Tom Konrad CFA
For the month, the model portfolio rose 7.9% in local currency terms and, 8.3% in dollar terms. For comparison the broad universe of US small cap stocks rose 5.9% (as measured by IWM, the Russell 2000 index ETF), and the most widely held clean energy ETF, PBW, shot up 11.6%.
This year I split the model portfolio into two sub-portfolios of six income stocks (NYSE:HASI, NYSE:BGC, TSX: RNW, TSX: CSE, TSX:NFI, and XAMS:ACCEL) four value and growth stocks (NYSE:FF, NYSE:PW, NASD: AMRC, and NASD:MIXT).
PBW (+11.6%) is a good benchmark for the value and growth stocks, which underperformed with a small gain of 1.6% in both local currency terms and dollar terms. The six income stocks, on the other hand, gave a strong performance with a 12.0% gain in local currency terms and a 12.8% gain in dollar terms. This is particularly surprising because global utility stocks (as measured by JXI) fell 3.5% for the month on worries about rising interest rates. The fossil free Green Alpha Global Enhanced Equity Income Portfolio (GAGEEIP), which I co-manage, also bucked the global utility trend and turned in a 5.5% gain for the month.
For the year to date, the portfolio is up 3.1% in local currency terms, and down 0.2% in dollar terms. This contrasts to a 4.2% gain for PBW and 2.5% for IWM. The four growth and value stocks are down 6.1% in local currency terms and down 6.3% in dollar terms. The income stocks are up 9.1% in local currency terms and up 3.9% in dollar terms. GAGEEIP has gained 4.6% in January and February.
The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of February news for each stock.
The low and high targets given below are my estimates of the range within which I expect each stock to finish the year.
1. Hannon Armstrong
Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23. Annual Dividend: $1.04. Beta: 0.81. Low Target: $13.50. High Target: $17.
2/28/2015 Price: $16.63. YTD Dividend: $0. YTD Total Return: 16.9%.
The stock of sustainable infrastructure financier and
Real Estate Investment Trust Hannon Armstrong staged a dramatic
advance of 21.4% in February. I believe this advance was
catalyzed by an article
by Brad Thomas, the author of a leading REIT newsletter. In the
almost two years since its IPO, Hannon Armstrong has been the odd
man out among renewable energy yieldcos, because of its REIT
structure and focus on energy efficiency financing so different
from the higher profile renewable energy project ownership of
other yieldcos. There are also no real comparables among
conventional REITs, meaning that HASI has also struggled to catch
the attention REIT investors.
Thomas' strongly positive article seems to have changed that, and
now REIT investors seem to be pricing HASI closer to what that
would be expected from traditional REITs that have a comparable
level of risk. Not that I'm selling at this point; I'm happy
to hold a company that pays a 6.3% dividend at the current price,
especially since management expects to continue to increase that
dividend by 12-15% over the next 12 months.
An ironic note to this whole story is that Brad Thomas himself
was surprised by the sea-change his article catalyzed.
Reading between the lines of his comments, he made up his mind
that HASI was very attractive, but decided to share his insight
with his readers before buying himself. He has an admirable
policy of waiting 10 days between publication and trading a
stock. In this case, the stock was trading at $14.57 when he
wrote the article, but it closed at $16.37 10 days after
more recent note from Thomas leads me to believe he is still
waiting for HASI to pull back.
Thank you Brad, for finally bringing Hannon Armstrong the
attention I have been unable to attract with my many articles
about the company since its IPO. For your sake, and for
anyone else who has not yet bought the stock at the very
attractive prices we had for the last 20 months, I hope the
pullback you're waiting for materializes.
Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90. Annual Dividend: $0.72. Beta: 1.54. Low Target: $10. High Target: $30.
2/28/2015 Price: $15.04. YTD Dividend: $0. YTD Total Return: 0.9%.
Last month the stock of international manufacturer of electrical and fiber optic cable, General Cable Corp. declined 23% because of several analyst downgrades and worries about Europe. A couple more downgrades followed before the company released its fourth quarter earnings and outlook for 2015 on February 4th. The stock sold off that day, but I felt the discussion of restructuring and outlook were generally positive. Investors seem to be coming around to my more optimistic point of view, since the company recovered all of its January losses in February with a percentage climb even more spectacular than Hannon Armstrong's.
Renewables Inc. (TSX:RNW,
12/31/2014 Price: C$11.48. Annual Dividend: C$0.77. Low Target: C$10. High Target: C$15.
2/28/2015 Price: C$13.13. YTD Dividend: C$0.12832 YTD Total C$ Return: 15.5%. YTD Total US$ Return: 7.3%.
Investors and analysts also liked the strong earnings
announcement from Canadian yieldco TransAlta Renewables,
propelling the stock up another 3.6% after strong January gains.
Scotiabank, Macquarie, and CIBC all increased their price targets
for the stock, with the average price target now C$12.71.
Capstone Infrastructure Corp (TSX:CSE.
12/31/2014 Price: C$3.20. Annual Dividend C$0.30. Low Target: C$3. High Target: C$5.
2/28/2015 Price: C$3.21. YTD Dividend: C$0. YTD Total C$ Return: 0.3%. YTD Total US$ Return: -6.8%.
In addition to the high yield (which alone seems sufficient reason to own the stock), there is potential for upside if the Bristol Water appeal is successful. Even if this appeal fails, I expect the high yield to cause the stock to appreciate as investors gain confidence that the dividend will not be cut.
5. New Flyer Industries
12/31/2014 Price: C$13.48. Annual Dividend: C$0.585. Low Target: C$10. High Target: C$20.
