Tom Konrad Ph.D., CFA
The History of the “10 Clean Energy Stocks” Model Portfolios
2017 will be the ninth year I publish a list of ten clean energy stocks I expect to do well in the coming year. This series has evolved from a simple, off-the-cuff list in 2008, to a full blown model portfolio, with predetermined benchmarks and (mostly) monthly updates on performance and significant news for the 10 stocks.
While there is much overlap between the model portfolio and my own holdings (both personal and in the Green Global Equity Income Portfolio (GGEIP), a clean energy focused dividend income strategy I manage), the model portfolio is designed to be easily reproduced by a small investor who only spends a few hours a year on his or her investments. Trading is kept to a minimum by retaining many names from each annual list, and only trading in the middle of the year in extreme cases. There have been only a couple trades in the middle of the year so far, once because one of my picks was bought out, and another because of what I believed to be fraudulent accounting.
Despite (or perhaps because of) the lack of trading, the model portfolio has performed well, and outstandingly well compared to clean energy stocks in general. It has outperformed its benchmark every year since 2008 except 2013. That year it returned 25% compared to the benchmark’s 60% return. Over the past five years (2012 through 2016) the model portfolio has grown at a compound annual rate of 10%, or a 62% cumulative gain. Despite the large gain in 2013, its benchmark has fallen at a compound annual rate of 3% for a total lost over 5 years of 15.3%. See the chart below (click for a larger version):
I will provide a detailed update on the final performance of the 2016 model portfolio later this month.
In the early years, the model portfolio mirrored the Clean Energy sector’s notorious volatility. More recently, I have attempted to focus the portfolio on less risky stocks, and this has allowed the portfolio to consistently outperform its benchmarks. I’ve also been emphasizing more income stocks since I began managing GGEIP at the end of 2013. GGEIP returned 12.8% in 2016.
How To Finesse Trump
In the game of bridge, “trump” is one suit that’s more powerful than all the others; the highest trump card played wins a trick. There’s also a technique called a finesse, which can be used to win a trick even when the opponents hold a more powerful card (including a trump) which they could play potentially play on that trick.
“Finessing Trump” may not be a perfect analogy for picking clean energy stocks which should do well despite a hostile White House under the eponymous President-elect, but I’ll run with it. The relative strength of the cards held by fossil fuel industries are certainly a lot stronger relative to those held by the clean energy industries than they were just a few months ago.
On the other hand, clean energy’s hands are still full of honors (aces and face cards.) According to the US Energy Information Administration, new coal and nuclear powered power plants are now far more expensive to build than new wind or solar. Investments in renewable energy create more jobs than the same amount of investment fossil energy, these jobs typically do not require a college education, and are often in rural areas. This is a perfect combination to deliver on Trump’s promises to his core voters. The rural nature of wind and biofuel jobs also give these technologies solid political support in the Republican controlled Congress.
President-elect Trump and the Republicans have made many grand promises, to deliver jobs, to renegotiate our relationship with allies and opponents alike, to dismantle regulations, and to lower taxes. They will not be able to deliver on all of them, and many contradict each other. Given this backdrop of political uncertainty and speculation, the focus of the 10 Clean Energy Stocks for 2017 list will be on companies that rely little on support from the federal government, and which should be relatively unaffected by the possible reversal of President Obama’s attempts to encourage Clean energy.
Two of the picks this year are also well positioned to benefit from a revival in oil and gas drilling. OPEC’s recent agreement to limit production has already set the stage for a slow revival in 2017, and Trump’s promises to ease environmental restrictions can only push in the same direction.
Last January, I used a weighted average of the Global X YieldCo ETF (YLCO) and the Powershares Clean Energy ETF (PBW) as my benchmark. The 70% weight on the income-focused YLCO reflected the 7 of 10 income stocks in the portfolio, while the 30% weight on PBW matched the three growth stocks. Given my greater caution this year, the 2017 portfolio contains eight income and only two growth stocks. Hence the portfolio’s benchmark will be a weighted average of 80% YLCO and 20% PBW.
