clean Energy ETF (PBW), the most widely held industry ETF and the one that I recommend for making short-term bets on the clean energy industry.  The 2010 list is here.

This year has been an interesting one for my picks, with one pick (C&D Technologies [CHHP.PK]) going through a bankruptcy reorganization from which it just emerged, and another pick (Portec Rail Products [PRPX]) the subject of a repeatedly delayed friendly takeover that took ten months due to lawsuits and negotiations with antitrust authorities.  The takeover was finally consummated in December. 

This year I offered two alternative lists, one of a full ten stocks, and a second that used two clean energy subsector ETFs to substitute for three of the stocks each.  The First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) was my stand-in for the three electric grid stocks in the portfolio, while the Powershares Global Progressive Transport (PTRP) stood in for the three transportation stocks in the portfolio.  Unfortunately, PTRP also ceased trading in December; the fund sponsor closed it due to lack of investor interest (although certainly not for lack of trying to drum up interest on my part.) 

Here is a chart of the two portfolios:



The inner ring is the portfolio using the two ETFs, while the outer ring represents the full portfolio.

Performance

For the year from December 27th to December 27th, the portfolio using the ETFs was up 6.9%, while the ten stock portfolio was up 2.8%.  For comparison the industry benchmark PBW fell 6.6%, and the broad stock market, as represented by the Russell 2000 index was up 13.6%.


The individual stock performance is below:

Security (Ticker)	% Change	% Yield
General Cable (BGC)	9.34%
MasTec (MTZ)	15.95%
C&D Technologies (CHHP.PK)	-83.67%
New Flyer Industries (NFI-UN.TO, NFYIF.PK)	17.44%	12.08%
FristGroup PLC (FGP.L) (in US$)	-6.73%	7.41%
Portec Rail Products (PRPX)	19.46%	2.35%
Waterfurnace, Inc. (WFI.TO, WFFIF.PK)	2.90%	3.17%
Linear Technology Corp (LLTC)	13.19%	2.99%
Flir Systems, Inc. (FLIR)	-7.48%
Waste Management (WM)	8.47%	3.73%

The number for Portec assumes that the cash payment from the takeover was reinvested in the benchmark when received.

Overall, my long time favorite stock New Flyer was the biggest winner, with an almost 30% total gain, while the biggest loser was C&D Technologies.  That company will probably recover a bit more now that they have a much stronger balance sheet with the bankruptcy restructuring behind them.

Coming up

I'm running a little late this year putting together my ten picks for 2011, but you should see them on AltEnergyStocks.com during the first week in January. 

DISCLOSURE: Long CHHP, NFYIF, WFIFF, LLTC. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:12 PM | Permalink | Comments (0)

Tom Konrad CFA

Cherry picking the holdings of green energy mutual funds.

So far in this series I've concentrated on trying to pick the best of the Alternative Energy and Climate Change Mutual Funds.  This is a difficult task, because while I found in Part III that most of the funds' performance has been better than comparable index ETFs, these mutual funds' costs are quite high, even by the standards of most mutual funds, as I discussed in Part I.  In part II, I tried looking at the sector breakdown of the funds' holdings, to see if I could explain some of their performance that way.  It turns out that funds that buy the most solar stocks have underperformed in the past.

The underperfomance of solar-heavy funds confirms one of the principles of alternative energy sector selection that arise from common misunderstandings about how Alternative will re-shape our economy.  I went into them in more detail in part II, but in short they are:

1. Underweight Solar
2. Overweight biomass producers compared to their customers, biofuel producers.
3. Focus on Energy Efficiency and Conservation.
4. Invest in the Electric Grid.
5. Favor Alternative Transport over the personal car.

What follows is my attempt to build a portfolio from the stocks owned by these mutual funds, but conforming to the principles above.

Fund Holdings: Solar Stocks

Many of the funds own large quantities of First Solar Inc (FSLR), SMA Solar Technology (S92.DE), MEMC Electronic Materials (WFR), and JA Solar Holdings (JASO).  First Solar is the largest holding of these mutual funds overall, accounting for 6.6% of the Winslow Green Growth Fund (WGGFX).  Overall, the average fund is about 24% allocated to solar, something I hope to improve on by leaving them out of the portfolio I'm building.

Fund Holdings: Biomass

By far the largest holding biomass holding in these companies is Sino-Forest Corp. (TRE.TO), a commercial forest plantation operator in China.  The second largest holding is Deltic Timber Corp. (DEL), but it's only held by one fund, the DWS Climate Change Fund Class S (WRMSX).  I'm looking for stocks held by at least two funds for this portfolio.

Fund Holdings: Energy Efficiency and Conservation

The top energy efficiency holding is also my personal favorite, Waterfurance Renewable Energy (WFI.TO), a manufacturer of Geothermal Heat Pumps.  Also held in quantity are Rubicon Technology (RBCN), which sells mono-crystalline sapphire and other crystals to the Light Emitting Diode (LED) industry, and LED industry leader Cree Inc (CREE).  In conservation, we have water system repair firm Pure Technologies Ltd. (PUR.V).

Fund Holdings: Electric Grid

The top electric grid holdings were meter-maker Itron (ITRI), and transmission contractor Quanta Services Inc (PWR), both of which I've written about in these pages. 

Fund Holdings: Alternative Transport

These funds are more focused on Climate Change than peak oil, so alternative transport stocks are few and far between, but one that's owned by three funds is Smart Grid and Smart Transport stock Telvent Git S.A. (TLVT).  In order to get a little more representation in this sector, I'm also going to include rail supply company Wabtec Corporation (WAB), even though it's owned by only one fund, WGGFX.

Green Energy Portfolio

This is my suggestion of a portfolio, which should perform better than most of the green energy mutual funds because of better sector selection and lower costs: TRE.TO, WFI.TO, RBCN, CREE, PUR.V, ITRI, PWR, TLVT, and WAB, equally weighted.  That's 11% Biomass, 45% Efficiency and Conservation, 27% Electric Grid, and 17% Alternative Transportation.  It's not representative of the market, but we're trying to beat the market here, not just match it.

I'll take a look back at this portfolio next year to document how it has performed relative to the mutual funds.

DISCLOSURE: Long PUR.V, WFI.TO, PWR.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 09:44 PM | Permalink | Comments (0)

John Petersen

Short sellers are the bane of every securities lawyer who represents small public companies. In over thirty years of practice I've never advocated a short sale because I hate the idea of profiting from someone else's misery. Based on recent quarterly reports filed by my short-list of pure play energy storage companies, which includes Tesla Motors (TSLA) as an honorary member, I'm compelled to break with tradition and suggest a paired trade that involves a short sale of Tesla coupled with a long purchase of Exide Technologies (XIDE).

The following table summarizes the year-to-date and quarter-to-date performance of the short-list companies. On a year-to-date basis, Tesla has been a runaway success while Exide languished. For the reasons discussed below, that dynamic is sure to change over the coming year.



Most of us know that money managers, analysts and investors tend to follow the herd without asking whether the herd's behavior is rational. Even a simplistic comparison of business fundamentals and market realities shows just how irrational the herd has become over the last year as electric vehicle hype reaches the peak of inflated expectations.

The following table is complex and I apologize for that, but it highlights the huge disconnects between market values and financial statement values that are common in the sector. To keep things comparable I started with data in the most recent quarterly reports filed by the short list companies and adjusted for financing transactions that occurred after the last balance sheet date. The columns with gold headers are business fundamentals derived from financial statements. The columns with green headers are market driven variables.



Why I Would Short Tesla - It doesn't take much market experience to know that companies cannot long sustain market capitalizations of almost twelve times book value, but that's exactly what Tesla is doing. When you drill down into the disclosures in Tesla's most recent quarterly report, you'll find that $88 million of its $202 million in working capital is set aside as restricted cash for capital investments in facilities construction, which leaves a paltry $114 in real working capital to cover anticipated operating losses and the pre-production costs for the 2012 introduction of its Model S sedan.

Any way you cut it, Tesla does not have enough cash to support its business for another year and it's already tapped Panasonic and Toyota. That means Tesla will have to go into the financial markets for additional cash – lots of additional cash. While stock market investors frequently ignore financial statement fundamentals when making investment decisions, I've met very few professionals with a similarly blasé attitude. The probability that hundreds of millions in new capital will be available to Tesla at anywhere close to a 1,200% premium to book value is remote beyond reckoning and it's a virtual certainty that substantial transactions with independent investors will not happen at anything close to the current market price.

Since the market can stay irrational longer than many of us can stay solvent, the safest way to play the likely price collapse will be a long-dated out of the money put option. For purposes of tracking the performance of this long-short pair over time, I'll use the publicly traded January 2012 $25 put, which last traded for $6. The short won't be profitable unless Tesla's price falls below $19, but I still like the risk/reward ratio.

Why I Would Buy Exide - I've discussed Exide at length in other articles including "Valuation Primer For Energy Storage Companies – Lesson #1." The short story is that it's taken Exide five years to emerge from Chapter 11 and restructure its manufacturing operations to a point where consistent long-term profitability is likely. Exide's current price earnings ratio is significantly below normal valuations of 15 to 18 times earnings and its prospects for rapid and sustained growth over the next five years are outstanding due to technological changes like stop-start idle elimination that are sweeping the automotive sector and will improve margins in both its OEM and after-market replacement business. While the financial analysts that follow Exide have an average price target of $10, my sense is that a price toward the high end of the $10 to $15 range is more likely.

Why Valence Terrifies Me - Valence Technologies (VLNC) has been around for years and is making significant progress in its efforts to commercialize a good lithium-ion battery technology. For several years it has depended on the commitment and generosity of a principal stockholder to keep the doors open. Currently Valence has a $7.3 million working capital deficit and a whopping $75.3 million stockholders equity deficit. As long as the principal stockholder is willing to continue providing additional financing on terms that are little more than gifts to the public stockholders, Valence stands a chance. If it is forced to go to unrelated investors that are unwilling to be sugar daddies, the likelihood that it will be able to raise over a hundred million dollars of new capital at prices that bear any relation to the current market price is less than slim. While I have often been forced to rely on the kindness of strangers, hope is not an investment strategy.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its common stock.

Posted by John Petersen at 08:41 AM | Permalink | Comments (0)

Tom Konrad CFA

Although green stocks did better than un-green (or brown) stocks since Newsweek's 2009 Green Rankings were published, the big winners were the greenest stocks in the brownest sectors.

Newsweek has released its 2010 Green Rankings for America's 500 largest corporations, and the companies at the top of the list are happily gloating about being greener than their rivals.  More important to investors is the question: Do the greenest companies beat the market?

Marc Gunther notes that the top 100 companies in the 2009 Green Rankings outperformed the S&P 500 by 6.8%. 

My experience is similar.  When last year's rankings came out, I suggested that investors might not just gain by looking for out performance among the greenest companies, but "turning the list upside down" and looking for under performance among the least green (or brownest) companies at the bottom of the list.  I picked five stocks that investors might short as a hedge for their other investments.  They were: Peabody Energy (BTU), Consol Energy (CNX), ConAgra Foods (CAG), Bunge (BG), and Vulcan Materials (VMC).  I highlighted Vulcan at the time as the stock I'd be most likely to short (I ended up shorting Peabody and Vulcan, although I've since closed out my Vulcan position.)

As a group, my short five picks ended up under performing the S&P 500 by 7.07% over the 13 months since I wrote that article.  Vulcan Materials (the one I said at the time I'd be most likely to short) in particular was down 31.56% over the last 13 months, again suggesting that green companies have an edge over brown ones.

Correlation and Causation

Marc Gunther asked Cary Krosinsky of Trucost if the out performance of sustainable stocks is part of a more general trend.  Trucost is one of the outfits Newsweek relies on to crunch the numbers behind the rankings.  No surprise, Mr. Krosinsky thinks this year's gains are part of a larger trend in which sustainability drives shareholder value.

While I agree with Mr. Krosinsky's conclusion, I wonder if the out performance of Newsweek's 100 greenest companies came because they are green, or because of some other factor.  Two other possible factors come to mind. 

First, although both Newsweek's list and the S&P 500 are drawn from the largest American companies, the lists are not quite the same.  One example I found was Boston Properties (BXP), which is in the S&P 500, but not in Newsweek's Green Rankings.  If the companies that are in the S&P but not in Newsweek's' list underperformed those companies in Newsweek's Rankings but not in the S&P, that would explain the out performance.  If we want to determine if Newsweek's Green Rankings are relevant to performance, we should only compare Ranked companies with other Ranked companies.

Second, industry biases may go a long way to explaining the out performance of the most green companies over the brownest ones.  The top echelon of the Green Rankings is stuffed with Technology companies (Eight of the top ten), while the bottom ranks are full of Basic Materials (3 of the bottom ten), Utilities (4/10), and Food and Beverage companies (3/10.)  Perhaps the reason that the 100 top ranked companies outperformed the S&P 500 and my five shorts underperformed it was simply that Technology had a good year, or Basic Materials, Food and Beverage, and Utilities had a bad year.

If we want to know if green stocks (as measured by Newsweek) do better than brown stocks, we need to

1. Only consider stocks ranked by Newsweek.
2. Only compare stocks within sectors.

That is precisely what I did.

Comparing Green to Brown

Newsweek used fourteen different industry sectors: Banks and Insurance, Basic Materials, Consumer Products & Cars, Financial Services, Food and Beverage, General Industrials, Health Care, Industrial Goods, Media Travel & Leisure, Oil & Gas, Pharmaceuticals, Retail, Technology, Transport & Aerospace, and Utilities.  In the table below, I've ranked how green the industry is by looking at the Newsweek rankings of the greenest and brownest companies in each industry.  I also show the performance of the greenest and brownest companies in that industry from September 16, 2009 when the 2009 Green Rankings were published until October 21, 2010 when I compiled the table.



The amount by which the greenest company in each sector outperformed the brownest company is shown in the second-to-last column, labeled G-B.  My sector-by-sector analysis does not show as much green out performance as we saw when just looking at the 100 greenest companies, or at my five picks to short, but it was still there. 

The "Rank" column shows how green the sector is relative to other sectors.  The lowest ranked sectors have the most companies with the lowest green rankings.  This ranking of sectors leads to two surprises:

• Brown Sectors Outperformed Green Sectors.  Although the greenest stocks outperformed the brownest stocks, the greenest sectors underperformed the browner sectors.  The G+B/2 column shows the average performance of the greenest and brownest company in each sector.  The twelve companies I looked at in the six greenest sectors lost, on average, 1% of their value, while the average change for all 30 stocks I looked at was +12%.  The twelve companies in the six brownest sectors gained, on average, 14%.
• In green sectors, the brownest stocks outperformed the greenest stocks by a slight margin.
  
• In brown sectors, the greenest stocks strongly outperformed the brownest stocks.

Any of these trends may be one-off, but if we believe that sustainability makes a difference in stock performance, it begins to make sense that the difference between stock performance would be greatest in the brownest sectors.  In a brown or "dirty" sector, there is a lot of scope for a company to change its ways to reduce its environmental impact.  On the other hand, the greenest sectors such as technology are inherently low-impact, and so there is much less scope for a company to differentiate itself by becoming more green to gain a competitive advantage.



A Long-Short Portfolio From the 2010 Green Rankings

Since the top of Newsweek's rankings are dominated by the greenest companies from the greenest sectors, investors who just buy stocks from the top of the list are missing out on the most lucrative potential gains from green investing.  These gains are to be had by investors who buy the greenest stocks in the brownest sectors and short the brownest stocks in those sectors.

In the 2010 list, the bottom of the list is again dominated by Basic Materials, Utilities, and Food and Beverage.  I built a small long-short portfolio from the list by shorting the five lowest ranked companies (two each from Basic Materials and Food & Beverage) and one from Utilities, and buying equal numbers of the greenest companies in those same sectors.  

Here is the list:

Sector	Stock to Buy	Price 10/22/10	Stock to Short	Price 10/22/10
Basic Materials	Ecolab (ECL) # 26	$51.56	Peabody Energy (BTU) #500	$51.04
Food and Beverage	Coca-Cola Enterprises (CCE) #54	$24.63	Bunge (BG) #499	$61.74
Utilities	PG&E (PCG) #20	$47.66	Ameren (AEE) #498	$28.83
Food and Beverage	H. J Heinz (HNZ) #84	$49.55	Monsanto (MON) #497	$57.15
Basic Materials	Praxair (PX) #92	$92.18	Consol Energy (CNX) #496	$39.03

Note that while all my green companies from brown sectors are among the 100 highest ranked firms, most are not even in the top 50.  Of the top 100 ranked companies in 2010, only seven are from these three brownest sectors where, if 2009 returns are any guide, the greatest benefts of greenery are to be had.

Will 2011 be a repeat of 2010?  I'll take a look at these to see how the portfolio has done when Newsweek publishes the 2011 rankings.

DISCLOSURE: Short BTU.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:44 PM | Permalink | Comments (2)

Tom Konrad CFA

To my surprise, the market came back in the 3rd Quarter, and my portfolio of put options designed to hedge a market decline is predictably down.  However, my benchmark (a put against the Dow Jones Industrials has performed even worse than my picks.)

I don't have a lot to say about the performance of my Ten Green Gambles for 2010 so far this year.  These gambles were a bet on a market decline in 2010.  Since we're now into the 4th quarter and the market is still basically flat for the year, it's no surprise that they are down.


