October was a spooky month
for clean energy stocks. My benchmark Powershares Wilderhill
Clean Energy Index (PBW)
cringed down 2.9% like the young Supergirl who jumped when a
mechanical ghost startled her at my door Haloween
night. My 10
Energy Stocks for 2014 model portfolio was more like
Supergirl's slightly older brother, who was dressed as a SWAT team
member and insisted that he wasn't scared: It rose a slim 0.9%
since the last
update on October 3rd. For the ten months since I
launched the portfolio on December 26th, PBW is down 2.6% while
the model portfolio is up 2.4%
Meanwhile, the broader market of small
cap stocks clawed its way out of a premature grave, digging its
way up 6.3% for the month to end up 2.1% (as measured by the
Russell 2000 index ETF, IWM.)
Individual Stock Notes
The chart and discussion detail the performance of individual
stocks in the 10 Clean Energy Stocks for 2014 model portfolio,
along with relevant news items since the last update.
(Current prices as of October 31st, 2014. The "High
Target" and "Low Target" represent my December predictions of
the ranges within which these stocks would end the year, barring
1. Hannon Armstrong
Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85. Low
Target: $13. High Target: $16. Annualized
Current Price: $13.98. YTD Total US$ Return: 5.7%
Last month I predicted Sustainable Infrastructure REIT Hannon
Armstrong would raise its fourth quarter dividend to 24¢ from
22¢. I was too conservative. In conjunction with the announcement
of a $144 million investment in ten operating wind projects,
President and CEO Jeffrey Eckel stated: "This investment should
enable us to achieve core earnings of $0.25 in the fourth quarter
and, in anticipation of further 2015 earnings growth, to support
the declaration of an increase in our December dividend to $0.26
The stock rally from the increased dividend was cut short a week
later when the company announced a secondary equity offering of 4.6
million shares at $13.60, for gross proceeds of $63.56
million. The company has a target leverage ratio of 2:1 debt
to equity, and since the company has not raised equity since $70
million (at $13.00/share) in April, this smaller offering should
have come as no surprise.
The stock pull-back in response to the equity offering should be
seen as a buying opportunity. At $13.89, the company's forward
yield is 7.4%, and this dividend was achieved by investing the
roughly $10/share raised in the IPO and April offering. Any money
raised at $13.60 a share should increase both book value per share
and per share dividend once it is invested.
2. PFB Corporation
12/26/2013 Price: C$4.85. Low Target:
C$4. High Target: C$6.
Annualized Dividend: C$0.24.
Current Price: C$3.98. YTD Total C$ Return: -14.2%. YTD
Total US$ Return: -18.5%
Green building company PFB continued to decline until October
30th, when the company announced
its third quarter results. Earnings per share
increased to C$0.23 from C$0.14 in the third quarter of 2013,
along with a 7% increase in revenue and an increase in gross
margin. Full financial statements for the quarter will be
filed on or before November 14th.
The company announced its regular 6¢ dividend, payable to
shareholders of record on November 14th. This amounts to a
6% annual dividend at the $4 current price.
Capstone Infrastructure Corp (TSX:CSE.
12/26/2013 Price: C$3.55. Low Target:
C$3. High Target: C$5.
Annualized Dividend: C$0.30.
Current Price: C$4.27. YTD Total C$ Return: 30.8%.
YTD Total US$ Return: 24.4%
Independent power producer Capstone Infrastructure will release
third quarter results after the close on November 11th.
4. Primary Energy
Recycling Corp (TSX:PRI,
12/26/2013 Price: C$4.93. Low Target:
C$4. High Target: C$7.
Annualized Dividend: US$0.28 (suspended pending
Current Price: C$5.82. YTD Total C$ Return: 22.3%
. YTD Total US$ Return: 16.3%
Waste heat recovery firm Primary Energy Recycling rallied on the
news that the board's strategic review had resulted in a buyout
offer from a group of investors led by Fortistar at US$5.40
per share. The deal seems very likely to win shareholder
approval, since it has the unanimous approval of the board, and
investors controlling 44.5% of common shares are subject to a lock
up agreement to vote their shares in favor of the deal. Only
66⅔% of outstanding shares is needed to approve the deal.
Group (Amsterdam: ACCEL,
12/26/2013 Price: €13.59. Annual Dividend €0.55
Low Target: €11.5. High Target: €18.
Current Price: €12.73. YTD Total € Return: -2.3%
. YTD Total US$ Return: -10.9%
SNS Securities increased its price target for Netherlands based
bicycle manufacturer and distributor Accell Group from €13 to €14,
but the stock posted a small decline along with European stocks in
Accell continues to integrate last year's acquisition of Raleigh,
which will now distribute
its Dutch-based Koga brand in the UK. Its Sparta brand
its 1000th speed pedelec (an electric-assisted bike with
unrestricted top speed which must be registered as a motorized
vehicle) in October. Sparta leads the accelerating Dutch market
for speed pedelecs with roughly 60% of the market.