The Making of 10 for 2017
Over the last few decades, stock market research has poked a number a gaping holes in the basic assumption of Modern Portfolio Theory that, other than diversification, there is no reliable way to reduce portfolio risk without sacrificing expected returns. Several of these potentially counter-intuitive findings have become important to my investment selection process:
- Selecting high dividend stocks reduces portfolio risk without reducing expected returns. When the stocks are small and mid-cap stocks, expected returns actually increase. (What Difference Do Dividends Make? C. Mitchell Conover, CFA, CIPM, Gerald R. Jensen, CFA, and Marc W. Simpson, CFA)
- Selecting stocks with low market correlation (Beta) or low volatility reduces risk without sacrificing returns. (Low-Risk Investing without Industry Bets Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen, and many others.)
- Small capitalization stocks and stocks with lower liquidity tend to outperform their larger and more liquid counterparts. (Liquidity and Stock Returns, Yakov Amihud and Haim Mendelson)
- Selecting a portfolio of individual stocks is a more effective way to take advantage of multiple such market anomalies than buying a collection of “Smart Beta” ETFs, which only focus on anomalies individually. (Fundamentals of Efficient Factor Investing, Roger Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA)
You will find that this year’s list tilts towards high dividends (average yield 6%), and low Beta (average Beta 0.63 – anything less than 1 is low.). All are small capitalization stocks, or near that range ($300 million to $2 billion) in market capitalization. Other factors I consider are traditional value metrics such as EV/EBITDA, Price to Book ratio, and dividend coverage, and trading of the st
ock by company insiders. This year, I’ve also added my own estimates of the risks and potential rewards of action by the Republicans in Congress and the White House.
I believe that technology continues to advance, and that the world and individual US states will continue confronting our environmental problems no matter what the federal government does. I’m also a moral investor, with the core belief that the actions taken by companies I invest in are as much my moral responsibility as actions I take myself.
Hence, I only consider green companies for this list and my managed portfolios. That does not mean just wind, solar and electric cars. It means that the company should be doing net good for the environment. For each company, I ask myself,
“If this company did not exist, would the environment be worse off?”
If the answer is “yes,” then I’ll consider the company for my portfolio. This can lead to a few unconventional picks. In this list are companies involved in energy from waste (Covanta (CVA)) and container shipping (Seaspan SSW-PRG). Another is an insulation company whose main customers are fossil fuel drillers and refiners. These companies are, in my opinion, better for the environment than the alternatives (landfills, air transport or less efficient container shipping, and oil refining with less effective insulation.) You may disagree on these admittedly qualitative judgements. If you do, you should omit these specific stocks from you portfolio.
Ten Clean Energy Stocks for 2017
Below is Ten Clean Energy Stocks for 2017 list, along with some of the metrics discussed in the stock selection section above. Data is as of December 31st, 2016.
|Pattern Energy Group||PEGI||8.6%||1.1||$1.6B||Some buying|
|8point3 Energy Partners||CAFD||7.7%||0.6||$368M||None|
|Hannon Armstrong Sustainable Infrastructure||HASI||7.0%||1.1||$906M||Strong Buying|
|NRG Yield, A Shares||NYLD/A||6.5%||0.7||$2.2B||Strong Buying|
|NextEra Energy Partners, LP||NEP||5.3%||0.5||$1.4B||Strong Buying|
|Covanta Holding Corp.||CVA||6.4%||0.9||$2.0B||None|
|Seaspan Corporation, Series G Preferred||SSW-PG||10.3%||0.3||$939M||None|
|Mix Telematics||MIXT||2.3%||1.0||$136M||Some Selling|
|Aspen Aerogels, Inc.||ASPN||–||-0.3||$97M||Strong Buying|
Below I describe each of the stocks and groups of stocks in more detail. I include with each stock “Low” and “High” Targets, which give the range of stock prices within which I expect each stock to end 2017. In 2016, all but two of the stocks ended the year within these ranges. One (Terraform Global GLBL) ended the year 1% below my low target, and another (Enviva EVA) ended 3% above my high target.