The chart above shows the performance of this hedging portfolio over the nine months since it was published.

Overall, the original portfolio is down 73% for the first 3 quarters.  Also shown in the graph below is "Portfolio 2" which is what would have happened to your money if read the second update, and agreed with my suggestion that "if you want to maintain your hedge, it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price." 

Portfolio 2 is only down 70% so far this year, since my short-term timing on that was good.  (Unlike my overall timing in calling for a likely a market decline.)

Picking Hedging Strategies

Like my last performance update for my Ten Clean Energy Stocks for 2010, I don't expect this article to draw in a bunch of readers who are impressed by my stock picking abilities or performance. 

Although both of these portfolios have beaten their benchmarks so far this year, they are also both down, which is what most investors (as opposed to money mangers) care about.   Hedging strategies based on equity puts, like this one, have the advantage that the cost is capped in the event of a strong bull market, but they have the disadvantage that they lose money when markets are flat.  In the accounts I manage, I choose the hedging strategy based on the level of options and margin allowed in the account.  Put-based hedges are the best strategy available in retirement accounts such as IRAs, so that is the one I use for IRAs.  In accounts with full option privileges, I use a mix of short call spreads and puts, a strategy which can cost more in the case of a upward trending market, but is more likely to break even in a flat market.

In retrospect, the best choice would have been to not hedge at all this year.  However, if we could make our investment decisions after the fact, we'd never need to hedge at all.

DISCLOSURE: Short LUV, HOT, JBHT.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:04 PM | Permalink | Comments (0)

Tom Konrad CFA

The best four stocks I've found in my six month quest to find the best peak oil investments.

I apologize for being a tease. 

Since March, I've been writing this series I've called "The Best Peak Oil Investments," but in many cases what I've actually done is to warn readers to stay away from particular sectors.  This bait-and-switch was compounded for my syndicated readers at Seeking Alpha when their editors decided to re-title the early articles in this series "Peak Oil Investments I'm Putting My Money On." 

If you've stuck with the series for the last seven months and twenty-five articles despite the sometimes misleading titles, I'm going to (finally) try to make it up to you.  After mentioning over fifty stocks in the course of this series, and dismissing entire sectors, I'll narrow my stock picks down to the four I like best at current prices.

My Criteria

These stocks are chosen to do well in what I called "The Methadone Economy" in part nine.  If oil prices continue to rise, I expect it to take a toll on economic growth and the availability of funding will probably remain tight.  I'm looking for companies that have solid balance sheets and can fund investment from internal cash flow.  I'll be looking for positive free cash flow, low debt, and high current ratios. 

I'm also looking for companies that typically reduce the use of the personal car, rather than simply making the car more efficient to drive.  More efficient vehicles do reduce fuel use per mile, but because of their lower operating costs may encourage driving, and fail to reduce overall fuel use as much as the efficiency number might lead us to believe.  I also see problems with most alternative fuels, mainly because there are limits to supply, which should lead to the prices of any widely adopted alternative fuel to track the price of oil.

The stocks I do like are Alternative Transportation stocks such as rail and bus companies, bicycle and e-bike companies, and Smart Transportation companies that combine information technology and pricing schemes to reduce waste in the transportation system by making the markets for travel services more efficient.  Unfortunately, I was not able to find any pure-play or nearly pure-play smart transport stocks that meet my financial strength and liquidity criteria.  Portable Navigation Device (PND) maker Garmin (GRMN) has the financial strength I'm looking for, but the increasing competition from GPS-enabled smartphones kept the company out of this list, even though I'm personally an avid user of the company's PNDs.

Top Four Peak Oil Stocks

#1 Advanced Battery Technologies (ABAT) is a Chinese company whose core business in making polymer Lithium-ion batteries.  The company recently bought an e-bike manufacturer which uses ABAT's batteries in its bikes.  I consider batteries in general the best way to invest in vehicle electrification, and ABAT's focus on e-bikes rather than cars also appeals to me.  At the recent stock price of $3.47, ABAT trades at a trailing price earnings multiple of 6.7, has an off-the charts current ratio of over 32.  Free cash flow has been negative over the last year, but turned positive in the last two quarters, and the company has enough cash on the balance sheet to internally fund operations for many years at current rates.  I discuss ABAT in more detail in this article on six electric vehicle and hybrid electric vehicle stocks.

#2 Stagecoach Group (SGC.L) is an operator of rail and bus services in the UK and North America, and it was my favorite of the three mass transit operators I've found because of low debt, relatively strong liquidity, and low price/earnings multiple.

#3 Accell Group (ACCEL.AS) is my top pick among bicycle company stocks.  Accell has a large stable of brands controlling leading positions in many European bike markets and segments.  High gas taxes and dense cities have helped Europe establish a lead in adoption of bikes for commuting and short trips, meaning that Accell has more experience meeting the needs of such riders, who grow in number with oil price rises.  Although I also like the business of bike component manufacturer Shimano (SHMDF.PK), Accell currently trades at a much better valuation.

#4 Vossloh AG (VOS.DE) German commuter and high-speed rail supplier Vossloh trades at an inexpensive price/earnings ratio of 11, with decent growth and dividends that are well covered by income and cash flow.  You can read more about Vossloh in my recent article on mass transit supplier stocks.

Honorable Mentions

In a recent article, I implied I'd pick my five favorite peak oil investments, not four.  When it came to actually picking, I found myself eliminating potential candidates on one criterion or another until I had just four. 

However, I do have two honorable mentions.  The first is the Powershares Progressive Transport Portfolio (PTRP), which I said "The Powershares Progressive Transport Portfolio (PTRP) is a good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices." One caveat: as some commenters on the original article pointed out, PTRP trades at very low volume, so PTRP is only appropriate for a long term investor and should always be traded using limit orders to minimize price impact.

A second honorable mention is Kandi Technologies (KNDI), which was profiled in a series of guest posts here.  Kandi is a profitable but little known Chinese company making electric mini-cars.  I bought a small position on the speculation that it might become better known, but I did not want to include it in this list because I consider it much riskier than the somewhat similar ABAT, which is already in the list.

Trading

For US based investors like myself, it's unfortunate (if not surprising) that only one of these companies is listed on a domestic exchange, and that one is a Chinese company.  To trade the three European companies, North American investors will need to go through the world trading desk of their broker, and this will involve paying much higher transaction costs.  The high transaction costs mean that these stocks should only be purchased as long-term investments to be held for several years.  However, that should not be a problem for peak-oil motivated investors, since we already can only be certain that oil prices will rise over the long term; short term price changes are anyone's guess.

I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term.  I'm waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.

Benchmarking

Even though I'm not buying these stocks today, I find it useful to look back on my stock picks and see how they have performed over time.  As I write on September 11th, a $10,000, equally weighted portfolio of these four stocks would contain 720 shares of ABAT, 878 shares of SGC.L, 61 shares of ACCEL.AS, and 24 shares of VOS.DE.   Since I've come out saying that investing in oil exploration and production companies is not the best way to invest in peak oil, I plan to test my theory by comparing this portfolio in the future to 183 shares of the Energy Select Sector SPDR (XLE), which is composed of oil E&P companies. 

[Late note: This article was not published until October 3, at which point the portfolio had risen 5.8%, while XLE was up by 4.0% between writing and publication.  While this makes the relative valuation of the companies less attractive, the reasons for choosing them over oil and gas companies are unchanged.  I have not yet bought any of them because I'm still expecting a significant market correction, and am waiting for even more attractive prices.]

Conclusion

These are my top oil related picks, but I have to admit I'm as curious as you are as to how they work out.  Can you do better?  Leave your picks in the comments, and I will track them along with my own when I check back to see how these stocks and XLE are doing.


DISCLOSURE: None.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:44 PM | Permalink | Comments (0) | TrackBacks (0)

Tom Konrad CFA

I like to think that one of the things that distinguishes me from the mass of investment bloggers and newsletter writers is that I write about my mistakes, as well as my great calls.  This is not just a service to readers, but a service to myself. 

Overconfidence and why I write about my mistakes

One of the most pernicious cognitive errors common among stock market investors arises from our wish to see ourselves as great investors.  One of the ways we accomplish that goal is to selectively and unconsciously self-edit our memories so that we can tell ourselves (and others) that we were correctly able to predict what was likely to happen.  While this may make us feel good, it has the pernicious effect of persuading ourselves and others that we're a lot better at investing than we really are.  Such overconfidence is particularly dangerous for an investor, because it leads us to put too much faith in our predictive abilities, and leads us to mistake our guesses for insights.
 
 Investors who mistake their guesses for insights often put too much money on them.  Betting too much is dangerous in two ways.  Most obviously, we lose money when those guesses are wrong.  When those guesses are right, we make money but end up even more overconfident than before.  That leads us to put even more money on the next guess.  If we keep on guessing right, our belief in our infallibility grows along with our fortune, until the odds catch up with us, and we go broke making one enormous bet a on guess we mistook for an infallible prediction.

At this point, most of my readers are probably patting themselves on the back for having avoided such dangerous overconfidence.  I'm a very lucky writer to have readers who are the product of millions of years of evolution favoring overconfidence, but who have mostly managed in various clever ways not to fall under the influence of that overconfidence when it comes to investing in the stock market.

Unfortunately, I am not made of such stern stuff, and I must resort to all sorts of ruses in order to remind myself that I'm far from infallible.  One such ruse is my discipline of writing every quarter about how my annual ten renewable energy and energy efficiency stock picks have been faring throughout the year. 

This quarter, I'm getting in touch with my humility.

Q3 Returns
In the three months since I last wrote about my Ten Clean Energy Stocks for 2010, the overall market has risen strongly.  My broad market benchmark, the Russell 3000 index has risen 5.9%, while my industry benchmark, the Powershares Wilderhill Clean Energy Index (PBW) has risen 9.3%.  In contrast, my ten stock picks have gained only 1.1% on average, while the alternative portfolio that substituted two ETFs, the Powershares Global Progressive Transport Portfolio (PTRP) and the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID), for six of the stocks did slightly better, gaining 5.2%.

C&D Technologies

In large part, my poor performance this quarter is explained by one stock on which I was quite decidedly wrong: C&D Technologies (CHP).

C&D's financing was tight at the end of last year when I recommended it, but I expected that they would have enough liquidity to meet their obligations without much improvement.  To make a long story short, quarterly results were not quite as good as I had hoped, and the declining stock price became a self-fulfilling prophecy, cumulating in a massively dilutive debt-for-equity swap that left stockholders owning only about 5% of the company.  The restructuring will greatly increase C&D's liquidity by removing $127 million of debt and the associated interest obligations.  This should leave the company in a much better position going forward.  But, since the debt swap valued CHP at about $0.25 per share according to my calculations, investors who bought it at the $1.40 stock price at which it was included in this list are unlikely to recoup their losses for quite a while.  On the other hand, investors who saw my September 15th comment that $0.21 seemed like a good price, as well as ones who bought with me at $0.30 the day before could see decent appreciation before the end of the year.

Portec Rail Products

As I mentioned in my recent article on Mass Transit supplier stocks (where I also discussed New Flyer Industries (NFI-UN.TO/NFYIF.PK)), L. B. Foster's (FSTR) friendly attempt to take over Portec Rail Products (PRPX) was extended to August 30 when FSTR increased the offer price to $11.80 per Portec share and agreed to pay $2 million to Portec if the deal does not go through.  Shareholders have tendered sufficient shares, but the deal is awaiting Department of Justice approval.  Foster management seems confident that they will get this approval before year-end.

First Group PLC

In a recent article on Rail and Mass Transit Operator companies, I concluded that I preferred Stagecoach Group, PLC (SGC.L) to FirstGroup PLC (FGP.L) because of their relatively low debt and strong liquidity.  I will continue to track FirstGroup in my year-end performance update, but if you're considering purchasing one of these now, my preference is Stagecoach.


YTD Performance

As you can see from the chart above, my picks are down 8.0% for the stock portfolio and down 0.4% for the stock/ETF portfolio for the year.  These results fall between the mediocre +2% performance of the broad market and the dismal -14.4% performance of Clean energy sector benchmark, PBW.  In other words, nothing to brag about.

I'll continue my humility building exercises in a couple of weeks with my quarterly review of my ten gambles for 2010.

DISCLOSURE: Long CHP, NFI-UN.TO/NFYIF.PK, PRPX

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:37 PM | Permalink | Comments (0)

Tom Konrad CFA

My speculative green gambles still have chips, but the mild decline of the stock market so far this year is not enough to make them really pay off, yet.

In January, I brought readers a collection of nine bearish puts on non-green companies and ETFs and one tiny energy efficiency company with a chance of taking off big before the end of the year.  They considered of bets against three fossil energy companies, four travel and leisure stocks, a Mexico ETF [EWW], a Trucking company (JB Hunt [JBHT]), and a long bet on Power Efficiency Corp [PEFF.OB].   These puts are intended as a complement to my more conservative Ten Green Energy Stocks for 2010, and as a possible hedge for those stocks in a green portfolio.

The energy companies are Consol Energy [CNX], Peabody Energy [BTU], and Chesapeake Energy [CHK], all of which have fallen considerably since the start of the year, making the Puts against their stocks the best performers in the portfolio.  The fall in these coal and shale gas companies seems to be mostly unrelated to BP's Deepwater Horizon oil spill, since the fall relative to the general market predates the disaster.

The travel stocks I thought worth betting against are airlines Delta Airlines [DAL], AMR Corporation [AMR], and Southwest Airlines [LUV], trucking company JB Hunt [JBHT], and Starwood Hotels [HOT].  These stocks have been strong this year, making the puts against them the worst performers of the lot.  The two remaining gambles were puts against the Mexican ETF [EWW].  My one long bet was Power Efficiency Corporation, which has also fallen since the start of the year.

Overall Performance

Overall, a speculator who decided to buy this portfolio in January, would still be at the table six months late, having lost about a quarter of his money.  However, in my most recent update on these gambles in late April, I concluded that "it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price."   That has so far turned out to be excellent advice, since I gave it right before the stock market started falling in April.

The chart below shows the performance of the portfolio of all ten gambles (dark blue), and each of the portfolio segments (Travel, Energy, and Miscellaneous) against a benchmark that is 80% composed of a put against the Dow Jones Industrials and 20% of the Powershares Wilderhill Clean Energy Index (PBW).  The light blue "Portfolio 2" line shows the returns that would have accrued to an investor who followed my April 27 suggestion, and moved 30% of his invested funds into additional puts against HOT, LUV, and JBHT.  An investor who had invested new funds in the puts on HOT, LUV, and JBHTwould have done even better.

Although the market as a whole has fallen this year, the fall has not as yet been drastic enough for most of these gambles to pay off, although investors who followed my April 27th suggestion to increase their bearish gambles would be slightly ahead for the year so far. 

The Second Half

Going forward, I remain bearish for the second half of the year.  At the start of the year, stocks were generally priced for a swift economic recovery, which I have long though was unlikely to happen, and now the general economic consensus seems to me moving in my direction.  If the stock market begins to price in a double-dip recession or just a long period of little or no economic growth as I expect, we will see further economic declines.

I continue to think that these gambles are an excellent hedge against the very real possibility of a considerable market decline in the second half of 2010, and since they are mostly focused on fossil fuel producers and fossil fuel dependent industries, they will also continue to make your portfolio that much greener while providing protection against general stock market declines.  You can find the full list of ten green gambles here, although if you are considering investing now, it probably makes sense to choose puts on the same underlying stocks that will expire in January 2012, rather than January 2011.

Security/Index	Change since 1/7/2010
CHK Jan 2011 17.500 put	36%
CNX Jan 2011 35.000 put	97%
BTU Jan 2011 30.000 put	8%
DAL Jan 2011 7.500 put	-41%
AMR Jan 2011 5.000 put	-32%
LUV Jan 2011 7.500 put	-70%
HOT Jan 2011 25.000 put	-57%
JBHT Jan 2011 20.000 put	-46%
EWW Jan 2011 30.000 put	-30%
Power Efficiency (PEFF.OB)	-38%
Portfolio	-24.0%
Portfolio 2	-0.3%
Benchmark	-13.6%
Energy	49%
Travel	-50%
Misc	-34%

DISCLOSURE: Short CNX,BTU, DAL, AMR, LUV, HOT, JBHT, EWW.  Long PEFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:40 AM | Permalink | Comments (0)

John Petersen

The second quarter was brutal for publicly traded energy storage companies which saw their stock prices fall by an average of 24.1% after a first quarter drubbing of 16.2%. Frankly I'm astonished that investors are chasing a battery-powered IPO like Tesla Motors (TSLA) and ignoring the energy storage technologies that will make EVs possible, and perhaps cost-effective, while making wind, solar and other renewable energy sources stable. At times like these I need to remind myself that energy storage is the beating heart of cleantech and take comfort in the fact that while Goldman Sachs began covering advanced batteries as a sector on June 27th, I've been focused on the energy storage sector for almost two years.

The following table provides comparative second quarter performance data and key valuation metrics for the 17 pure-play energy storage companies I track. All values have been adjusted to reflect disclosed material changes since the last reporting date. In the working capital columns, I've included my subjective assessment of working capital adequacy based on historical operating results and disclosed capital spending plans. The "Blue Sky" value is the spread between the book value shown on a company's balance sheet and its current market capitalization. For this quarter only, I've included Tesla as an honorary member because it's blue sky premium equals 118% of the blue sky premium for the 17 energy storage companies combined.