6. New Flyer Industries
12/26/2013 Price: C$10.57. Low Target: C$8. High
Annualized Dividend: C$0.585.
Current Price: C$13.00. YTD Total C$ Return: 27.6% .
YTD Total US$ Return: 21.3%.
Leading transit bus manufacturer New Flyer made headlines
with its delivery of two fully electric buses to the Chicago
Transit Authority. The purchase shows that fuel savings
alone do not yet support purchase of electric buses by transit
agencies, as they cost $400,000 more than conventional diesel
buses, but will save approximately $300,000 in fuel costs over
their 12 year lifetime. However, they deliver other
benefits such as no exhaust (a benefit to anyone standing or
driving behind them), a smoother and quieter ride for passengers,
and likely lower maintenance costs.
The company will
announce its third quarter results on November 5th and hold
a conference call on November 6th. It paid its regular
monthly dividend of C$0.0475.
7. Ameresco, Inc.
12/26/2013 Price: $9.64. Low Target: $8. High
Target: $16. No Dividend.
Current Price: $8.24 YTD Total US$ Return: -14.5%.
The stock of energy performance contracting firm Ameresco
recovered 11% from previous lows, but remains down for the year.
Part of the jump was likely the result of a series of transactions
by the new New York Green Bank which will provide funding for
the types of projects Ameresco specializes in. The announced
projects have a large number of financial partners, but the only
developers were Ameresco and privately held BQ Energy.
I also expect that the October rise is partly in anticipation of
likely positive third quarter results and outlook. The
second quarter was the first relatively upbeat conference call
after a series of disappointments starting in 2012. If the
third quarter outlook (to be announced on November 6th) is also
upbeat, expect the climb to continue this month.
8. Power REIT (NYSE:PW).
12/26/2013 Price: $8.42. Low Target:
$7. High Target: $20. Dividend currently suspended.
Current Price: $10.12 YTD Total US$ Return: 20.2%
Solar and rail real estate investment trust Power REIT and its
opponents Norfolk Southern Corp. (NYSE:NSC) and its sublease
Wheeling & Lake Erie Railway filed responses to each others
motions for summary judgment in their civil case. The
filings can be found on
the Power REIT website.
Both a litigation researcher on Seeking Alpha and I think the
case may be nearing a finish, and we published our analyses
virtually simultaneously. My analysis is here,
and a more
pessimistic view by a new anonymous author is here.
The author, "Small Cap Litigation Research" or SCLR claims not to
have a position in the stock (I am long) and I feel he or she
missed several subtleties of the very complex case despite a legal
To summarize the article, SCLR believes that
- Power REIT's attempt to discount the performance of the lease
in its interpretation is unlikely to succeed.
- NSC is demonstrating its confidence by continuing to omit the
lawsuit as a legal risk in its SEC filings.
- At the current price of $10, current shareholders are betting
on a windfall profit.
I'll take each of these points in turn.
1. Performance under the lease.
Since I'm not a legal expert, I don't have an opinion on how
relevant the performance of the parties over the last 50 years
will be to the judge's decision. Even if SCLR is correct
that performance is very relevant to the interpretation of the
lease, there are many possible defaults under the lease to which
performance is irrelevant because they have not come up
previously. In particular, the lease provides that the
lessees pay legal expenses which are "necessary or desirable" for
the maintenance of PW's interest in its property, so long as these
expenses are "not for the sole benefit of its shareholders."
Since the lessees have paid some legal expenses in the past, this
part of the case (which could lead to total default under the
lease) rests not on performance, but on the court's interpretation
of what is for the "sole" benefit of shareholders, and what is
"desirable." I discuss in my article why Power REIT's case
seems strong in this regard.
Another possible default under the lease to which performance is
not relevant would be WLE's sale of mineral rights, which are not
explicitly conveyed by the lease. PW only became aware of
this over the course of the lawsuit, so could not have previously
acquiesced to such sales.