Yieldcos are companies with a business focused on the ownership or financing of of operating clean energy assets, and use most of the resulting cash flow to pay dividends to shareholders. Operating clean energy assets include wind farms, solar farms, biomass and biofuel plants, and other sustainable infrastructure which reduces overall greenhouse gas emissions. Yieldcos often have a developer “sponsor” which holds a majority of the Yieldco’s stock, and gives the Yieldco the first opportunity to buy many of the developer’s projects, called a “Right of First Offer” or ROFO.
Because Yieldcos own existing infrastructure and sell renewable energy, they are much less dependent on the continuation of government subsidies for clean energy than many renewable energy companies that have to sell or install products to make a profit. The stability of Yieldco cash flows (and dividends) depend much more on counter-parties (usually investment grade utilities) living up to their obligations than on government policy.
Even wind farms, which often receive an ongoing tax subsidy in the form of the federal Production Tax Credit (PTC) are relatively safe. When the PTC has been allowed to lapse in the past, the change has only applied to new wind farms, not wind farms already in production.
This stability and current low valuations led me to include six Yieldcos in the list for 2017. The current low valuations mean that most Yieldcos cannot now issue new stock to fund acquisitions and grow quickly, but the resulting high dividends mean that there is significant protection against further declines because income investors do not require significant growth prospects to buy high dividend stocks as long as they believe the dividend is safe.
The biggest risk from a Trump administration for Yieldco investors is the same as the risk borne by every income investor: Increased spending and tax cuts may lead to ballooning federal deficits, which will in turn cause interest rates to rise. Rising interest rates could make Yieldco stock pr
ices fall in order for the yield to rise along with other interest rates. I believe that most Yieldco prices have already fallen enough to account for most of this risk.
Pattern Energy Group (NASD:PEGI)
12/31/16 Price: $18.99. Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67. Low Target: $18. High Target: $30.
Pattern is a Yieldco owning mostly wind projects in North America. While Pattern is smaller than most other Yieldcos, and has a more limited development pipeline from its sponsor, it has historically been able to acquire new projects at higher cash flow yields than its bigger rivals with higher profile sponsors. This advantage is in large part due to Pattern’s focus on the less competitive market for wind farms (as compared to solar farms).
Wind Yieldcos vs. Solar Yieldcos
Wind farms also tend to have higher returns than solar because wind production varies more from year to year than solar, and the higher cash flow yields are compensation for higher risk.
One other advantage of wind over solar for Yieldcos is very long term. Wind farms need large scale to be cost competitive, and certain locations such as ridges have much better wind resources than most other locations nearby. These factors mean that, in 15 or 20 years when utility power purchase agreements (PPAs) expire, the utility will have difficulty replacing the power from an existing wind farm with another next door. This is much less the case with solar, where my neighbor’s solar resource is almost identical to mine.
I believe that wind farms will have higher residual value at the end of their power purchase agreements than will solar farms. The wind farm location and existing towers should retain more value even in the face of the falling price of wind technology than will the location and other infrastructure of solar farms.
Pattern’s stock has sold off since its third quarter earnings call when the company announced that it had discovered a material weakness in its internal controls over financial reporting. As I wrote at the time, a weakness in financial controls means that they believe it would be possible for some financial data to be misreported, not that this has happened. The weakness arose because the company’s systems had not kept up with rising headcount in 2016.
The company is working to fix this, but it will probably take a couple more quarters. Unless some material mistakes are found in the meantime, the stock should recover when it reports the problem has been resolved.
8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05. Low Target: $10. High Target: $20.
8point3 is a solar-only Yieldco started by joint sponsors, First Solar (FSLR) and SunPower (SPWR.) Because of recent rapid decline in the price of solar modules, both have recently been struggling to find a way to profitability.