The following graph compares the composite price performance of my five categories with the Dow Jones Average since November 14, 2008, when I first started tracking the sector.



The following table summarizes the portfolio performance a hypothetical investor would have realized over the last three months if he invested $1,000 in each company and the three broad market indexes on March 31, 2010.

Broad Market Indices	-11.29%
Cool Emerging Companies	-31.47%
Cool Sustainable Companies	-10.71%
Cheap Emerging Companies	-35.19%
Cheap Sustainable Companies	-17.94%
Chinese Battery Companies	-25.23%

Cool Emerging Companies

My Cool Emerging Companies category includes four companies that are developing cool but expensive energy storage technologies that are not yet commercialized. The companies in this category are Ener1 (HEV), Valence Technology (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON). The Cool Emerging group fell an average 31.47% in Q-2 and have fallen an average of 58.65% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Valence, Ener1 and Beacon do not have sufficient working capital to support their operating losses and capital spending plans for more than three to six months without relying on financing transactions where shares are sold into the public market on a regular basis for the purpose of providing working capital, which can put significant pressure on stock prices. Until their working capital positions improve, I'd be cautious.

While Altair will likely need additional financing within the next year, it does not appear to have any pressing needs and its low market capitalization of $31.6 million and miniscule blue sky premium of $1.7 million leave significant room for outsized gains if it successfully implements its business plan.

Cool Sustainable Companies

My Cool Sustainable Companies category includes three companies that manufacture cool but expensive energy storage devices and generate substantial recurring revenue. The companies in this category are A123 Systems (AONE), Maxwell Technologies (MXWL) and Ultralife (ULBI). The Cool Sustainable group fell an average 10.71% in Q-2 and have fallen an average of 2.47% since November 2008

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



In the Cool Sustainable category Ultralife strikes me as a bit of a sleeper because of its diversified product lines and customer base. It has larger revenues and smaller losses than either of its peers and is currently trading at a modest discount to book value. It certainly merits further analysis.

Cheap Emerging Companies

My Cheap Emerging Companies category includes two companies that are developing effective and objectively cheap energy storage technologies that are not yet commercialized. The companies in this category are Axion Power International (AXPW.OB) and ZBB Energy (ZBB). The Cheap Emerging group fell an average 35.19% in Q-2 and have fallen an average of 43.51% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.


 
ZBB does not have enough working capital to support its operating losses and capital spending plans for more than three to six months without relying on financing transactions where shares are sold into the public market on a regular basis for the purpose of providing working capital. ZBB's recently announced financing plans are more company friendly than others I've reviewed, but future pressure on its stock price cannot be ruled out. Conversely its miniscule market capitalization of $7.3 million and very small blue sky premium of $3.3 million leave significant room for outsized gains if it successfully implements its business plan.

In the two emerging company categories, Axion Power is the only company with enough working capital to support a couple years of operations and significant expansion of its manufacturing capacity.

Cheap Sustainable Companies

My Cheap Sustainable Companies category includes four companies that manufacture effective but objectively cheap energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are Enersys (ENS), Exide Technologies (XIDE) C&D Technologies (CHP) and Active Power (ACPW). The Cheap Sustainable group fell an average 17.94% in Q-2, but gained an average of 76.43% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Chinese Battery Companies

My Chinese Battery Companies category includes four companies that manufacture a variety of energy storage devices including lead-acid, NiMH and lithium-ion batteries, and generate substantial recurring revenue from product sales. The companies in this category are Advanced Battery Technology (ABAT), China BAK Batteries (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). The Chinese Battery group fell an average 25.23% in Q-2, but has risen an average of 36.69% since November 2008..

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



China BAK is very weak from a working capital perspective and has not publicly disclosed its plans to remedy the problem. Until its working capital position improves, I'd be cautious.

My Murky Crystal Ball

For two years I've been telling readers why energy storage will be a core enabling technology for the cleantech revolution and cautioning that valuations in the cool technology groups were less attractive than valuations in the cheap technology groups. On that basis alone, I've consistently suggested that the cool technology groups were likely to stagnate or underperform on a go-forward basis while the cheap technology groups were likely to outperform. I think the comparative price performance charts say it all.

These are heady times because times and technologies are changing rapidly and risky times because many of the highest profile technologies like electric vehicles are not cost-effective and may never reach that goal. In my opinion, the biggest challenge for energy storage investors is separating business reality from press release hype and establishing a realistic timeline for expected changes in the energy storage sector.

During the information and communications technology revolution, we got used to the idea that Apple (AAPL) could announce a new product and sell millions of copies within a few months. In cleantech the development timelines will be longer and until we build a substantial experience base with some of these exciting new technologies, adoption rates will be slow and uncertain. One of the most useful graphs I've seen for energy storage and cleantech investors is set forth below.


My last table is arranged in declining order of blue sky premiums and summarizes where I believe the pure-play energy storage companies I track fit on the technology adoption lifecycle graph.



For my investment dollar, companies that have already crossed the chasm, together with developers like Maxwell and Axion that have a good shot at crossing the chasm in the next 12 to 18 months are better opportunities than riskier business models that face a three to five year development cycle and uncertain customer acceptance.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock.

Posted by John Petersen at 06:30 PM | Permalink | Comments (3)

Tom Konrad CFA

In the six months since I published my annual clean energy mini-portfolio, it has far outperformed my industry benchmark, the Powershares Wilderhill Clean Energy Index (PBW).  The dismal performance of renewable energy stocks so far this year is likely to lead to great buying opportunities in the rest of the year.

2010 is the third year in a row that I've published a list of ten renewable and energy efficiency stocks that I expect to perform well over the coming year. The details on the list for 2010 are here; this article is my second quarterly look back at the performance of the ten stocks so far this year.

These stocks are intended for small investors wanting to put some money in the sector, but not satisfied with the performance or holdings of clean energy mutual funds or clean energy exchange traded funds (ETFs). Please consult your investment advisor to decide if any or all of them are appropriate for your portfolio.

The diagram below shows the two versions of the my Ten Clean Energy Stocks for 2010 mini-portfolio, with the outer ring denoting an equal weight portfolio of ten stocks, including three energy efficiency stocks, three electric grid stocks, three alternative transportation stocks, and one biomass/waste to energy stock. The inner ring denotes a simplified portfolio, which substitutes the Smart Grid Infrastructure Index Fund (GRID) for the three electric grid stocks and the Powershares Global Progressive Transport ETF (PTRP) for the three alternative transportation stocks. For future reference, I'll call the portfolio shown in the outer ring "10 stocks for 2010" and the portfolio shown in the inner ring "4 stocks plus 2 ETFs for 2010."

Performance

Since December 27th, the Russell 3000 broad market benchmark has fallen 3.67%, while the Powershares Wilderhill Clean Energy Index (PBW) has fallen 21.7%. Both portfolios are trailing the broad market by less than 2%, while outperforming the industry benchmark by almost 16%, producing a nearly identical -5.21% for the ten stocks for 2010 and -5.34% for the four stocks plus two ETFs for 2010.

Coming Opportunities

While the performance against PBW is impressive, most investors would have probably been happier if they had simply stayed out of the market, or hedged their market exposure so far this year, which is exactly what I've been urging readers to do (see here, here, and here.) Although I saw some brief buying opportunities in clean energy at the end of May (I picked up a little Exide (XIDE) at $3.85 and US Geothermal (HTM) at $0.70) those opportunities were short-lived, and probably do not represent the market bottom for clean energy.

If the year continues to progress as I expect, the broad market will continue to decline, as will the clean energy sector. Individual clean energy stocks will likely continue to present excellent buying opportunities when the market as a whole has been declining rapidly. Buying opportunities in clean energy are likely to lead buying opportunities in the market as a whole, because the rapid decline of the whole clean energy sector over the last year is already producing great valuations. These great valuations broaden the appeal of clean energy stocks beyond the base of committed environmental investors, drawing in dyed-in-the-wool value investors who may not even think that Global Warming is happening, but know a good value stock when they see one.

I personally am still maintaining an overall short position in the market, but expect to be buying clean energy stocks with a focus on profitable micro-cap companies opportunistically.

Since these ten stocks have held up better than clean energy as a whole, we're liable to find fewer than average great buying opportunities in this list. C&D Technologies (CHP), currently trading at $0.95 is the best value I see among them at the moment, and this company may have already see its low for the year ($0.90 on June 10.)

One opportunity for short term gain may have just re-emerged in Portec Rail Products (PRPX). The company is the subject of a takeover bid from LB Foster (FSTR) which I covered in detail on June 1. The judge in a shareholder class action lawsuit lifted her earlier injunction blocking the merger on June 25th. The merger is not a done deal, however, since, as of May 28, only 59% of Portec shares had been tendered, and 65% are needed for the successful completion of the buyout. Foster may have to raise the offer price in order to consummate the deal.

Conclusion

At some point, I hope to be able to say it's time to buy this portfolio as a whole, but I think that time is not yet. Just the best strategy for the first six months of the year so far has been to stay in cash, and I think that will continue to be the best strategy for at least few more months. Now is still a time to remain mostly in cash, while keeping an eye out for individual buying opportunities.

DISCLOSURE: Long CHP, NFYIF, PRPX, WFIF, XIDE, HTM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:35 AM | Permalink | Comments (0)

Tom Konrad, CFA

The stock market is up, and my bets against it are down, except in energy.  It's time to double down.

Earlier this week, a client asked me if I'd found any buying opportunities while doing research for my "Best Peak Oil Investments" series.  The answer is, "no," although I've found a few companies I'm hoping to buy at lower prices, later. 

As regular readers know, I've been bearish since June 2009, after I cashed in on the quick rally in March, April, and May of that year.  My last ten months of sitting on the sidelines as the general market has risen 30% has been far from fun, but it has not made me question my decision to get out.  At the time, I judged that the potential gains did not justify the downside risks, and I believe the rise since then has only reduced any potential gains and increased the risks of staying in.

When I published my 10 Green Energy Gambles for 2010 in January, I had just these risks in mind, and suggested that readers use them to hedge any long stock positions, or use them to speculate on a decline. 

Readers who took this advice have lost about a third (34%) of their money, which is about what we've seen from my benchmark, composed of puts on the broader market and a clean energy ETF (down 38%).  If they had used this portfolio of puts as a hedge against the S&P 500 by investing $1 in this portfolio for every ten in the S&P 500, they would have acheived a net 2.5% gain, compared to a 4% unhedged gain on the S&P.

The following table shows how the individual picks have performed so far this year:

Security	Weight	Underlying	sector	1/9/10*	4/27/10*	Gain
EWW Jan 2011 $30 Put	20%	iShares Mexico (EWW)	Misc	$0.825	$0.40	-52%
CHK Jan 2011 $17.5 Put	7%	Chesapeake Energy (CHK)	Energy	$0.865	$0.955	+10%
DAL Jan 2011 $7.5 Put	7%	Delta Airlines (DAL)	Travel	$0.975	$0.60	-39%
AMR Jan 2011 $5 Put	7%	AMR Corp (AMR)	Travel	$0.85	$0.655	-23%
LUV Jan 2011 $7.5 Put	7%	Southwest (LUV)	Travel	$0.50	$0.10	-80%
CNX Jan 2011 $35 Put	7%	Consol Energy (CNX)	Energy	$2.325	$3.30	+42%
BTU Jan 2011 $30 Put	6%	Peabody Energy (BTU)	Energy	$1.45	$1.13	-22%
HOT Jan 2011 $25 Put	10%	Starwood Hotels (HOT)	Travel	$1.725	$0.30	-83%
JBHT Jan 2011 $20 Put	10%	JB Hunt (JBHT)	Travel	$0.65	$0.20	-69%
Power Efficiency Corp	20%		Misc	$0.275	$0.26	-7%
Portfolio	100%					-34%
Benchmark
DIA Jan 2011 75.000 put	80%	DIAMONDs (DIA)		$1.49	0.84	-44%
Powershares Wilderhill Clean Energy (PBW)	20%			$11.74	$10.08	-14%
Benchmark	100%					-38%
* Prices given are the midpoint between the bid and ask at the close on the given date.

I've also categorized these picks as "Travel" (including airline, trucking, and hotel stocks), "Energy" (including coal and shale gas stocks), and "Misc" including my bet against Mexico's peak oil economy and the energy efficiency company Power Efficiency Corp. (PEFF.OB).  The following chart shows how the portfolio as a whole and these sectors have performed against the benchmark.


As you can see, the portfolio (blue) as a whole is tracking the benchmark (orange) closely, but the energy companies have fallen (and the puts have risen) despite the market trend, while the travel companies have outperformed the market (and the puts on travel companies have fallen.) 

The star performer was the put on Consol Energy (CNX) a firm with interests in both shale gas and Appalachian coal.  The main reason for its share price decline has been a large dilutive issue of common stock, priced at $42.50 a share that has depressed the share price.  The stock was trading at $56 when I first priced the option.

Outlook

The occaisional stock on the list may fall due to specific news, but if these gambles are going to pay off, it will require either a spike in oil prices that causes a steep decline in the price of the travel stocks, or a significant broad market decline, or both.  I think either or both is likely this year, and the recent market rise makes a decline from these levels more likely. 

If you've been hedging your portfolio with some or all of these puts, you should realize that as stock prices rise, the value of  these puts as a hedge against relatively small declines in stock prices falls.  Hence, if you want to maintain your hedge, it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price. 

DISCLOSURE: Short EWW,DAL,AMR,LUV,CNX,BTU,HOT,JBHT,DIA.  Long PEFF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:24 PM | Permalink | Comments (0)

Tom Konrad, CFA

Three months have passed since I published my annual clean energy mini-portfolio.  So far, these stocks have beaten the Powershares Wilderhill Clean Energy Index (PBW) handily, but they trail the broader market.

This is the third year in a row I've published a list of ten stocks for the year ahead at the end of December.  In 2008 my list trailed the broader stock market but beat the clean energy index, and last year it outperformed both.  So far, this year looks more like 2008 than 2009.  In addition to the portfolio of ten stocks, I gave an alternative portfolio which substituted two specialized exchange traded funds for six of the stocks.  You can read the original article here.

For the first quarter, the portfolio was up 1.3%, including dividends, and the alternative portfolio with 4 stocks and two exchange traded funds (ETFs) was down 1.2% with dividends.  These two results were bracketed by the broad Russell 3000 index (up 4.03%) and my sector benchmark, the Powershares Wilderhill Clean Energy ETF (PBW), which was down 11.57%. 



Individually, here is how the stocks have performed:

Electric Grid Stocks

General Cable (BGC): Down 14.8%. The company fell on lowered earnings guidance on February 11.  I took an in-depth look at General Cable's prospects shortly thereafter.
MasTec (MTZ): Up 0.4%.
C&D Technologies (CHP): Up 12.2%.

Collectively, these three stocks were down 0.7%, which beat the substitute ETF, the Smart Grid Infrastructure Index Fund (GRID), which was down 5.5%

Efficient Transportation Stocks

New Flyer Industries (NFI-UN.TO, NFYIF.PK): up 16.0%
Firstgroup PLC (FGP.L): down 15.5%
Portec Rail Products (PRPX): up 14.2%.  Portec is the subject of a cash takeover by L. B. Foster Company (FSTR).  If the merger goes through, I plan to look for a replacement.

Collectively, my transport picks are up 4.9%, compared to a 1.1% gain for the substitute ETF, the Powershares Global Progressive Transport ETF (PTRP.)

Energy Efficiency Stocks

Waterfurnace, Inc. (WFI.TO, WFIFF.PK): up 9.5%
Linear Technology Corp (LLTC): down 8.4%
Flir Systems, Inc. (FLIR): down 13.4%

Collectively, my energy efficiency picks were down 0.7%.  There is no efficiency ETF with which to compare them.

Biomass Stock

Waste Management (WM): up 2.9%.

Conclusion

The biggest surprises of the quarter were the relative poor performance of the clean energy ETFs, PBW, GRID, and PTRP.  I've long thought that stock picking can be useful in clean energy because it is a new, rapidly changing sector that is not yet closely followed by many Wall Street analysts.  Three months of outperfomance compared to these exchange traded index funds means very little.   But now that we have over two years of outperfomance relative to the clean energy ETFs, it is starting to look like a trend. 

This year was the first year the sub-sector ETFs GRID and PTRP were available, and they allow us to dissect the portfolio's performance in more detail.  In general, I think the broad clean energy ETFs such as PBW over-emphasize popular sectors such as solar, and under-emphasize less exciting sectors such as efficiency.  GRID and PTRP  underperformed my corresponding picks by about four percent each, but the broad clean energy ETF underperformed my picks by about 13%.  Assuming my outperformance was not luck, we can attribute 9% of it to the emphasis on Energy Efficiency, Electric Grid, and Clean Transportation sectors over Solar and Wind.  The other 4% outperformance would be from old fashioned stock picking within sectors.

Even successful stock picking is not likely to lead to profits when the market as a whole is down, as we saw in 2008.  My picks that year only looked good in comparison to PBW.  I continue to expect a general market decline in 2010, and so I continue to wait before I commit much money to any of these picks.  When I do, I'll let you know.

DISCLOSURE: Long BGC, CHP, NFYIF, PRPX, WFIFF, and WM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 09:20 PM | Permalink | Comments (0)

Tom Konrad, CFA

A quick update of last month's list of speculative puts, to reflect the new options symbols.