2/28/2015 Price: 13.91$. YTD Dividend: C$0.0975 YTD Total C$ Return: 3.2%. YTD Total US$ Return: -4.1%.
Leading North American bus manufacturer New Flyer continues to
announce significant new orders of buses, such as 110 compressed
natural gas (CNG) buses and options ordered by Nassau county, NY,
and smaller orders from Lane Transit in Eugene Oregon and
Hamilton, Ontario for up to 20 hybrids and 18 CNG buses,
respectively. These orders follow on the strong backlog of
orders I discussed in the last update.
Although a date has not yet been announced, the company should
report 2014 fourth quarter and full year results in March.
12/31/2014 Price: €13.60. Annual Dividend: Varies: at least 40% of net profits. €0.55 in 2014. Low Target: €12. High Target: €20.
2/28/2015 Price: €16.06. YTD Dividend: €0. YTD Total € Return: 18.1%. YTD Total US$ Return: 9.2%.
The stock of bicycle manufacturer Accell Group also advanced
strongly in February. This does not seem to be due to
company specific news, but rather to growing interest by
institutional investors in the bicycle industry. It seems
that fund managers, especially US fund managers, have become
disappointed in the performance of golf companies, and are
looking to replace these positions with well known bicycle
brands. Fund managers may be beginning to realize that bikes
not no longer just for kids, and are increasingly popular among
high income adults.
Outdoor retailer REI knows this fitness-conscious demographic well, and has recently begun offering Accell's "premium, high-performance, award-winning" Ghost Bike brand in its stores countrywide and on its website.
While it may seem strange that investment managers' attitude
towards golf companies should have any bearing on how they feel
about the bicycle companies, this connection is a product of
widespread practice of diversifying and portfolios among
industries. While there is probably little economic
connection between the economics prospects of Accell and Callway
(NYSE:ELY), many fund managers specialize in certain
industries. When such analysts and managers upgrade or buy
one stock in their universe, they often will downgrade or sell
another stock. Hence, if a mutual fund manager who
specializes in sports equipment sells Callaway, it might not be
surprising to see him buy Accell.
Even this annual list shows that effect. I focus on clean
energy companies, so in order to add four new companies to this
2015 list, I had to drop
three clean energy companies I still liked from the 2014
12/31/2014 Price: $13.02. Annual Dividend: $0.24. Beta 0.36. Low Target: $10. High Target: $20.
2/28/2015 Price: $12.3 YTD Dividend: $0.06. YTD Total Return: -5.1%.
Specialty chemicals and biodiesel producer FutureFuel, also recovered (and paid a 6¢ quarterly dividend) in February. While there has not been significant company news, the EPA has made strong statements about getting "back on track" setting quotas under the Renewable Fuel Standard (RFS.) The lack of quotas in 2014, and the delay of the 2015 quota are the main reason the stock is currently so cheap. EPA transportation chief Christopher Grundler recently told a meeting of ethanol producers that the agency would combine three years' worth of standards -- for 2014, 2015 and 2016 -- into a single regulatory action. EPA plans to release a proposal this spring and finalize it by the end of November. The RFS is at least as important to biodiesel producers like FutureFuel as it is for ethanol producers.
Power RET released a new investor presentation on its website, which includes a management estimate of the net asset value of the company's assets if they were sold on the open market (page 19.) Management feels that, even without a win in the civil case, its railroad asset is significantly undervalued compared to NSC's bonds, which have similar credit and cash flow characteristics. However, the company has not revealed any plans to sell any of its assets, and would not consider a sale of the railroad asset before the civil case is resolved, even if a buyer could be found.
Energy service contractor Ameresco will release fourth quarter
and full year 2014 results before the market opens on March 5th.
Over the last two quarters, the company has spoken of signs that
its market for may be recovering from a multi-year slump. If
the trend continues, the stock should reverse its long decline,
10. MiX Telematics
12/31/2014 Price: $6.50. Annual Dividend: $0. Beta: 0.78. Low Target: $5. High Target: $20.
2/28/2015 Price: $5.65. YTD Dividend: $0. YTD Total South African Rand Return: -12.3%. YTD Total US$ Return: -13.1%.
MiX also signed its 500,000th subscriber in February. To put this in perspective, US-based competitor Fleetmatics (FLTX) announced that it had achieved 500,000 vehicles under subscription in January. I'm not sure how comparable MiX's "subscribers" are to Fleetmatics's "vehicles under subscription" but, if they are not the same thing, I have trouble seeing how MiX could have less vehicles under subscription than it has subscribers. Further, Fleetmatics' offering is suitable to the small and medium sized businesses to which it caters, and so its offering is less sophisticated (and hence lower value) than the solution MiX delivers to the large multinational companies which are its core clients.
Given the similar size of the two companies' client bases, one would expect that the two companies would also be valued similarly. In fact, Fleetmatics' enterprise value is $1.4 billion (approximately $2,800 per vehicle under subscription in January) compared to MiX's enterprise value of only $106 million, or $212 per "subscriber" in February. Based on this metric, the market seems to be undervaluing MiX compared to FLTX by a factor of approximately 13.
I found the January declines of many of the stocks in this list
inexplicable, and wrote that the start of February was an excellent
time to buy any of them. The rapid rises in Hannon Armstong,
General Cable, and Accell Group show that I was right in at least
these three cases.
Several excellent values remain. Capstone Infrastructure and MiX Telematics look particularly attractive at their current prices. Ameresco also looks quite attractive, but its near term performance will hinge on the March 5th earnings announcement and management's outlook for the rest of the year.
Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, FF, BGC, RNW/TRSWF. I am the co-manager of the GAGEEIP strategy.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.