2. NSC's apparent confidence.
SCLR fails to distinguish between NSC and WLE. While it is
true that NSC has not disclosed this lawsuit in the legal risks
section of any of its SEC filings, it is WLE, the sublessee, which
will be responsible for paying the majority of any award. As
I discussed in an article
linked to by SCLR, the sublease agreement limits NSC's
liability to the $7,466,951.42 balance of a "settlement account"
described in the lease as of the closing date of the sublease
agreement. This liability is most likely already disclosed
on NSC's books as long term debt. Given its tiny size
relative NSC's $34 billion market cap, the outcome of the lawsuit
would only be material to NSC if the judge were to award back
interest on the settlement account. In my judgment, NSC is
probably correct in its confidence that back interest will not be
awarded, and so the results of the case are not likely to be
material to NSC. I still believe NSC should be disclosing
the lawsuit despite its confidence, accompanying the disclosure
with a statement that the chances of the lawsuit resulting in a
material liability to NSC are low, if that is the opinion of
management. The intent of such disclosures is not to predict
what will likely happen, but rather to disclose what might happen..
WLE, on the other hand, is potentially responsible for more than
half of the $16 million balance of the settlement account, PW's
legal bills, may be forced to renegotiate the lease if it is found
in default, and has a chance of owing back interest as well.
While these potential liabilities are certainly material to WLE,
the company is privately held and so has no responsibility to
make public statements about the lawsuit.
Hence, NSC's apparent confidence is only relevant to the
possibility that back interest might be awarded, and has no
bearing on most of the matters of contention.
3. Are investors betting on a windfall?
Neither SCLR nor I provided a valuation of PW in our articles, so
it is difficult to judge from them if shareholders are betting on
a windfall profit. I did however, provide a
back-of-the-envelope valuation in response to a comment. I responded,
PW has about $1.9 million in annual revenue from its
leases (Rail and Solar.) Recurring expenses are about $0.8M,
including interest, so we have about $1M to pay dividends each
year. As of the end of June (the last 10Q), there were 130,000
preferred outstanding, with an annual dividend of $0.25M. That
leaves $0.75M to pay dividends on 1.73M common shares, or 40-45
cents a share.
If PW lost, they would write off the settlement account, meaning
that dividends would become classified as return of capital for
the next 16 years or so. The ending of the lawsuit would also
remove uncertainty, and allow Lesser to resume the yieldco
business plan as well as make it easier to refinance the debt used
in the solar acquisition. So the answer to your question depends
on what you think the market would pay for a stock with a 40 cent
annual return of capital dividend (i.e. deferred income taxed at
the LT cap gains rate) and some potential for growth. I
personally would be happy to buy such a stock at a 5% yield (the
cheapest yieldcos trade at 4%), which would be $8 to $9, but it
would probably fall below $8 in the short term, especially since
the dividend would not be resumed until unpaid attorneys fees had
been paid off. Those will probably amount to $2 million or so, so
the dividend would likely remain suspended for 3 years. Hence, we
should discount back my $8 estimate by 3 years at something like
15%, which also gives me a $5 downside.
My best guesses on the probabilities of various outcomes and
The weighted average of these outcomes is $10.75.
- 25% - PW loses on all counts - $5
- 40% - PW collects a portion of settlement account and legal
fees - $10
- 30% - PW collects entire settlement account & legal fees
- 5% - PW collects legal fees, settlement account, and also
has upside from renegotiating lease and from some asset sales
or interest not included in NSC/WLE version of settlement
account - $20+
If my estimates are correct, shareholders are only betting on a
mixed result to the lawsuit, which I gave a 40% likelihood among the
scenarios I evaluated.
In summary, the flaws in SCLR's analysis all of favor the lessees
over PW. SCLR claims to have no position in the stock, which
could be the reason for a lack of diligent research. Another
possibility is that the writer is actually short the stock, and is
looking to profit from a decline caused by the article. If
that is the case, SCLR is unfortunate that we were working on our
Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17. Low Target: $8.
High Target: $25.
Current Price: $8.91. YTD Total ZAR Return: -21.6%. YTD Total
US$ Return: -26.8%
South Africa based global provider of software as a service fleet
and mobile asset management, MiX Telematics will announce
its fiscal second quarter 2015 results on November 6th.
10. Alterra Power Corp.
12/26/2013 Price: C$0.28. Low Target: C$0.20. High Target:
C$0.60. No Dividend.
Current Price: C$0.32 YTD Total C$ Return: 14.3% .
YTD Total US$ Return: 8.6%.
Renewable energy developer and operator Alterra Power completed
financing for its 62 MW Jimmie Creek
run-of-river hydroelectric expansion in conjunction with its
development partner, Fiera Axium. The company will
announce its third quarter results after market close on
Although October spooked many clean energy stocks, my model
portfolio did not take fright. Hannon Armstrong's larger
than expected dividend increase, and the announcement culmination
of Primary Energy's strategic review helped keep the ghosts at
bay. I included both in the list because I knew these
positive events reasonably likely, and am glad they came at such
an opportune time.
Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT,
PW, AXY, FVR, FF.
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.