In January, I put together a list of nine puts and one small energy efficiency stock I expect to do well this year.  I normally only do updates on these every quarter, but because of the recent change option symbols, I thought I'd revisit my 10 Green Energy Gambles.  The links in the original article have stopped working; this new table shows the current list.

Here's the list: with updated option symbols.

Security	Portfolio Weight	Underlying	1/9/10*	2/11/10*	Gain
EWW Jan 2011 $30 Put	20%	iShares Mexico (EWW)	$0.825	$1.00	21%
CHK Jan 2011 $17.5 Put	7%	Chesapeake Energy (CHK)	$0.865	$1.225	41%
DAL Jan 2011 $7.5 Put	7%	Delta Airlines (DAL)	$0.975	$0.925	-6%
AMR Jan 2011 $5 Put	7%	AMR Corp (AMR)	$0.85	$0.68	-20%
LUV Jan 2011 $7.5 Put	7%	Southwest (LUV)	$0.50	$0.35	-30%
CNX Jan 2011 $35 Put	7%	Consol Energy (CNX)	$2.325	$3.20	37%
BTU Jan 2011 $30 Put	6%	Peabody Energy (BTU)	$1.45	$2.12	46%
HOT Jan 2011 $25 Put	10%	Starwood Hotels (HOT)	$1.725	$1.65	-5%
JBHT Jan 2011 $20 Put	10%	JB Hunt (JBHT)	$0.65	$0.70	8%
Power Efficiency Corp	20%		$0.275	$0.275	-2%
Portfolio	100%				8.4%
Benchmark
DIA Jan 2011 75.000 put	80%	DIAMONDs (DIA)	$1.49	1.885	27%
Powershares Wilderhill Clean Energy (PBW)	20%		$11.74	$9.53	-19%
Benchmark	100%				17.4%

* Prices given are the midpoint between the bid and ask at the close on the given date.

After a little over a month, it's too early to draw any conclusions about the portfolio's performance.  I'm naturally happy that the portfolio is up, but disappointed with its performance relative to the benchmark.  On the other hand, I don't know any theory behind benchmarking options portfolios, let alone mixed option and stock portfolios. 

Anyway, it's nice that the portfolio is up for the month, so I shouldn't complain that I'm not meeting my self-imposed benchmark. 

For those of you keeping score at home, my long-only Ten Clean Energy Stocks for 2010 portfolio is down 5% since December 27, 2009, compared to a drop of 14% for PBW and a drop of 4% for the Russell 3000 index.  The simplified version of the portfolio, which substitutes the ETFs PTRP and GRID for six of the stocks is down 8%.


DISCLOSURE: Short EWW,DAL,AMR,LUV,CNX,BTU,HOT,JBHT,DIA.  Long PEFF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 05:17 PM | Permalink | Comments (0)

Tom Konrad, CFA

Given the small size of its economy and rather lackluster approach to climate change, Canada has many of the Cleantech stocks with the best prospects.  Canadian listed firms come from a broad range of sustainable sectors, and a lack of attention from United States investors means that many trade at very attractive valuations.  Corporate Knights' has picked ten of the best.

I'm often surprised at how many of my favorite green stocks are listed in Canada.  This year, two of my Ten Clean Energy Stocks for 2010 are Canadian listed.  The same was true for my 2008 list, while my 2009 list contained three stocks from Canadian exchanges.  I mostly stick to companies that are traded on North American exchanges, so it's not surprising that more Canadian-listed companies appear than, say, companies listed in Britain (only one over three years.)  It's also surprising that there are so many Canadian listed firms, given that Canada's economy is only about one tenth the size of the United States' economy.  Canada's largest exchange, the TSX, has 3841 companies with a combined market capitalization of about $1.4 trillion, compared to 3615 $10.8 trillion for the NYSE and 2249 at $2.8 trillion for the NASDAQ.

The number of stocks on Canadian exchanges is key to the number of great Cleantech stocks listed there.  While Canada's relative market capitalization parallels the relative size of the economy, the number of Canadian listed stocks is about 2/3 of the number of stocks listed in the United States.  Small companies often find that listing on the TSX is faster and easier, and often comes with less burdensome reporting rules than a NASDAQ listing [powerpoint pdf.]  This means that American Cleantech investors interested in the many new companies going public find ourselves with relatively few options on US exchanges, while a bumper crop of Cleantech IPOs heads towards Canada.

However, the less burdensome listing requirements for Toronto listed firms are a two-edged sword: investors looking at these companies not only have to sift through more of them, but they need to be more careful with the ones they choose to consider in more detail.  Many investors decide the extra work is not worth the bother, and stick to the relatively few US listed firms.  Their reluctance is good for those of us willing to venture across the Northern border and do our homework: a smaller pool of investors means we can often buy these companies at much better valuations.

Sorting the Wheat from the Chaff

With many more Cleantech stocks to choose from, it helps to narrow down your focus on a few companies before doing the many hours of due diligence that should accompany any stock market investment.  I often start with companies that are part of third party indexes.  Beyond that, I tend to focus on a few Cleantech sectors such as Energy Efficiency Stocks, Clean Transportation Stocks, and Electric Grid stocks which get less attention than more popular sectors such as solar.  

Companies in indexes have garnered enough shareholder attention that there will decent liquidity.  This can be surprisingly important, even for a small investor.  I became interested in a TSX-traded energy efficiency firm over the holidays, did hours of due diligence, and even wrote an article.  The stock typically trades 1,000 to 2,000 shares a day, and I have only been able to buy 1700 shares at what I consider to be an attractive price.  I'm waiting to publish the article until I've made my purchase.  Given that the stock has risen since I bought it, I may never get the chance to buy more at the prices that prevailed when I did my research.  Researching higher-liquidity stocks means that you can get in when you want without greatly moving the market.

The Cleantech 10^TM

Corporate Knights calls itself "The Canadian Magazine for Responsible Business," and they publish (in collaboration with The Cleantech Group) an annual list of ten "technology-driven growth companies that have big impacts on resource efficiency and the environment—not simply those re-branding themselves as ‘green.’"  By starting with a list like this one, I know I'm only looking at companies with businesses I would like to own.  What I don't know is if the stocks are good values, if they strong financially, or if management has the skills necessary to have them succeed against the competition.  These latter three questions are the ones I try to answer during due diligence.   In 2009, their list outperformed the TSX/S&P Composite by 38%.

They published the most recent Cleantech 10^TM list in October 2009. With one replacement because of the buyout of Canadian Hydro Developers, here is their list, along with a few of my observations about each company.  The first ticker is the Canadian ticker (in Canadian dollars,) and the second ticker is the US ticker, denominated in US$.

1. Westport Innovations (WPT.TO, WPRT)

Vancouver-based Westport trades on the NASDAQ as well as the Toronto Stock Exchange.  This means the company may be less interesting to investors looking for less-noticed stocks.  The company's alternative engines and drive trains will probably do well if oil prices continue to rise.  Although the company can fund about two year's worth of operating cash losses from the balance sheet, I prefer profitable companies which are actively paying down their debt.

2. RuggedCom (RCM.TO, RUGGF.PK)

I took a close look at Smart Grid company Ruggedcom in November, and I concluded that, although I liked the business and had a generally good feeling about management, I felt it was overvalued at US$16.60.  Since it's currently trading around $20, I'm in no hurry to buy.

3. WaterFurnace Renewable Energy (WFI.TO, WFIFF.PK)

Waterfunace is a long-time favorite of mine, having appeared in both my own top stock lists in 2009 and 2010.  In fact, I first learned about the Cleantech 10 list because it showed up in a news story about Waterfunace.  

The Fort Wayne-based company manufactures a broad range of geothermal heat pumps, a clean energy technology that not only saves energy compared to other forms of heating and cooling a building, but also shifts electricity use to seasons during which wind based power is plentiful.

The company also provided me with some extra confirmation that US based investors tend to ignore Toronto listed companies: A contributing writer for the Motley Fool called me to ask about the company in January, after a relative had recommended one of their heat pumps for his home.  He was researching it for his own portfolio, and when I asked him if he was likely to write about it, he said that he probably wouldn't.  The Motley Fool pays him to write articles that are likely to be popular, and, he said, that companies without US tickers don't interest many of their readers.

4. Magma Energy Corp. (MXY.TO, MGMXF.PK)

Vancouver based Magma Energy Corp went public in July last year, with the intention of buying up interests in geothermal electricity projects.  Geothermal is one of my favorite renewable energy sectors, since the electricity it produces is competitive with wind, but the power is much more reliable, but I have not yet taken the time to analyze Magma and decide if it's a good value.

5. 5N Plus (VNP.TO, FPLSF.PK)

Montreal based 5N Plus provides purified metals, and is probably most interesting to investors because it supplies pure metals used in the Solar photovoltaic panels.

6. Carmanah Technologies Corp. (CMH.TO, CMHXF.PK)

Victoria based Carmanah manufactures LED lighting with integrated solar panels and batteries which allow for use in remote locations without a grid connection.  Not having to lay wires for a grid connection means that Carmanah's products are often the most cost effective lighting solution, despite the high cost of both the batteries and solar.  I owned the stock from late 2005 until I sold it in September 2008 in response to the financial crisis, because I did not think that the company had the financial muscle to weather the storm.  

The company last traded at $0.80, still below the $0.95 at which I sold despite almost doubling since March 2009, but I have not looked at the company again to see if they have done what I consider to be sufficient work repairing their balance sheet and cash flows.

7. NEO Material Technologies (NEM.TO, NEMFF.PK)

Toronto based NEO Material Technologies is one of the companies that made this whole exercise of going through the list worth doing.  I was not previously aware of this manufacturer of rare-earth and Zirconium based magnets, which are used in high-performance electric motors (Recall John Petersen's recent Storm Warning about the availability of rare earths for hybrid and electric vehicles.) Despite worries about rare earth supply, if NEO Materials is able to pass higher supply costs on to its customers, the company could be very profitable.  Will it?  Finding out is where the work comes in.

8. Stantec (STN.TO, STN)

Also new to me is Edmonton based Stantec, a design firm geared towards sustainability.  Stantec is worth further research because energy efficiency is more often about design than about products.  In other words, design firms can often do more to reduce energy use than can be accomplished by simply slotting more efficient products into the same systems.  

9. Hemisphere GPS (HEM.TO, HEMGF.PK)

Calgary based Hemisphere GPS manufactures GPS equipment for farming equipment which allows farmers to better gauge the amount of fertilizer or pesticide applied to a specific part of the field to the needs of the crop there.  This more efficient use of resources not only improves the economics for the farmer, but is less wasteful and polluting to the environment.

10. Innergex Renewable Energy Inc. (INE.TO, INGXF.PK)

Innergex is a developer and operator of hydroelectric and wind projects, with the majority being hydroelectric.  This makes the company an interesting play because the economics of upgrading old hydroelectric plants are far better than even building new coal plants, while new hydropower projects have economics that are comparable with the best other renewables, wind and geothermal.  Like most of these, I have not looked at Innergex's valuation, but I consider it worth a look.

 

The Cleantech 10 List from Corporate Knights on Vimeo.

Next Steps

NEO Materials, Stantec, Magma, and Innergex all are interesting enough to me that I may do further research.  With interesting prospects like these, my next step is to start monitoring the news for these companies, and perhaps do a preliminary valuation based on simple metrics such as P/E, cash on hand, current ratio, and cash flow from operations.  If the stock price falls to a point where the valuation looks good, and the news does not account for the change, it will be time to do the real work of reading through annual and quarterly reports.

DISCLOSURE: The author and/or his clients own WFI. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:03 AM | Permalink | Comments (0)

Tom Konrad, CFA

If you like to take risks, want to fight climate change and prepare for the impact of peak oil, and would also like a chance to make a big return on your investments, here are ten investments you can make that might do all of those things. 

Note (4/28/2010): A performance update for these picks is available here

A small part of my portfolio is usually in small, risky green companies with the promise of big returns.  This year, however, I'm too bearish to own many small, risky companies, but I'm still making some long-shot bets that could pay off big.  Last year, my list of ten green energy gambles had two stocks that returned over 100%.  This year, I'm hoping to do better by looking for profit on the short side of the market.

In December, I made the case that green and peak oil investors should be looking to the short side of the market.  Declining supplies of oil and gigantic debt are bound to be a drag on the economy for years to come.  Some companies and industries will be hurt more than others.  Action to reduce carbon emissions will have both winners and losers.  No matter how many green jobs are created, some industries will be hurt.  Spotting the companies that will be hurt is easier than spotting the beneficiaries: They're the ones trying hardest to derail climate legislation. They may succeed, but if they fail, we'll see it in their stock price.

Putting Your Money Down

On the short side, these gambles are going to be puts on companies or industries I highlighted in my Green Energy Investing for Experts series.  I'm using puts because they have the right sort of payout for gamblers: if the stock does not fall much, you lose the premium you paid for the put.  If the stock falls a lot, the put pays off in a big way.

One other advantage of puts is that they are more accessible to the ordinary investor than shorting.  It's much easier to get trading authority to buy options from your broker than it is to get permission to sell calls or short stocks.  It's even possible to buy puts in a brokerage IRA, where federal regulation prohibits shorting. Because this is a list of picks for 2010, I'm only going to use puts that expire in January 2011, giving us a target date of one year.

Should you be buying puts in your IRA? Your investment advisor would almost certainly tell you "no."  But he'd probably also tell you that "you should hold stocks for the long run." This conventional wisdom makes no sense if you expect peaking fossil fuels to cause economic decline.  Holding stocks for the long run also didn't make sense when Jeremy Siegel's book with that title was published in 1998.  If you'd bought the S&P 500 at the high in 1998, and sold at the high in 2009, you would have lost 9% over 11 years.  If you'd bought at the low in 1998, and sold at the low in 2009, you'd have lost 27%.  

That's not the kind of performance I want in my account.   Nevertheless, you should use puts judiciously.  This is gambling, even if peak oil is tilting the odds in our favor.  For myself, the money in this type of bet is a very small part of my portfolio.

The Picks

Security	Ticker*	Portfolio Weight	Underlying	Price 1/9/10**	Related articles
EWW Jan 2011 $30 Put	XBLMD.X	20%	iShares Mexico	$0.825	Experts part II - Shorting Mexico
CHK Jan 2011 $17.5 Put	VECMW.X	7%	Chesapeake Energy	$0.865	Experts Part III - Shale Gas
DAL Jan 2011 $7.5 Put	ZQIMU.X	7%	Delta Airlines	$0.975	Experts Part IV - Airlines
AMR Jan 2011 $5 Put	VMRMA.X	7%	AMR Corp	$0.85	Experts Part IV - Airlines
LUV Jan 2011 $7.5 Put	VUVMU.X	7%	Southwest	$0.50	Experts Part IV - Airlines
CNX Jan 2011 $35 Put	VTLMG.X	7%	Consol Energy	$2.325	Experts Part V -Coal, Experts III Shale Gas
BTU Jan 2011 $30 Put	ZZTMF.X	6%	Peabody Energy	$1.45	Experts Part V -Coal
HOT Jan 2011 $25 Put	VVOME.X	10%	Starwood Hotels	$1.725	Experts/Index - Travel
JBHT Jan 2011 $20	ZORMD.X	10%	JB Hunt	$0.65	Experts/Index -Trucking
Power Efficiency Corp	PEFF.OB	20%	n/a	$0.275	see below

*These ticker symbols will change after the second quarter 2010.

**Since options are typically illiquid and often go without trading for days, this price is not the most recent trade, but the average of the bid and ask price.

My Long Pick

On the long side, I have one energy efficiency stock that I decided not to add to my Ten Clean Energy Stocks for 2010 because of liquidity concerns.  

This stock is Power Efficiency Corporation (PEFF.OB.)  I first heard about them over two years ago when BJ Lackland, the company CFO called us up and said he wanted to advertise on AltenergyStocks.com.  They had read one of the many articles I write about energy efficiency, and why it should be at the core of a clean energy portfolio, and decided that our readers would get the benefit of cutting energy use of escalators, elevators, rock crushers, and other variable-load, constant speed motors with clever controllers.  Did you realize that a single escalator can draw about 6kW?  One kW is about the amount of energy used by a typical home. Power Efficiency's controller cuts that to about 4kW.  In other words, if an escalator runs 12h a day, one of their controllers will save enough energy to run an entire home. 

When they first became an advertiser, I was reluctant to give them an extra boost by mentioning them in articles, because of the conflict of interest.  I did mention them a couple times, but never as prominently as this, and always with a disclosure about the relationship.  Last fall, however, I finally decided to take the plunge, and made a significant investment in the company, simply because I think it's a good investment.  Now that my own money is where my mouth is, I feel much better writing about the stock.  I can now honestly say that this is a company that I would invest in myself.

Liquidity matters because PEFF trades on the Bulletin Boards.  If too many readers rush to buy, the price will shoot up and make it no longer a good value.  This happened in a small way to C&D Technologies (CHP) which I included in the top 10 list.  That stock was up over 20% the three trading days after I published my top 10 stock list, despite the fact that CHP had a daily turnover of about $300,000 and there was no other news.  There was news of an Army contract the following day, though, so part of the run-up could have been driven by people in the know illegally trading on the information.  I've come to believe that that type of insider trading is quite common, because I often see stock prices moving in anticipation of this sort of announcement.