On the sunny side, 8point3 has relatively little debt compared to most Yeildcos, and this relatively low debt give it great flexibility even in the face of weak sponsors. All of this debt is held at the company level (other Yieldcos use specific projects to back much of their debt.) Company level debt typically has a slightly lower interest rate than project level debt, and it typically requires only interest payments. Both of these factors help increase short term Cash Available For Distribution (CAFD, and the reason for 8point3’s choice of ticker symbol.) High current CAFD allows 8point3 to pay a higher dividend than it otherwise would.
On the cloudy side, CAFD’s focus on solar and its reliance on non-amortizing company level debt could be storing up trouble for the long term, when PPAs start to expire in 15-20 years. As I discussed in the Pattern Energy section, I believe that solar farms will have greatly diminished cash flows and residual value when 8point3’s current PPAs expire. While project level debt is paid off over the life of the project PPA, company level debt is not. Unless 8point3’s share price recovers in the next few years, allowing the company to return to growth, 8point3 Partners could face the prospect of greatly diminished income and undiminished debt when PPAs begin to expire in 15-20 years.
Fifteen years is a long time, so it is not yet time to run from the shadow of this possible future, but it does make sense to expect a slightly higher dividend from 8point3 than other Yieldcos in order to compensate for this risk. 7.7% will do the trick for me.
Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/16 Price: $18.99. Annual Dividend: $1.32 (7.0%). Expected 2017 dividend: $1.34 to $1.36. Low Target: $15. High Target: $30.
Hannon Armstrong is a Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure. It’s a leader in the disclosure of the net effect on greenhouse gas emissions caused by its activities. Hannon Armstrong has been in this list since 2014, the year after it became public.
Hannon Armstrong is unique among Yieldcos in two ways. First, it invests in senior securities of clean energy projects, meaning that Hannon Armstrong will be paid before equity investors such as the other Yieldcos. It also has a broader focus, and its expertise in in financing allows it to invest in energy efficiency projects as well as the energy production and transmission infrastructure that other Yieldcos invest in.
When Hannon Armstrong’s stock price is strong, it issues new stock in secondary offerings, and uses that money to invest in projects. This boosts the long term growth of the dividend.
When the stock price is relatively weak, it continues to finance clean energy projects, but it sells the assets to third parties. This boosts short term earnings, but does not help the dividend in the long term. The bursting of the 2015 Yieldco bubble kept HASI’s stock priced depressed in early 2016, and the company did more than the usual number of third party financings. It signaled a planned return to investing on its own account in the second half of 2016, but the lower level of investment had the effect of lowering its dividend growth for 2017 to 10%, compared to the 12-15% it had grown in previous years.
The election result, the lower than expected dividend increase, and two negative articles from a short seller on Seeking Alpha have combined to push the stock price down almost to its level at the start of 2016, when it was already cheap. With a 10% dividend increase since then, this is the best opportunity to buy Hannon Armstrong since early 2015.
Hannon Armstrong unique and relatively low risk business model should make it a core holding for any investor wanting to invest in clean energy. &
nbsp; If you do not already own it, this is an excellent entry point.
NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%). Expected 2017 dividend: $1.00 to $1.10. Low Target: $12. High Target: $25.
The term “Yieldco” was first applied to NRG Yield (NYLD and NYLD/A), and the company rode the Yieldco bubble in 2014 and early 2015. During this period, I was often short the stock, as a hedge against the other, significantly better valued, Yieldcos. I added NRG Yield to the list last year, and the stock has advanced along with its dividend.
The company’s parent, NRG, develops both conventional and renewable energy projects, but remains committed to large scale renewable projects suitable for acquisition by NRG Yield. Such dropdowns will be limited, however, until the Yieldco’s stock price recovers, allowing it to issue new equity to fund the acquisitions.
NRG Yield remains in the 2017 list because of good traditional valuation measures (Price/Book and EV/EBITDA) and significant insider buying of the stock.
The reason I focus on the less liquid A shares rather than the more liquid and widely held C shares (NYSE:NYLD) is because this list is mostly targeted towards small investors for whom A shares should be sufficiently liquid for unconstrained trading. Other than liquidity, all the advantages lie with NYLD/A. Both classes of stock pay the same absolute dividend, but A shares are less expensive and produce a higher yield. A shares also have more votes, which will make them more valuable in any potential restructuring of the Yieldco.