Power Efficiency only has a daily turnover of a little over $1,000.  Since you're gamblers, I'll just suggest that you get in early, or wait and hope for a correction after this article bumps up the stock price.

Weights

You'll note in the table that I've assigned weights.  These are mostly intended for tracking the performance of the portfolio over the year, and were chosen to reflect my general confidence in each of the bets.

I expect that readers are not going to buy all these securities in these proportions. In fact, you will probably be better off if you only buy a few of the suggested puts, and use different strike prices than the ones I've listed.  Only buying a few will save you money on commissions, while using different strike prices will help you get reasonable prices on these illiquid securities.  I'd suggest using limit orders as well, to limit the price impact of your individual orders. 

How Much to Buy

Unlike last year, this portfolio is meant as a complement to my 10 Green Picks for 2010.  If you have a larger portfolio and an account where you can buy options, this portfolio can be used as a complement to that portfolio if you are worried about a fall in the market as a whole.  The dollar investment in these puts should only be around one to five percent of your total long portfolio positions if you're trying to hedge your exposure.  If you are confident that the market will fall drastically and hope to profit from such an event in 2010, you might invest more.  I personally don't have that much confidence in my own sense of timing.  I have a long history of being much too early on my market calls, going back to the start of my investing career in the late 90s, when I thought this Internet fad was going to end at any time. It took three more years.

Benchmarks

Because this is a mostly a portfolio of Puts, ordinary benchmarks don't make sense.  Instead, in order to compare like to like, I plan to use a put on an index ETF which also expires in January 2010.  My first choice for an underlying ETF would be SPY, but long dated puts on SPY expire in December, not January.  Instead, I'll use a put on the DIAMONDS Trust (DIA), which tracks the Dow Jones Industrial Average.  In particular, my benchmark will be DIA Jan 2010 $75 Put for the 80% of this portfolio on the short side. This put is currently trading under the ticker ZAVMO.X, with the average of bid and ask prices at $1.49. For the long side of the portfolio, I'll use the Powershares Wilderhill Clean Energy ETF (PBW), with a 20% weight, which closed on January 8 at 11.74.

How the portfolio performs relative to this benchmark will give some indication of how useful my sector and stock picking  is, even though the profitability of this portfolio will mostly be determined by the direction the market takes in 2010.  If we have another year like 2008, this portfolio should be profitable no matter how bad my sector picks were, while if next year is a repeat of 2009, no amount of sector picking is going to save this portfolio from a loss (barring some catastrophic event for one of the particular companies.)  In other words, the benchmark is there to test how good my ideas in Green Energy Investing for Experts really were.

I'll update you on how this portfolio and my top 10 picks are doing each quarter, just like I did last year.  

DISCLOSURE: Long PEFF.  Short EWW, DAL, AMR, LUV, BTU, CNX, HOT.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:26 PM | Permalink | Comments (0)

Year in Review: Ten Green Energy Gambles for 2009

Tom Konrad, CFA

My speculative renewable and alternative energy stock picks for 2009 had mixed results. The gambles came nowhere near the performance of my 10 Clean Energy Stocks for 2009, and only kept pace with their benchmarks.  The reasons why can be found on the companies' balance sheets and cash flow statements.

In January 2009 in response to popular demand, I gave readers ten picks of speculative green energy stocks.  I tend to buck the general trend that renewable energy investors tend to be gamblers, but my annual stock picks draw a wider audience, and I decided to give the crowds what they wanted, picking ten green stocks I thought were on the risky side.  I summarized my expectations for these stocks by saying, "that although all of these have a chance of spectacular returns, I think the portfolio as a whole will fall, unless financial market conditions improve rapidly."

Financial market conditions did improve rapidly in 2009, but they did not improve uniformly.  Lenders and other suppliers of capital became much more discriminating, allowing the strong to raise money at reasonable rates, while the weak fell by the wayside.  

What Happened

My green energy gambles were collectively up 22%, compared to returns of 31% for the Powershares Wilderhill Clean Energy Index (PBW), and 9% for the iShares S&P Global Clean Energy Index (ICLN), the two ETFs I specified as benchmarks for comparison when I published the original list.

This is an uninspiring performance, so I'm not happy with the overall results.  After all, my ten conservative green picks were up an average of 57% in 2009 solidly beating their benchmarks, but my speculations didn't even beat both benchmarks.  In a strong bull market year like 2009, I would normally expect riskier stocks such as these to outperform my more conservative picks.  That did not happen, and it did not happen by a wide margin.

I did get some "spectacular returns."  Had I known last January that the S&P 500 would be up 28% in 2009, I would have expected at least three of these to return more than 100%.  As it was, UQM Technologies (UQM) and Cosan (CZZ) more than doubled returning 252% and 116%, respectively.  Nevertheless, it's disappointing in such a good year for the market as a whole.

What happened?

The Weak and the Strong

When I presented these gambles, I broke them up into three categories:

Unprofitable Companies Without Strong Balance Sheets

1. Beacon Power Corporation (BCON), up 7%
2. Axion Power International  (AXPW.OB), up 17%
3. Valence Technology, Inc. (VLNC), down 48%
4. Composite Technology Corp (CPTC.OB), no change
5. Environmental Power Corp. (EPG), down 76%
6. Emcore Corp. (EMKR), down 15%

Unprofitable Companies, Somewhat Stronger Balance Sheets

1. UQM Technologies (UQM), up 252%
2. Cosan, Ltd.(CZZ), up 116%
3. Raser Technologies, Inc. (RZ), down 63%

Profitable Companies, For Now

1. Zoltek (ZOLT), up 30%

The companies is the first category performed extremely poorly compared to the companies in the latter two categories, with the last four stocks returning an average of 84%, and the first six stocks returning -19%. Because of this (and the out performance of my ten conservative picks), I call 2009 "The Year of the Balance Sheet."  Hindsight, of course, is 20/20, but at least I separated the companies by financial strength for readers who had a better idea of what 2009 would look like than I did.

For 2010, I'm going to try something a little different for any green-minded gamblers out there.  Readers of my Green Energy Investing for Experts series have been getting a preview of what I'm talking about.  I plan to publish the new list Sunday night or Monday morning.

DISCLOSURE: Long AXPW.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 05:09 PM | Permalink | Comments (0)

Tom Konrad, CFA

A mini-portfolio of stocks that not only are green, but should outperform the market in an environment of increasing concern about climate change and peak oil.

This is the third annual list of green stocks I have published.  In 2008, it was a list of ten speculative alternative energy companies (in three parts) that I thought might catch public notice that year.  As we all now know, 2008 was a horrible year for speculative stocks, and my stocks were no exception, losing an average of 55% that year, although that still ended up being better than seven out of nine of the sector mutual funds and ETFs that I was then tracking.

In 2009, my ten green stock picks were more conservative, with a focus on profitable companies with good cash flow.  The results have been better than I hoped.  These 10 picks gained an average of 57%, beating my benchmarks by an even wider margin.  I'll be surprised if I do as well in 2010, but if there's one thing the stock market delivers reliably, it is surprises. 

10 for '10

In November, I wrote a series of articles for the beginning investor in clean energy, and I plan to follow my own advice with this list, putting emphasis on those clean energy sectors that most investors are not giving enough attention.  Once you've decided how much of your portfolio to put in clean energy, splitting that investment evenly between these ten stocks should give you exposure to the best clean energy sectors, as well as decent diversification.  In other words, these ten stocks are intended as a substitute for a clean energy Exchange Traded Fund (ETF).

In late 2008, when I was putting together my list for 2009, I had a relatively easy time.  Fear was rampant, and there were many great companies selling for single-digit multiples of earnings.  Today, complacency and greed have returned to the markets, and good values are very hard to come by.  The following 10 are mostly the result of culling through our Alternative Energy Stock lists for companies in my favored sectors that look ready for the premature end of the recovery: Companies with strong balance sheets, good cash flow and profitability at not-too-expensive multiples.

Electric Grid & Electricity Storage (30%)

• General Cable (BGC)  
• MasTec (MTZ)  
• C&D Technologies (CHP) 

-or-

• Smart Grid Infrastructure Index Fund (GRID)

Efficient/Clean Transportation (30%)

• New Flyer Industries (NFI-UN.TO, NFYIF.PK)
• Firstgroup PLC (FGP.L)
• Portec Rail Products (PRPX)

-or-

• Powershares Global Progressive Transport ETF (PTRP)

Energy Efficiency (30%)

• Waterfurnace, Inc. (WFI.TO, WFFIF.PK)
• Linear Technology Corp (LLTC)
• Flir Systems, Inc. (FLIR)

Biomass, Waste to Energy, Recycling - 10%

• Waste Management (WM)

Simplified Portfolio

I've provided an alternate, simplified portfolio by substituting the clean energy sector ETFs GRID and PTRP for the stocks in the Electric Grid/Storage and Efficient Transport sectors.  This simplified portfolio is better suited for investors who have smaller accounts and want to control transaction costs by making fewer trades.  Some investors may also find it difficult to buy London-traded FirstGroup PLC.  Such investors may choose to substitute PTRP for FGP.L or for all three efficient transport stocks.

Notes on Stocks

I plan to write about many of these stocks in more depth over the next few months, but here are some links to relatively recent articles for those who want more information before they invest:

• John Petersen on C&D Technologies (December 2009)
• New Flyer Industries update. (October 2009)
• MasTec and General Cable. (June 2009)
• Flir Systems (March 2009)
• Portec Rail Products (February 2009)

Choice of Weights

I was roughly sticking to the sector breakdown I recommended in my Green Energy Investing Target Portfolio, shown here,

but I was constrained by only working with 10 stocks, and wanting to keep the weights equal for simplicity.  People who use the simplified version with the two ETFs substituting for six stocks may come closer to the target portfolio, because those ETFs (especially GRID) also contain significant numbers of companies which I would categorize as falling in other clean energy sectors.

Tax Considerations

New Flyer and Waterfurnace pay dividends and trade on Canadian exchanges.  Canada withholds 15% of such dividend payments to US-based investors, an amount which can usually be offset as "foreign tax paid" when filing US taxes.  Unfortunately, if the stock is held in a non-taxable US account, I don't believe that it is possible to claim this deduction.  In other words, most US based investors will probably do better by holding these stocks in taxable accounts, although you will probably want to consult a tax advisor if you are investing significant sums in these stocks, since your circumstances may not match my experience. 

Performance Updates and Benchmarks

As in previous years, I plan to monitor the performance of these stocks quarterly, and to do that, I need benchmarks.   An appropriate benchmark should be widely available, consist of the companies in the investment universe from which the portfolio is drawn, and be defined in advance.  Since I tend to take a broader view of clean energy than the designers of most clean energy indexes, I historically have used two benchmarks: one broad market benchmark, and one sector-specific benchmark.

In the past, I've used the S&P 500 index as my broad market index, but some readers have rightly criticized it because it is mostly composed of larger capitalization stocks than my picks, so this year I will use the Russell 3000 index. For in industry benchmark, I'll used the oldest and most widely held of the clean energy ETFs, the Powershares WilderHill Clean Energy Portfolio (PBW.)

Security (Ticker)	Price 12/27/09	Shares* in a $10,000 10 for '10 Portfolio:	Shares* in the $10,000 Simplified Portfolio
General Cable (BGC)	$32	31.25	n/a
MasTec (MTZ)	$12.54	79.745
C&D Technologies (CHP)	$1.47	680.27
Smart Grid Infrastructure Index Fund (GRID)	$32.58	n/a	92.081
New Flyer Industries (NFI-UN.TO, NFYIF.PK)	$9.4853	105.43	n/a
Firstgroup PLC (FGP.L) (in US$)	$6.6246	150.95
Portec Rail Products (PRPX)	$10.21	97.943
Powershares Global Progressive Transport ETF (PTRP)	$27.1885	n/a	110.34
Waterfurnace, Inc. (WFI.TO, WFFIF.PK)	$24.0335	41.609
Linear Technology Corp (LLTC)	$30.77	32.499
Flir Systems, Inc. (FLIR)	$32.24	31.017
Waste Management (WM)	$33.76	29.621
Total		$10,000	$10,000
Russell 3000 (^RUA)	660.44	15.14142
Powershares WilderHill Clean Energy Portfolio (PBW)	11.15	896.861

*Fractional shares would not be used in a real portfolio, and there would of course be transaction costs reflected here as well.  These are simply the weights I'll be using to track my model portfolio.

DISCLOSURE: Long CHP, LLTC, NFYIF, WFIFF, PRPX, and WM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:02 PM | Permalink | Comments (3)

Tom Konrad, CFA

2009 was a banner year for my clean energy stock picks, which are up 57% over 12 months, greatly exceeding their benchmarks.

Over the last 12 months,  my ten green energy stocks for 2009 are up 57% vs. 29% for the S&P 500, and 12% for my clean energy benchmark, the iShares S&P Global Clean Energy Index (ICLN), the two indexes I specified for benchmarks when I published the list a year ago.

Below is a detailed rundown of the results.  

Company	Ticker	Change 12/27/08 to 12/27/09	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	113.04%	13.13%
Cree, Inc.	CREE	265.60%
First Trust Global Wind Energy ETF	FAN	26.86%	0.46%
General Electric	GE	-3.32%	5.13%
Johnson Controls	JCI	64.64%	3.07%
New Flyer Industries	NFYIF.PK	43.72%	16.21%
Ormat	ORA	27.66%	0.84%
Trinity Industries	TRN	7.24%	1.87%
Warterfurnace Renewable Energy	WFIFF.PK	60.22%	4.37%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13)	3x $ - 2x SPY	-72.44%	-0.18%
Total Portfolio		57.15%
Benchmarks
Standard & Poors 500 Index (S&P500)		29.07%
iShares S&P Global Clean Energy Index (ICLN)		12.14%

The somewhat cryptic last pick, "3x $ - 2x SPY" is a hedge against a possible market decline.  Rather than using a pure short, I wanted to give it approximately equal weight to the other picks.  In order to have an initial investment of $1 in each pick, including the short, I sold a hypothetical $2 worth of SPY short, but kept the $2 cash proceeds, along with an extra $1 cash allocated to the pick.  Hence that pick is a combination of $2+$1 = $3 cash and -$2 short of SPY.  (I left out a few details here for simplicity.  All the gory detail is here.) 

Outlook for 2010

In the panic of late 2008, picking good companies at reasonable prices was like shooting fish in a barrel.  Today, the world is much different, with confidence back and many investors scouring the markets for relative (if not absolute) value stocks.  My soon-to-be-published list of ten clean energy stocks for 2010 was much harder to choose, so although I expect to beat the market for a third year running, I don't expect to do so by as much as I did in 2009.   Only two of these stocks, Waterfurnace and New Flyer, made it onto the 2010 list.

I also expect the market as a whole to fall in 2010, although probably not so badly as it did in 2008.  I'll publish my list of ten clean energy stocks for 2010 in the next couple days in order to continue the tradition, despite my opinion that now is the wrong time to buy.  A better option might be to buy my list of ten clean energy stocks for 2010, but hedge the resulting market exposure with a selection of the short ideas in my Clean Energy Investing for Experts series.  For non-experts, you can simply wait in cash a few months for the market to fall.  In the stock market, avoiding the big losses is worth it even if you also miss out on the big gains.

DISCLOSURE: The author and/or his clients own AGQNF, CREE,  GE,  NFYIF, ORA, TRN, WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:00 AM | Permalink | Comments (0)

Tom Konrad, CFA

I never thought 2009 would be a good year for risky stocks, but my readers asked for them anyway.  The market's strong third quarter have paid off for risk-takers who gambled on my 10 Green Energy Gambles for 2009.

I started out the year by providing readers with a portfolio of ten relatively conservative plays on green energy.  That portfolio was representative of how I planned to approach the market this year, and has produced stronger returns and less volatility when compared to both green energy stocks and the market as a whole.  Many of my readers are looking for big gains on little stocks, so I also provided (but did not endorse) ten such green energy gambles.

I went into some detail on each, but I generally felt that most of those stocks would benefit disproportionately from an easing of the credit crunch.  In Q1 and Q2, those gambles performed in-line with the green energy sector indexes, but the return of optimism in the third quarter has allowed these risky stocks to shoot ahead of the sector with the turbo-charged performance that I hoped they would provide.  They've even managed to pull ahead of my extremely strong conservative portfolio (by 44% to 41%.)

If the fourth quarter is anything like the third, I'd expect the portfolio to end the year with a double.  I don't expect that to happen, but I've been wrong about the length of this rally before.

The following table and graph show stock-by-stock performance for the first three quarters:

Ticker	1/9/09 close	4/9/09 close	7/13/09 close	10/8/09 close	Gains 1/9 to 10/8/09
BCON	$0.46	$0.47	$0.637	$0.686	49%
AXPW.OB	$1.20	$0.85	$1.34	$2.14	78%
VLNC	$1.77	$2.23	$1.51	$1.60	-10%
CPTC.OB	$0.30	$0.23	$0.245	$0.489	63%
EPG	$0.86	$0.34	$0.54	$0.44	-49%
EMKR	$1.43	$0.84	$1.07	$1.32	-8%
UQM	$1.72	$1.70	$2.46	$5.97	247%
CZZ	$4.18	$4.45	$5.00	$7.91	89%
RZ	$3.62	$4.13	$2.00	$1.46	-60%
ZOLT	$7.47	$7.98	$8.46	$10.62	42%
Portfolio	$1,000	$900.20	$986	$1443	44%
Benchmarks
ICLN	$21.93	$19.40	$21.01	$23.08	5%
PBW	$9.01	$8.55	$9.15	$10.81	20%

 

Benchmarks

The two benchmarks, the iShares S&P Global Clean Energy Index ETF (ICLN) and the PowerShares Clean Energy Index ETF (PBW) most likely produced such different results because 

• US-based clean energy companies received more of a boost from the ARRA or stimulus package than global firms
• The global firms in ICLN's portfolio tend to be better established and more profitable than those in PBW's portfolio, which means that ICLN will typically outperform PBW in down markets, and underperform in up markets.  This is exactly what we have seen this year, with the best performance coming from ICLN in the dismal 1st quarter, but PBW gaining ground since then.  

Compared to these two, the portfolio has done quite well.  Even in the down first quarter, the highly volatile companies in the portfolio managed to perform better than the slightly more stable companies in PBW, but they were able to take off much faster than PBW when the market turned around.

Notes Individual Stocks

With the exception of Axion Power (AXPW.OB) and a small option position on Raser Technologies (RZ), I've sold my stake in all of these, and no longer follow them.   

That said, the best place to go for information on the three energy storage stocks (Axion Power International (AXPW.OB), Beacon Power Corporation (BCON), and Valence Technology Inc (VLNC)) is John Petersen.  He recently discussed how the stocks in the energy sector were performing here. 

The best performer so far has been UQM Technologies (UQM).  In January, I said "an auto bail-out which forced the big three to produce many more hybrid and electric vehicles could prove a bonanza for UQM."  We had such an auto-bailout, but UQM's success did not come solely from government stimulus.  Rather, the stock began to take off when they announced a deal to supply drive trains for an electric sedan from Coda Automotive, and then accelerated when they received a $45m award of ARRA funds. 

A similar story to UQM was my lone nod to biofuel, Brazilian ethanol producer Cosan, Ltd.(CZZ).  I said, "Either a return to high oil prices, or a reduction in America's ethanol import duty could greatly help the stock."  Since then, there has been a lot of talk that the administration is considering ending ethanol import tariffs. The recent rise in oil prices also seems to be helping the stock.

My least successful bet has been Raser Technologies, Inc. (RZ).  I began to think the stock had fallen far enough in my six month review of these stocks, and soon after called  Raser "too cheap to ignore" with the idea that an announcement or government loan guarantees or other funding might cause the stock to take off, just as it did to UQM.  A month later, the DOE denied the loan guarantees, and I sold my stake except for a few $5 calls (one of their ships may still come in.)  I'm now even more bearish on Raser with the revelation that they were a bit overoptimistic about delivering power from low temperature geothermal sources.  Fortunately, I got out with only a small loss.

I have not been watching Composite Technology Corp (CPTC.OB), Environmental Power Corp. (EPG), Zoltek (ZOLT), or Emcore Corp. (EMKR) since I sold them.

DISCLOSURE: Tom Konrad and/or his client have positions in AXPW and RZ.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:43 PM | Permalink | Comments (3) | TrackBacks (0)

My annual green energy stock picks continue to hold up, but the Obama Effect for clean energy seems to have been lost in the summer's healthcare debate.

Tom Konrad, Ph.D., CFA

For the first 9 months of 2009,  my ten green energy stocks for 2009 are up 23.4% vs. the S&P 500, and up 20.4% over my clean energy benchmark, the iShares S&P Global Clean Energy Index (ICLN).  For the third quarter, that amounts to a loss of 1% relative to the S&P 500, and a gain of 7% relative to ICLN.

In my second quarter update, I attributed the out-performance of both clean energy in general, and my picks to the Obama Effect.  That is, green energy outperformed the market strongly in the first half of the year because of the strong political and financial support it received from the new administration and Congress.

In the third quarter, with the administration and congress distracted by the health care debate, the market as a whole made up a lot of ground against my general green energy index, but my picks were able to hold on to almost all of their gains, despite the less favorable climate.

Below is a detailed rundown of the 9 month results.  The somewhat cryptic last pick, "3x $ - 2x SPY" is a hedge against a possible market decline.  Rather than using a pure short, I wanted to give it approximately equal weight to the other picks.  In order to have an initial investment of $1 in each pick, including the short, I sold a hypothetical $2 worth of SPY short, but kept the $2 cash proceeds, along with an extra $1 cash allocated to the pick.  Hence that pick is a combination of $2+$1 = $3 cash and -$2 short of SPY.  (I left out a few details here for simplicity.  All the gory detail is here.)

Company	Ticker	Change 12/27/08 to 9/30/09	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	77.42%	11.16%
Cree, Inc.	CREE	144.02%	0%
First Trust Global Wind Energy ETF	FAN	37.42%	0.46%
General Electric	GE	2.82%	4.51%
Johnson Controls	JCI	50.89%	2.30%
New Flyer Industries	NFYIF.PK	26.73%	9.98%
Ormat	ORA	37.03%	0.44%
Trinity Industries	TRN	0.24%	1.40%
Warterfurnace Renewable Energy	WFIFF.PK	68.63%	3.27%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13)	3x $ - 2x SPY	-54.81%	-0.17%
Total Portfolio		41.51%
Benchmarks
Standard & Poors 500 Index (S&P500)		17.13%
iShares S&P Global Clean Energy Index (ICLN)		21.11%

 

My Trades & Updates

I continue to expect a market decline, and am now more worried than 3 months ago, when I had sold most of my positions in Cree, Ormat, and General Electric.  In the meantime, in addition to increasing the overall level of market hedging for my portfolio, I sold more of my GE stake.

If you want to delve deeper, I recently published an update on the Algonquin Power Income Trust.  I'll also have an update on New Flyer Industries which will be published at the preceding link early next week (now published).  The original article has more information on the other picks.

Three months ago, I told readers, "If I had to buy any of these stocks today, it would be Trinity."  In the three months since then, Trinity has risen 29%, compared to a rise of 14% for the S&P 500, a rise of 6% for ICLN, and a rise of 11% for my portfolio as a whole  (relative to their prices at the time.)  Trinity was not the best performer for the quarter, but readers who chose to buy it then will probably be happy with the results.  

If I had to buy any of these stocks today, I wouldn't.  I'd take a position shorting the market (i.e. 3x $ - 2x SPY.)  Let's see how that works out in three months.

Other Portfolios I'm Tracking

I recently published the half year update for my quick mutual fund tracking portfolio. That portfolio had continued to outperform the mutual funds it was designed to track, and, in my investigation, I discovered it was because the portfolio had higher market risk (beta) than the funds it was drawn from.  Since I've now determined that it is not a good tracking portfolio, I don't intend to update readers on its performance again, but I may use some of the lessons learned in future portfolio design.

I also need to update my ten green energy gambles for 2009, which I intend to do (schedule permitting) about 6 months after the list was published, or around October 11.  The six month update is here.  That portfolio also continues to do well, although it is much more vulnerable to a market decline than the 10 stocks I discussed here. 

DISCLOSURE: The author and/or his clients own AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 09:54 PM | Permalink | Comments (0) | TrackBacks (1)

Tom Konrad, Ph.D., CFA

My Quick Clean Energy Tracking Portfolio continues to outperform all benchmarks and expectations... is it luck, or did I stumble onto a better way to invest in green energy stocks?

I continue to be stunned at how the portfolio which I intended as an easy way to duplicate green energy mutual fund performance at much lower cost continues to blow those green mutual funds out of the water.  I last published an update on this portfolio at the end of May, and was shocked to find that it had beaten the funds it was intended to replicate by over 20% in 3 months.  The trend continues... it's now almost 7 months later, and the portfolio has widened its lead over the mutual funds by 30%.

Winners and Losers

In May, I hypothesized that the out performance might have been due to how I constructed the portfolio: I chose five stocks from the top holdings of the mutual funds which had performed worst over the preceding three years.  I did this because there is a fairly well-documented winner-loser effect [pdf], that shows systematic price reversals in stocks that show long-term gains or losses.  In particular, stocks showing long term losses are more likely to make gains in following years than long term winners.

I tried to test if the out-performance was solely due to winner-loser effects by going back to my original data and seeing how a portfolio constructed with winners rather than losers would fare.  To my surprise, the "winners" portfolio also significantly outperformed the mutual funds (by 10% over 3 months).  I've updated the performance of the "winners" portfolio as well, and it also has increased it's gains compared to the mutual fund portfolio, and is now outperforming by 15% over 7 months.

Winner-loser effects seem to be playing a role, but at most, they explain about a quarter of the out-performance of the "Losers" portfolio so far.  There may be other, as yet unknown, causes of the superior performance of the "Losers" portfolio.  

No matter what the cause, for winner-loser effects to explain all of the difference, the "Winners" portfolio would have to be under-performing the mutual funds by about as much as the "Losers" portfolio is outperforming.  Where did the other three quarters of the out-performance come from?  Is it just luck?

"Losers" Tracking Portfolio

Company	Shares	Price 2/27/09	Close 9/24/09	% Change
Citrix Systems (CTXS)	48	$20.58	$37.65	82.94%
Echelon Corporation (ELON)	165	$5.99	$12.82	114.02%
SunTech Power (STP)	162	$6.09	$15.96	162.07%
Cemig (CIG)	94*	$10.47*	$14.66	40.02%
Vestas Wind Systems (VWSYF.PK)	22	$44.85	$69.50	54.96%
Total		$4998.65	$9,415.06	88.35%

*Dividend and split adjusted.

"Winners" Tracking Portfolio:

Company	Shares	Price 2/27/09	Price Close 9/24/09	% Change
LSB Industries (LXU)	114	$8.66	$15.34	77.14%
Echelon Corporation (ELON)	165	$5.99	$12.82	114.02%
First Solar Inc (FSLR)	9	$105.74	$150.62	42.44%
South Jersey Industries (SJI)	28*	$35.11*	$34.83	-0.80%
American Superconductor (AMSC)	23	$13.46	$29.73	120.88%
Total		$4975.30	$8,394.90	71.10%

*Dividend adjusted.

Mutual Fund Portfolio

Mutual Fund	Shares	Price 2/27/09	Close 9/24/09	% Change
CGAEX (Calvert)	122.19	$6.82	$10.29	51%
ALTEX (First Hand)	171.47	$4.86	$7.20	48%
GAAEX (Guinness Atkinson)	205.76	$4.05	$6.49	60%
NALFX (New Alternatives)	29.75	$26.68	$41.51	56%
WGGFX (Winslow Green Growth)	111.71	$7.46	$12.28	65%
Total		$4999.98	$7,794.71	56%

The Other Three Quarters

Since I did the first update, I've come up with three hypotheses to explain the phenomenon:

1. Higher Beta: The stocks I picked may be more sensitive to market moves than the mutual funds as a whole.  Since the market has been rising, the "Winner" and "Loser" portfolios have been rising more.
2. Cleantech sectors: My picks put more emphasis on certain Cleantech sectors than do the funds; perhaps the overweight sectors have driven the out-performance.
3. Mutual Fund Manager skill: The mutual fund managers are likely to hold more of their favorite stocks than they hold of other stocks.  If they each have a few good ideas, then I am taking advantage of those good ideas by selecting my portfolios from the mangers' top five holding.  The high diversification of the mutual funds keeps mutual fund shareholders from fully benefiting from their managers' skill.

Below, I've graphed the performance of the "Winner" and "Loser" portfolios against several possible benchmarks: the blended performance of the mutual funds, the S&P 500 index, and five green energy ETFs (ICLN, QCLN, PBW, PBD, and GEX.)  Since the ETFs each track a difference index for the Cleantech sector, it's reasonable to assume that they represent the performance of the average Cleantech stock.

 

This promises to be a fairly long investigation, so I plan to break it up into a series that I'll publish over the next few days.  I'll add links to the articles here as I publish them.  The first one, in which I look into my "Higher Beta" hypothesis, will be published here shortly.

It could turn out that none of my hypotheses explain the out-performance we've seen.  In that case, it could be luck, or it could be something I have not thought of.  

Easy Green Money... Too Good to be True?

I'm hoping that I find some evidence for mutual fund manager skill.  To do that, I'll need to eliminate the other possibilities. If I can, we can expect this method to produce out-performance in the future, and under any market condition.  In other words, my attempt at a tracking portfolio might just be a better way to play green stocks.  An easy way to play green energy, without having to pay high fees?  It sounds to good to be true, but in the wild west of green energy investing, in might last for a year or two.

What do you think?  Is there  something else I should investigate?  If so, please leave your suggestion in the comments.

DISCLOSURE: Tom Konrad and/or his clients own LXU, ELON, and AMSC. The Guinness Atkinson Fund is an advertiser on his website, AltEnergyStocks.com

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 06:57 AM | Permalink | Comments (0) | TrackBacks (4)

Index to the Clean Energy Shopping List Series, and a few Bonus Stocks.

Tom Konrad, Ph.D., CFA

I started my "Clean Energy Shopping List" series on the premise that the market was near a peak, and it would be better to wait than to buy now.  My market call turned out to be premature (or just plain wrong... time will tell) and the market has since advanced more than I thought it would.  But I feel the challenges facing our economy and financial system are too grave not to bring down the market from its current heights eventually, so each rise simply makes me more bearish.

However, I feel the shopping list series is getting tired (or at least I'm getting tired of it), so I'm going to end it now, with just a list of stocks in the series and the articles that cover them.  In addition, I'll throw in the few companies I've been thinking about using but have not made it in so far. 

Article	Companies
Clean Transportation Stocks	NFYIF.PK, PRPX, FGP.L, WAB, PTRP
Energy Efficiency stocks	ERII, LXU, WFFIF.PK, FLIR, CREE
Electric Transmission Stocks	BGC, ABB, PIKE, MTZ, PWR
Landfill Gas and Geothermal Stocks	WMI, VE, ORA, RZ, NGPLF.PK
Solar Stocks	SMLNF.PK,  SATC, PWER, STG.V, AEIS
Smart Grid Stocks	BCON. AMSC, ELON, ITRI, TLVT

It's also worth noting that soon after I included Raser Technologies in my Geothermal Shopping list, I decided that the sale was already on, and decided to buy now.  The company is holding above the $2.00-$2.05 range at which I bought it, but it will be interesting to see if it continues to hold if the downturn I expect materializes.

Bonus Picks

All along, I've been thinking about writing a list of battery stocks I like, but John does that so well, I've decided just to reference him.  Among the battery stocks John follows, the ones I'll be looking to scoop up if they fall in a general market decline are the ones he refers to as "Cheap" (in reference to the value of their products, not necessarily the stock prices.) I like both the "Cheap Sustainable" group that can fund their operations out of existing cash flow, and the "Cheap emerging" ones developing new inexpensive battery technology.  Here are John's lists of battery stocks.

There are also a couple other efficiency stocks that didn't make the list... I was thinking about doing a second list of five, but instead I'll just give you three honorable mentions here: Owens Corning (OC), Linear Technology Corp (LLTC), and Power Efficiency Corp (PEFF.OB).

Thaaat's All Folks!

For a guy who said at the start of the year that I wanted to reduce my individual positions to no more than 50 companies, I clearly have conflicts: I just listed 39 companies I'd like to buy (at the right price.)  At least I already own 2/3 of  the list.  But it's clearly time to stop while I'm behind.  

I just noticed I didn't list any wind stocks.  There's always FAN...

DISCLOSURE: Tom Konrad and/or his clients own AMSC, ELON, ITRI, TLVT, SATC, STG., WMI, VE, ORA,  RZ,  NGLPF, BGC, ABB, SI, PIKE, MTZ, PWR, ERII, LXU, WFIFF, FLIR, CREE, NFYIF, PRPX, OC, LLTC, and FAN.  PEFF is an advertiser on AltEnergyStocks.com


DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:27 PM | Permalink | Comments (4) | TrackBacks (0)

Tom Konrad, Ph.D., CFA

I never thought 2009 would be a good year for risky stocks, but my readers asked for them anyway.  So far, my risk taking readers have not been burnt too badly, and the portfolio as a whole continues to track its benchmarks.

In my first quarter update for my green energy gambles for 2009, I noted that the portfolio had lost about 10%, between the benchmark returns (-12% and -5%), but not very impressive.  Since then, the portfolio as a whole has gained a little ground, and is almost exactly midway between the benchmarks.

The following table shows stock-by-stock performance.

Ticker	Price (1/9/09 close)	Price (7/13/09 close)	Percent gain
BCON	$0.46	$0.637	38.5%
AXPW.OB	$1.20	$1.34	11.7%
VLNC	$1.77	$1.51	-14.7%
CPTC.OB	$0.30	$0.245	-18.3%
EPG	$0.86	$0.54	-37.2%
EMKR	$1.43	$1.07	-25.2%
UQM	$1.72	$2.46	43.0%
CZZ	$4.18	$5.00	19.6%
RZ	$3.62	$2.00	-44.8%
ZOLT	$7.47	$8.46	13.3%
Portfolio	$1,000	$986	-1.4%
Benchmarks
ICLN	$22.05	$21.01	-4.7%
PBW	$9.01	$9.15	1.6%

In January, I made two predictions about this portfolio:

1. The portfolio as a whole would fall, unless financial market conditions improve rapidly.
2. All of these stocks have a chance of spectacular returns.