Large investors who do face liquidity constraints may consider splitting their purchase between the two share classes.
Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10. High Target: $30.
Atlantica Yield was formerly called Abengoa Yield after its now bankrupt sponsor, Abengoa SA. Over the last year, Atlantica has made substantial progress disentangling itself from its former sponsor. Most importantly, it has achieved full autonomy and is now responsible for the entirety of its own operations.
The main remaining obstacle to its divorce from Abengoa are waivers to covenants on certain project debt which were triggered by Abengoa’s bankruptcy. The largest of these are needed from the US Department of Energy due to loan guarantees granted as part of the ARRA financial stimulus package in 2009. The Yieldco states that these negotiations are “very advanced” and I expect that the DOE will do everything in its power to finalize them before control shifts to the new administration on January 20th.
If it fails to do so, the likely new Energy secretary Rick Perry has shown himself to be pro-business when it comes to clean energy technologies, despite his denial of the science of climate change. He had a record of promoting renewable energy as an economic driver in his 14 year term as governor of Texas. I expect that Secretary Perry will focus on dismantling those parts of the Department of Energy which he believes interfere with companies’ ability to go about their business. I expect that will include granting the necessary waivers to Atlantica.
As Atlantica is able to finalize the necessary waivers, it will increase its dividend accordingly. If all had been achieved at the end of the third quarter, that would have been an annual dividend of $1.45, or a current yield of 7.5%.
NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%). Expected 2017 dividend: $1.38 to $1.50. Low Target: $20. High Target: $40.
NextEra Energy Partners’ is the poster boy for the widely held investor belief that Yieldco’s with strong sponsors deserve a premium price. I have long been skeptical of this belief on the grounds that the main constraint on Yieldco growth is not access to quality projects from a sponsor, but access to inexpensive capital from investors. But Yieldcos with strong sponsors do command a premium, and that can help the Yieldco to grow faster as long as the premium lasts.
That strength lasted for NRG Yield until NRG ran into trouble in 2015. Along with the Terraforms (TERP and GLBL) and Atlantica, NRG Yield proved that the sponsor could as easily be a source of Yieldco weakness as a source of strength. Uniquely among Yieldcos, NEP’s sponsor, NextEra (NEE) remains strong.
When NextEra was trading at $40-$45 in 2014 and 2015, it topped my list of overvalued Yieldcos. In early 2016 at the bottom of the Yieldco bust, it traded as low as $23, and I missed a chance to buy it because I was using all the available capital I had (as well as some borrowed money) to buy other massively undervalued Yieldcos I was more familiar with, and which had higher yields. I took profits on most of those trades last summer and fall. NEP is now starting to look relatively fairly valued because of a combination of strong dividend growth and a relatively flat stock trajectory. Unless the stock recovers, even NEP will not be able to achieve its annual 12% to 15% distribution growth targets through 2020, but a 5.3% current yield is high enough that I’m now willing to buy some and wait to see.
Other Income Stocks
Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00 (6.4%). Expected 2017 dividend: $1.00 to $1.06. Low Target: $10. High Target: $30.
Covanta is the US leader in the construction and operation of waste-to-energy plants. These plants incinerate trash (often called municipal solid waste or MSW) and use the resulting heat to generate electricity. Recyclable metals are recovered from the ash.
Waste to energy has a bad name among many environmentalists because it is a less valuable use for recyclable materials, and because improperly operated incineration of waste can lead to toxic emissions, such as dioxins, especially if the combustion temperature is too low. I include Covanta as a green stock because, as I discussed above, I believe its operations are a net positive for the environment. The MSW Covanta burns includes some recyclables, but this is also true for any MSW which is headed for landfills. In a landfill, the organic component of MSW emits methane which is an extremely powerful greenhouse gas, and the incineration allows the recovery of metals which would otherwise be land filled. Electricity generated from waste displaces electricity which might otherwise be generated from fossil fuels.