Prediction #1 continues to be on target.  As of July 13th, the market as a whole is basically flat for the year, and the portfolio is down a smidgeon.  

Prediction #2 is harder to judge.  The best performing stocks, Beacon Power (BCON) and UQM Technologies (UQM), are up only 38.5% and 43.0%, respectively.  While these are not bad returns, after six months, my more conservative 10 Clean Energy Stocks for 2009 best performers were up 73% (Algonquin Power Income Fund (AGQNF.PK), with dividends) and 60% (Cree Inc (CREE)).  

On the other hand, since that portfolio was up 27.5% overall, or 29% more than this one, the best two performers among these gambles did relatively much better than their peers.  That's clearly small consolation if you bought this portfolio rather than the less exciting one with my more conservative picks, which outperformed in the harsh economic climate.

I continue to own small stakes in a few of these, in conjunction with covered calls.  At current prices, Raser Technologies (RZ) is my favorite, which is why it made my Clean Energy Stocks Shopping List: Landfill Gas and Geothermal.  However, it's still a risky stock, and could as easily go down as up.  

Given my bearish short term expectations, I expect the portfolio as a whole will end the year lower than it is today.  I'm still willing to buy most of these at the right price, but, for most, the right price is significantly lower than the current price.

DISCLOSURE: Tom Konrad has positions in AXPW, EMKR, RZ, and ZOLT.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:03 PM | Permalink | Comments (0) | TrackBacks (0)

The Obama Effect continues to make my annual ten picks shine.

Tom Konrad, Ph.D., CFA

This is the second performance update on my 10 Clean Energy Stocks for 2009.  In the first quarter, the model portfolio was up a tiny 1.6%, but still managed to beat the benchmarks handily (by 8% and 9%), since they were both down significantly.

In the last three months, the market has turned around, logging significant gains, but my ten picks have continued to outperform.

Company	Ticker	Change 12/27/08 to 7/2/09	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	+64.97%	8.17%
Cree, Inc.	CREE	+59.96%
First Trust Global Wind Energy ETF	FAN	21.88%	0.46%
General Electric	GE	-28.24%	3.88%
Johnson Controls	JCI	22.14%	1.53%
New Flyer Industries	NFYIF.PK	+26.23%	5.98%
Ormat	ORA	+33.27%	0.44%
Trinity Industries	TRN	-21.97%	0.93%
Warterfurnace Renewable Energy	WFIFF.PK	+17.77%	2.16%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13)	3x $ - 2x SPY	-14.45%	-0.16%
Total Portfolio		27.05%
Benchmarks
S&P 500		2.59%
iShares S&P Global Clean Energy Index (ICLN)		13.95%

In the second quarter, the portfolio has added 16.5% relative to the broad market index, and 4.1% relative to the clean energy ETF, for a total of 24.5% and 13.1% out performance for the first half.

I continue to attribute my out performance to the Obama Effect, and the fact that clean energy has been outperforming the market as a whole supports this hypothesis.  If it's not just luck, the reason I've been beating the clean energy ETF is also probably due to the Obama effect: my pick are concentrated on sectors which are not only green, but likely to deliver the biggest boost to jobs.

My Trades

As readers are well aware, I don't expect market gains to continue, and have been moving into cash.  I got called out of most of my Cree position, as well as a little of my FAN, shed much of my Ormat position as well, and managed to lighten up on GE when it hit $14.50, but I still like all four companies, and will buy again when I feel the price is right.  The others I've been holding, although I sold some calls on Johnson Controls.  

If I had to buy any of these stocks today, it would be Trinity.  

Despite all this trading, I'm keeping this model portfolio as it is.  I expect these 10 to continue to outperform, even if (as I expect) both the market and this model portfolio head down in the third quarter.

Up Next

Stay tuned for updates on my Ten Clean Energy Gambles for 2009 (now slightly outperforming the benchmarks - Q1 update here) and my Quick Clean Energy Mutual Fund Tracking Portfolio (building on previous gigantic gains - Q1 update here) as these come up on 6 months after the articles were published.

DISCLOSURE: The author and/or his clients own AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 12:19 PM | Permalink | Comments (2) | TrackBacks (0)

Charles Morand

There was an interesting post in Barron's tech trader daily on Monday discussing how solar PV stocks are coming under pressure, in part because product prices are falling further than expected. About a month ago, I discussed the potential return effect for households in given states of removing the $2,000 ITC cap. Such measures, it seems, are failing to kickstart demand, and solar recovery might end up being significantly slower than many had been expecting.

Case in point, since hitting a high of $11.49 on June 11, the TAN ETF is down about 12%. KWT, for its part, hit a high of $17.35 on June 10 and is down 11% since. The S&P 500, in comparison, is down about 4% from its June 12 high. While both TAN and KWT are up >30% on the S&P 500 over the past six months, neither is up on the benchmark index over the past 12 months.

I took a long position in TAN in early March at $5.00 when an automatic buy order I had had on it for a while kicked in. At the time, I stated:

This is still very much my belief. I took some profit at $10.00 when an automatic sell order kicked in, and I'll gladly purchase a little more if it goes back down substantially. It must be said, however, that I use sell orders at set return levels to protect profit and not in an attempt to time the market.

Overall, those who are investing in one the two solar ETFs today and hanging on will be happy they did so two years from now and beyond. The road there, however, will be fraught with volatility.

DISCLOSURE: The author is long TAN.

Posted by Charles Morand at 11:21 PM | Permalink | Comments (2)

My Quick Clean Energy Tracking Portfolio has solidly outperformed its benchmark... was it bad design?

Tom Konrad, Ph.D.

On February 27, I used the top holdings of the (then six) clean energy mutual funds to design a tracking portfolio intended to replicate the performance of those funds at much lower cost.  If my methodology was sound, the tracking portfolio should produce returns within the range of returns of the mutual funds on which it was based. If all went well, the returns would be at the upper end of that range because of the way I chose to emphasize stocks which had underperformed over the previous three years.

Tracking Portfolio

Company	Shares	Price 2/27/09	Price 5/27/09	% Change
Citrix Systems (CTXS)	48	$20.58	$30.23	45.0%
Echelon Corporation (ELON)	165	$5.99	$7.12	17.3%
SunTech Power (STP)	162	$6.09	$15.46	150.6%
Cemig (CIG)	94*	$10.47*	$12.67	19.4%
Vestas Wind Systems (VWSYF.PK)	22	$44.85	$75.10	65.8%
Total		$4998.65	$7973.54	59.5%

*Dividend and split adjusted.

And here is the performance of the five remaining clean energy mutual funds:

Fund	Shares	Price 2/27/09	Price 5/27/09	% Change
CGAEX (Calvert)	122.19	$6.82	$9.58	40.5%
ALTEX (First Hand)	171.47	$4.86	$6.47	33.1%
GAAEX (Guinness Atkinson)	205.76	$4.05	$6.13	51.4%
NALFX (New Alternatives)	29.75	$26.68	$36.02	28.6%
WGGFX (Winslow Green Growth)	111.71	$7.46	$10.35	38.8%
Total		$4999.98	$6922.87	38.5%

As you can see, the tracking portfolio outperformed all the mutual funds in question, with the portfolio's performance 9.4% better than the best performance (Guinness Atkinson) of the five funds, and 21% better than the average of the five funds.  

Oops

Out performance for a tracking portfolio is not necessarily good news: it may be a sign that the methods used to construct the tracking portfolio are flawed, and the portfolio may be as likely to produce underperformance as out performance.  Hence. we should ask:

1. Is the out performance statistically significant?
2. If yes, is it caused by some systematic factor?
3. If a factor or factors can be identified, are they likely to produce out performance in all market conditions, or will they produce underperformance under different market conditions?

Significance

After only 3 months, it's a little early to draw any conclusions, but the standard deviation of the five mutual fund returns is only 8.6%, so the "Tracking" portfolio's performance was 2.43 standard deviations above the mean (p-value = 2.43).   We can be 99% certain that the returns of the tracking portfolio do not come from the same distribution as the returns of the mutual funds, assuming the fund returns follow a bell curve.

In other words, this is a significant result, and deserves further investigation.

Possible Causes

My first thought was that the out performance was due to my choice to pick the stock in each sector with the worst three year performance record, in order to take advantage of the tendency of long-term losers to outperform in subsequent periods.  This is a strategy I've discussed before in my article on selling cash covered puts.  In order to test this theory, I took a look at what would have happened if I'd chose the best performing stock in each sector, rather than the worst performing stock.  The results are shown in my "Winners Portfolio" below:

Winners Portfolio:

Company	Shares	Price 2/27/09	Price 5/27/09	% Change
LSB Industries (LXU)	114	$8.66	$15.09	72.0%
Echelon Corporation (ELON)	165	$5.99	$7.12	17.3%
First Solar Inc (FSLR)	9	$105.74	180.69	68.6%
South Jersey Industries (SJI)	28*	$35.74*	$33.35	-7.9%
American Superconductor (AMSC)	23	$13.46	$26.47	94.1%
Total		$4975.30	$7387.38	48.5%

*Dividend adjusted.

The Winners Portfolio also outperformed the mutual funds, although not at a statistically significant level.  Nevertheless, if the out performance of the tracking portfolio were to be described only by winner/loser effects, we would expect the Winners Portfolio to under-perform the funds.  Although it seems like winner/loser effects might be part of the explanation, they are far from complete.

Other Potential Biases

Two other biases to consider are

1. The sector weights in my tracking portfolio are 20% in each sector, which does not mirror the funds' sector  weights (and underemphasizes Wind and Solar.)
2. I chose the stocks from the top five holdings of each fund, rather than the complete holdings of all the funds.

Upon examination, explanation #1 fails, since the four stocks (Suntech, Vestas, First Solar, and American Superconductor) had better performance than either the tracking or winners portfolios as a whole.  If I had increased the allocation to any of these stocks, the new portfolios would have performed even better than these two.

The explanation I'm left with is #2.  The top five holdings of the funds are those stocks that, for whatever reason, the funds feel most comfortable holding in large quantities.  If we assume that the fund managers are good enough at their jobs that their judgments are useful, then concentrating on the top five holdings might mean that we are simply benefiting more from the fund mangers' skill (by holding a relatively undiversified portfolio) than investors in the funds are themselves.  However, there is some question as to whether most mutual fund manages add value.  On the other hand, research shows that mutual fund disclosure does hold useful information on outperforming the market.

On the other hand, mutual funds might be holding more of certain stocks because of factors other than expectations of future performance.  For instance, they might only want to hold large quantities of companies which are more liquid, are larger, or are currently more profitable or growing faster.  To the extent that any of this is true, we should be concerned that while the market has favored these preferred types of companies over the last three months, that could change at any time, and cause under-performance in the future.

Conclusion

My guess is that my focus on only the top five holdings of each fund caused much of the significant tracking error.  To avoid this tracking error in the future, I would need to look at the funds' full portfolios. 

I will revisit this tracking portfolio again next quarter to see if it continues to outperform, or if the trend reverses itself, and to see if I can draw any further conclusions. 

DISCLOSURE: Tom Konrad and/or his clients own LXU, ELON, and AMSC. The Guinness Atkinson Fund is an advertiser on his website, AltEnergyStocks.com

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 11:08 PM | Permalink | Comments (0) | TrackBacks (0)

Charles Morand

Last week, I added a little to my position in AAER (AAERF.PK). I first took a long position in AAER, the Canadian-based MW-size wind turbine maker, over two years ago. I've since pared down it significantly, both because I wanted to take some profit after a meteoric rise in share price in Q4 2007 and later because of the company's seeming inability to get orders for more than a couple of turbines at a time.

Although there was, before the credit crisis hit, a severe shortage of wind turbines and wind turbine components, barriers to entry have remained high: (1) average order size has been growing and scale is becoming more critical; and (2) quality considerations are top-of-mind for funders as defective machines can throw off project economics. Both factors play against small emerging turbine makers with no quality records to show for. Getting a first large order has thus been the key milestone investors in AAER have been waiting for.

Finally, last October, as global markets were in the eye of the storm, AAER reached an agreement with a mid-size Canadian independent power producer, Northland Power, for 61 1.65 MW turbines for a total order size of 100.65 MW. This contract is valued at approximately C$142 million (~$152 million or $~1.5 million/MW) by the company and is structured as a cost-plus agreement, meaning that AAER is guaranteed to recoup its costs and earn a profit on the deal. However, the agreement was only that - an agreement - with a formal contract to be signed when both parties met a number of conditions. After being pushed back twice, this moment came on May 9 when the turbine supply agreement was finalized and signed...sorta. The contract is subject to a "notice to proceed" by the developer contingent "on final permitting, approvals and financing [being] obtained by both parties."

This could mean that Northland is having difficulty securing financing on acceptable terms. It could also mean that Northland anticipates permitting delays - a previous project not too far from this one was delayed by two years because of permitting hold-ups - and doesn't want to commit before it's certain it can get the regulatory green light. It could also mean nothing - according to the contract Northland signed with Hydro-Quebec, the utility buying the power, the developer is not required to show proof that it has secured financing until June 2010, so Northland might want to wait for credit markets to ease out a bit. However, with a contractual deadline obligating Northland to start producing power by December 2010 (failing which the developer must pay a penalty of C$55 per MW per day up to a max of C$2.01 million), the order will have to be initiated soon if the turbines are to be delivered on time.  

In the clearest indication yet that the market's risk appetite is far from back, the stock finished the week down over 15%. While investors are not yet pricing a worst-case scenario, it is fair to say that they feel overall very skittish about the apparent blanket option for the buyer to delay the turbine order as long as it pleases.

Last Friday (May 15), a glimmer of hope appeared after markets closed: AAER increased the size of an upcoming best effort unit offering - one unit is made up of one common share and one common share purchase warrant - from a minimum of C$2 million and a max of C$5 million, to a min of C$3 million and a max of C$7.5 million. Although small in absolute terms, this is an appreciable relative increase in the size of the offering of 50% at both tails. The company's bankers, it seems, are seeing increased appetite for the stock.

I'm liking the contract and added a little to my position. My thesis behind this is two-fold: (1) if the notice to proceed is given within a reasonable time frame - and I believe that it could be - the share price could experience a nice pop, following which I would take a little profit; and (2) although this order falls well short of the plant's theoretical capacity of 400 turbines per year (AAER has only 6 other turbines currently scheduled for delivery in 2009), it might just be enough to keep the firm alive through the end of the worst part of the credit freeze and until US renewable power policies kick-start the sector. Management has taken many of the right steps over the past two years and, with a large order in hand, the firm would be well positioned to fill the order book.     

A Risky Bet

This is a risky play that essentially amounts to a bet on the Northland contract going through. If it doesn't and AAER fails to secure another large order in the next few months, I would be very worried and would pull my money. This is why:

Liquidity: 2009 promises to be a punishing year liquidity-wise, with $14.9 million in contractual obligations and $9.5 million in payables and debt payments due. Meanwhile, AAER has a cash ratio of only 0.19 with C$2.6 million in cash and equivalents. This will be partly counterbalanced by cash coming through from a 2009 order book of around 9.65 MW (something in the neighborhood of $15 million), the money raised through the current unit offering and an unused line of credit worth $1 million. The liquidity crunch exists because AAER is in the process of tooling up its factory, purchasing inventory and paying off licensing fees to the companies from which it is licensing its turbine technologies.

Limited financing options: The credit crisis has made equity financing incredibly expensive for small alt energy companies - they are often forced to raise equity at a fraction of the price investors were willing to pay a year-and-half or two years ago. AAER is a prime example: it raised equity in November 2007 at $1.15 per share but, a year later in December 2008, had to do the same at $0.15. Investors typically don't like dilution, and AAER won't be able to optimize its capital structure by raising significant debt until it shows it can fill the order book. Eventually, too much dilution leads investors to bail, creating yet more pressure on the stock price and raising the cost of equity capital further. As at December 31, 2008, AAER had 122.4 million shares outstanding, a 48% jump on 2007.  

The credit crisis: There is no doubt that the credit crisis has seriously shaken the renewable power sector. Perhaps ironically, the more mature technologies such as wind are amongst the hardest hit because of their relative capital intensity - the disappearance of tax equity investors coupled with the dearth of reasonably-priced debt has led to a marked slowdown in US wind installations. Many of the turbine majors have laid off employees in order to cut costs and reduce capacity. It will probably be a few more months before definite numbers to come out on the state of the industry so far in 2009, but if anecdotes one hears at conferences or reads in the paper are any indication, it ain't gonna be pretty! Needless to say, this is isn't exactly the best time to try to turn a start-up into an established firm in an already-crowded industry struggling to cut capacity. Luckily, this situation will be short-lived.

UPDATE (May 22, 2009): The company just announced that it fully sold its unit offering (~C$7.5 million) and issued another C$1.5 million worth of units to "suppliers and other business partners". This is positive news in my view as it indicates increased market appetite for the firm.

DISCLOSURE: Charles Morand is long AAER.

Posted by Charles Morand at 10:31 PM | Permalink | Comments (2)

This year, I published a list of 10 clean energy stocks I thought people should buy, and, because of readers' requests, also published a list of ten speculative clean energy companies.  For the most part, these speculative companies were chosen because they have compelling technology or manufacturing capability, but were not profitable or were only marginally profitable, and they had been beaten up because they would likely all need to raise money this year.

That means that if the financial crisis eases quickly, these companies should be able to raise money on favorable terms.  If the crisis continues or worsens (which has so far turned out to be the case) the stocks will continue to fall.  This is why they are gambles; as a whole, the portfolio is really a gamble on a quick resolution to the credit crunch.

Performance So Far

Until the recent market rally, spurred by Treasury Secretary Geithner's relatively clear plan for the financial sector, and the FASB's relaxation of mark-to-market accounting, all these stocks were down for the year.  I'm a bit surprised that the FASB rule change has had such a salutary effect on the market.  After all, one of the major problems is that we don't know how to value the murky mortgage-backed securities.  Giving banks more leeway to muddy the waters even further seems like a lousy idea to me (at least in the long term.)  I feel it's more win-the-battle-lose-the-war thinking, and will hurt markets in the long term by undermining investors' confidence with increased uncertainly.

Ticker	Price (1/9/09 close)	Price (4/9/09 close)	Percent gain
BCON	$0.46	$0.47	2.17%
AXPW.OB	$1.20	$0.85	(29.17%)
VLNC	$1.77	$2.23	25.99%
CPTC.OB	$0.30	$0.23	(23.33%)
EPG	$0.86	$0.34	(60.47%)
EMKR	$1.43	$0.84	(41.24%)
UQM	$1.72	$1.70	(1.16%)
CZZ	$4.18	$4.45	6.46%
RZ	$3.62	$4.13	14.09%
ZOLT	$7.47	$7.98	6.83%
Portfolio	$1,000	$900.20	(9.98%)
ICLN	$22.05	$19.40	(12.02%)
PBW	$9.01	$8.55	(5.11%)

The recent rally has been very good for alternative energy companies as a whole, and this portfolio in particular.  As of a month ago, all these stocks were down for the year, but now half of them are showing positive returns.  

Benchmarks

In January, I made two predictions about this portfolio:

1. The portfolio as a whole will fall, unless financial market conditions improve rapidly.
2. All of these stocks have a chance of spectacular returns.

Prediction #1 has so far been spot-on: financial market conditions have not improved rapidly, and the portfolio as a whole is down.  Prediction #2 is still difficult to judge.  None of these stocks have produced "spectacular returns" (although stay tuned for my quick clean energy mutual fund tracking portfolio update coming at the end of May.)  Nevertheless, "spectacular returns" tend to come from quick up-moves of stocks, and most of these stocks will require an improvement in financial markets to take off.

I've provided two Clean Energy ETFs as benchmarks: The oldest such ETF, the PowerShares Clean Energy ETF (PBW) and my preferred global clean energy ETF, the iShares S&P Global Clean Energy Index, (ICLN).  So far, the portfolio as a whole is slightly below the average of the two (see table).  This performance is neither impressive nor horrible, but since I never intended these stocks to be purchased as a portfolio (see prediction #1), what really matters to readers will be if they bought one of the five that is up or one of the four that is down much more than the market as a whole.

I personally still have small positions in Raser (RZ), Axion (AXPW.OB), Emcore (EMKR), and Zoltek (ZOLT), which is mostly a function of the fact that I've sold calls on my positions, and they have not yet been assigned.  I'm a bit down on these positions (even counting the gains from the call premiums) over the quarter.  

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has positions in AXPW, EMKR, RZ, and ZOLT.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 05:13 PM | Permalink | Comments (0) | TrackBacks (0)

I promised I'd do a performance update on my 10 Clean Energy Stocks for 2009 each quarter.  Here is the first (although readers got a mini-update in mid February, because I decided I didn't want to use double-shorts.)

Company	Ticker	Change 12/27/08 to 3/27/09	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	+7.14%	5.36%
Cree, Inc.	CREE	+59.96%
First Trust Global Wind Energy ETF	FAN	-10.73%
General Electric	GE	-32.50%	1.94%
Johnson Controls	JCI	-25.97%	0.77%
New Flyer Industries	NFYIF.PK	+13.52%	2.31%
Ormat	ORA	+6.81%	0.23%
Trinity Industries	TRN	-33.20%	0.47%
Warterfurnace Renewable Energy	WFIFF.PK	+17.77%	1.05%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13)	3x $ - 2x SPY	4.31%	-0.14%
Total Portfolio		1.61%
Benchmarks
S&P 500		-6.51%
iShares S&P Global Clean Energy Index (ICLN)		-7.30%

As you can see, the portfolio has been strongly outperforming both the market index (+8%) and clean energy stocks (+9%).  The big gainers were Energy Efficiency Stocks Cree and Waterfurnace Renewable Energy, and Mass Transit stock New Flyer Industries.  All of these are set to benefit from the American Recovery and Reinvestment Act: New Flyer even received a visit from Vice President Joe Biden.  The inclusion of these stocks in the list was no accident: I chose to emphasize energy efficiency and transit because I was expecting them to be a large part of the stimulus (although I can't claim to have predicted the VP's travel itinerary.)

On the losing side, we see conglomerates (each also involved in clean transportation and/or energy efficiency) which have been knocked down by the continuing financial crisis (GE), car industry (Johnson Controls), or rail industry (Trinity), all of which have been disproportionately  hurt by one aspect or another of the continuing downward slide of the economy.  It was for just this contingency that I included the SPY short, since, as I said "I feel there is more downside risk than upside potential for the market as a whole in 2009."  

As usual, in hindsight, I feel I should have seen the implications of GE's exposure to finance, or Johnson Controls's exposure to the auto industry, but I can't complain about the overall performance.

Stay tuned for updates on my Ten Clean Energy Gambles for 2009 (on a losing streak, but no more than the benchmarks) and my Quick Clean Energy Mutual Fund Tracking Portfolio (more "turbo-charged" than "tracking") as these come up on 3 months after the articles were published.

Tom Konrad, Ph.D.

DISCLOSURE: The author owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 04:13 AM | Permalink | Comments (2) | TrackBacks (0)

Yesterday, I outlined a strategy to approximately replicate the performance of a Clean Energy mutual fund at much lower cost, with only a couple hours of effort.  I gave a cost example based on $5000 invested in 5 stocks, with another $1000 worth of a single stock added in each subsequent year.  

This is the procedure I would use to select the initial five stocks.

1. Collect all the top five or ten holdings of the available Clean Energy mutual funds.  This data is available from Morningstar, and on fund sponsor's home pages.
2. A few of these holdings may be international, and not available through your stock broker to small purchasers.  Eliminate them from consideration.
3. Organize the remaining companies by cleantech sector (we have stocks listed by sector on out Cleantech Stocks page, or you can select sectors yourself by reading the company profile on Morningstar, or the company's home page.
4. In the top five sectors, rank the companies by recent performance (1-3 year.)  Recent underperformers tend to do better in subsequent years, so choose the worst performers. 

In subsequent years, look at your portfolio, and pick a single stock which you do not yet own from a sector which is relatively underrepresented in your current portfolio.  Such under-representation could occur because your other sectors have been outperforming that sector, or because you have been picking more stocks from other sectors in recent years.

Stocks Green Mutual Funds Own

Here are all the stocks listed in the top 5 holdings of the clean energy mutual funds compared in my recent article: American Trust Energy Alternatives Fund (ATEAX), the Calvert Global Alternative Energy Fund (CGAEX), Firsthand Alternative Energy (ALTEX), Guinness Atkinson Alternative Energy Fund (GAAEX), New Alternatives Fund (NALFX), and Winslow Green Growth Fund (WGGFX), along with CleanTech sector and 3 year performance (obtained from Morningstar.com.)  I have eliminated several which investors would need to purchase on foreign markets.  Many brokers have minimum transaction sizes and higher fees for such transactions.. 

If you were putting together a larger portfolio this way, you might also look at the top holdings of the Clean Energy ETFs, and/or expand the search to the top 10 holdings of each fund.

Stock	In Fund(s)	Sector	3 yr Annual
ADM	American Trust	Ethanol	-5%
CTXS	American Trust	Efficiency	-14%
WFFIF	Winslow	Efficiency	-10%
LXU	Winslow	Efficiency	10%
ELON	Firsthand	Grid	-10%
STP	Firsthand	Solar	-45%
FSLR	Winslow, AmericanTrust	Solar	216%*
CIG	Guinness Atkinson	Utility	-2%
FPL	Calvert	Utility	6%
SJI	New Alternatives	Utility	11%
VWSYF.PK	New Alternatives	Wind	-17%*
GCTAF.PK	Calvert	Wind	-6%
AMSC	Winslow	Wind	10%
* Average annual return based on less than 3 years' data.

Since we are looking for 5 stocks, and 6 different sectors appear in the chart, we have a choice of one sector not to include.  I personally don't feel that most of the utilities listed belong in a clean energy fund, because most of them produce more than half of their power from fossil fuels, with the exception of Cemig (CIG), which is mostly hydropower.  If Cemig were not in the list, I'd drop the utility sector.  However, since it is in the list I choose to drop the Ethanol sector instead, given the questionable environmental benefits of ethanol.  

Note that I am not making this decision based on the sector which I think will perform the best, because I am attempting to do this exercise using only information which a small investor who is interested in clean energy might have at his fingertips, and predicting stock moves is not something that should be tried by someone only willing to devote a few hours a year to their investments.

Taking the stock which has the worst previous 3 year performance from each of the remaining categories, I arrive at this portfolio, based on closing prices on February 27, 2009:

Company	Shares*	Price
Citrix Systems (CTXS)	48	$20.58
Echelon Corporation (ELON)	165	$5.99
SunTech Power (STP)	162	$6.09
Cemig (CIG)	72	$13.66
Vestas Wind Systems (VWSYF.PK)	22	$44.85
Total portfolio cost: $5,000 including $65 brokerage commissions

My hope is that this portfolio should roughly track a basket of the six mutual funds it is based on, but outperform due to its lower costs and the strategy of picking previous underperformers.  For comparison, here's the mutual fund portfolio:

Fund	Shares	Price
ATEAX (American Trust)	82.43	$10.11
CGAEX (Calvert)	122.19	$6.82
ALTEX (First Hand)	171.47	$4.86
GAAEX (Guinness Atkinson)	205.76	$4.05
NALFX (New Alternatives)	29.75	$26.68
WGGFX (Winslow Green Growth)	111.71	$7.46
Total portfolio cost: $5000, including $39.58 front-end load on NALFX

A year from now, I plan to take a look at how the two portfolios performed, and choose another stock to add.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has long positions in  ADM, WFFIF, LXU, ELON, GCTAF, and AMSC.  GAAEX is an advertiser on AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:54 AM | Permalink | Comments (4) | TrackBacks (1)

And I'm not talking about gold, but I liked the play on this title. Last December, I wrote about a report that claimed that solar stocks were the best play on the cleantech revolution. In that article, I analyzed the two solar ETFs: the Claymore/Mac Global Solar Index ETF (TAN) and the Market Vectors/Van Eck Global Solar Energy ETF (KWT).

At the end of the article, I said I had an open buy order on TAN. That buy order expired unfilled in January as the suckers rally progressed, but TAN then dropped to the kinds of levels I was looking for on Monday so I took a position at $5.

As I said in the December article, this is long-term. I don't expect this investment to realize its full potential for another 18 to 24 months, so patience is of essence. Of course, certain catalysts, such as a rapid rise in oil prices, could push this ETF up before then, and I would be more than happy to take a little profit if that happened (I haven't been taking a lot of that recently...). But my time horizon is two years plus here - this a play on the thesis put forth in the report that in the long run solar stocks have significant capital appreciation potential.

DISCLOSURE: Charles Morand has long position in TAN.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 09:27 PM | Permalink | Comments (2)

For readers who are tracking my 10 Clean Energy Stocks for 2009 portfolio, take note that I now think that SDS is a lousy hedge.  So in the model portfolio I'm personally tracking, I replaced each dollar of SDS with $3 of cash and $2 short SPY, an ETF which tracks the S&P 500.  Because I'm tracking the portfolio as a way to see how well a reader would perform, I did the replacement at the closing prices on Feb 11th, the day the article where I explained why not to use doubleshort ETFs (and short, ultras, or triples, for that matter.)  

Here's how the portfolio stood as of the close on February 12th:

Company	Ticker	Change since 12/27/08	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	+16.73%	0.87%
Cree, Inc.	CREE	+42.83%
First Trust Global Wind Energy ETF	FAN	-6.42%
General Electric	GE	-26.86%
Johnson Controls	JCI	-20.90%
New Flyer Industries	NFYIF.PK	+2.14%	0.77%
Ormat	ORA	+9.80%
Trinity Industries	TRN	-23.87%
Warterfurnace Renewable Energy	WFIFF.PK	+30.98%
-2x  S&P Depository Receipts + 3x Cash	3x $ - 2x SPY	+2.92%
Net Change		+2.91%

For comparison, the iShares S&P Global Clean Energy Index (ICLN) is down 5.6% and the S&P 500 is down 4.3% over the same period.  The reason that the 2x short + cash position is only up 2.92% instead of 8.6% is because of the underperformance of SDS.  (Here's the brief version: Suppose the underlying index starts at $10, drops $1 (10% of $10), and then to goes up $1 (11.11% of $9) for no net loss or gain.  If you do the math, the corresponding short (x-1) or ultra (x2) ETFs will fall a net 2.2% over the same move, and the ultrashort (x-2) and the triple (x3) ETFs will fall a net 6.7%.)

Problems With Contango

The other reshuffle I did was in my real portfolio.  A couple weeks ago, I wrote about why I bought OIL, a tracker for crude oil in the futures markets.  A reader pointed out that this (and most other oil tracking ETFs) suffer when the futures market is in contango (i.e. the futures prices are higher than the spot price, as they are now.)   Although oil futures market contango is a strong sign that price will rise, I decided that expected gains weren't enough to tempt me to stay in the market, so I sold my position.

Now that crude has dropped further, I'm considering a replacement position in USL, which tracks a basket of futures contracts over the next 12 months, rather than just the closest futures contract tracked by OIL (the same reader brought this one to my attention.)  USL is likely to lose less money than OIL when the market is in contango, because the futures market flattens out as you go out further into the future.  But I'm still on the fence with this one.

DISCLOSURE: Tom Konrad owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, and WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 06:52 PM | Permalink | Comments (7) | TrackBacks (0)

In times like these of financial uncertainty, regulated utilities have traditionally been considered a safe haven.  But that is changing.  The Dow Jones Utilities Average was down 30% in 2008, vs. a 34% drop in the Dow Industrials.  Not much of a safe haven.

In a recent interview, utilities analyst Daniel Scotto noted, that the utility industry offers "a lot less security" than it used to.  His reasoning is based mainly on the fact that the regulated portion of utility company's business is smaller than it has been in previous recessions, making them vulnerable to lower growth (or even contracting) energy demand.  Scotto forecasts electricity demand growth at "no more than 0.2% this year, and he sees a chance that the U.S. electric utility industry could experience negative growth for the first time since the 1950s.

Because of my work as an expert witness helping clean energy groups with utility regulation, I fear that even the regulated portion of utilities' business may be in jeopardy.  In November, I wondered if utility Demand-Side Management programs could remain effective with the phase-out of the incandescent light bulb, but that may be only the tip of the iceberg.  I was recently asked to advise an anti-coal, pro renewables advocacy group in a rate case.  Looking at the evidence, I expect that utility regulators may begin to slash authorized returns on equity.

Authorized Return on Equity (ROE)

Because they are monopolies, utility regulators cannot rely on the market to keep utilities from making excess profits.  Instead, they set rates calculated to let utilities make returns on equity comparable to what other companies with similar risk profiles make in competitive industries.  Determining what this might be is complex, and analysts use several models to calculate what might have been.  ROEs can be determined using the Capital Asset Pricing Model, Discounted Cash Flow models, Equity Premium model, the method of Comparables, and various Risk Factor models.

All of these calculations have common elements: they are based on historical data and analysts' expectations for the stock and bond markets.  Over the (very) long term, publicly traded companies total returns should be approximately equal to ROE.  Utility regulators turn this simple relationship on its head, and, after performing considerable manipulation to tease out other factors unique to the business of the utility in question, set authorized ROE based on observed and expected long-run market appreciation.

Crash

In regulatory practice, "long-run" usually means ten to twenty years of returns.  What happens when the market falls 34% in one year, and the continuing weakness of the credit markets causes analysts to revise their long term expectations for the market downward?  Over a 10 year span, a 34% drop will reduce the average annual return by 3.4%, even without any drop in expected growth.  Over a 20 year period, that same drop will reduce annual growth by 1.7%.

Many regulators may look at these lower "long-run" returns, and cut the authorized ROE by 1-3%, something which would soon pass through to the utilities' bottom lines, and hence impact share prices significantly.

It's Different This Time

While historically utilities have done well in a downturn, the market models described above were not developed until the 1960s and 70s, let alone used in utility regulation.  Hence there is little historical precedent to know how regulators will behave.  Will they look at the need to invest in transmission and renewable energy infrastructure, and decide that current authorized returns will help utilities raise the necessary capital?  Or, will they look at the economic plight of ratepayers, and decide that, if the models say that ROE should be cut, why not cut ROE and let ratepayers keep some money in their pockets?

I'm not intimately familiar with each state regulator's decision-making process, so I don't know which utilities are likely to be impacted, nor when.  I've decided not to take the gamble, and have sold nearly all