When it comes to dangerous pollutants from incineration, Covanta has
shown that it has the technical capabilities to operate safely, and emissions from incineration must also be compared to emissions from land filled waste and from the electricity generation that Covanta’s operations displace.
Trump and Covanta
In addition to an attractive current valuation, high yield, and strong insider buying, Covanta is well placed to benefit from possible initiatives of a Trump administration.
First, while Covanta is quite capable of controlling the emissions of its plants, loosening limits on power plant emissions in order to benefit coal are equally likely to benefit Covanta. Second, any large investment in domestic infrastructure is likely to increase the production of waste going to Covanta’s facilities, and to increase the prices of the metals Covanta recycles.
Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94. Annual Dividend: $2.05 (10.3%). Expected 2017 dividend: $2.05. Low Target: $18. High Target: $27.
Seaspan is a leading independent charter owner of container ships. On the whole, its fleet is newer, has larger capacity, and is more efficient than the worldwide fleet.
Container shipping is in the depths of a worldwide downturn, leading to massive industry overcapacity and low prices for ships and their leases. The long term nature of Seaspan’s contracts largely insulates it from these prices, but there is some turnover and leases cannot currently be renewed at prices which are anything like the old contracts.
While the current environment holds some risk for Seaspan, it also presents opportunities. The company recently scrapped some of its oldest ships and was able to replace them with newer, more efficient ships at close to the scrap price it received for the older ones. As low prices lead older ships to be scrapped, the overall supply of container ships will fall. This will in turn lead to higher leasing prices when the industry recovers.
I took an in-depth look at Seaspan and both its common (SSW) and preferred shares in November. You can read it here. Since then, the price of the preferred has fallen slightly, while the common had fallen less. This makes the case for investing in the Preferred even stronger than it was then. This investment can be done with or without the put hedge I describe in the article. I don’t think the put hedge will actually be needed, and I recommend it only for investors who take very large positions in the preferred relative to the size of their whole portfolio. This is what I have done: Seaspan Preferred shares are currently my largest holding.
Seaspan has several other classes of preferred stock, as well as exchange-traded notes. The notes (SSWN) have not fallen nearly as much as the preferred series have, so I find them less interesting. The different preferred shares are all similar, varying only in maturity date, interest rate, and market price. Since I wanted to pick one, I chose G because it is the farthest from maturity, but series D, E, and H could easily be substituted.
Trump and Seaspan
A Trump administration presents some risks for the global shipping industry because of the President-elect’s negative attitude towards trade. If his aggressive negotiation tactics lead to a global trade war, it will almost certainly worsen the shipping industry’s troubles. This is part of the reason I strongly prefer SSW-PRG over the company’s common shares. I think it’s very unlikely that the company will cease paying dividends on its preferred shares, but a substantial dividend cut on the common shares is very likely. I may become interested in buying SSW after that cut happens, if the cut is large enough that I become confident there are no further cuts in the future.
MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19. Annual Dividend: $0.14 (2.3%). Expected 2017 dividend: $0.14 to $0.16. Low Target: $4. High Target: $15.
MiX provides vehicle and fleet management solutions to customers in 112 countries. The company’s customers benefit from increased safety, efficiency and security. The company’s core customers are large, international corporations with large fleets. Many of these customers are in the oil and gas industry, and these have been reducing their vehicle fleets during the oil price downturn. The oil price recovery, which seems to have begun because of OPEC’s recent agreement to limit output should contribute to MiX’s growth this year. Despite the oil price headwind, MiX has managed year over year subscription growth of 10% or more in recent quarters.
Many of MiX’s other customers are in the logistics and transportation industries. All customers benefit from reduced fuel usage, better safety, and lower insurance premiums after implementing the company’s vehicle management solutions. Even when fuel prices are low, the increased safety and insurance savings can easily pay for MiX’s services.
In August, MiX repurchased 25% of their outstanding stock with cash on hand. This will lead to a 33% year over year growth in revenue and earnings per share for the next few quarters.
Trump and MiX
If Trump manages to accelerate the oil and gas drilling in the US, it should cause MiX current customers to purchase more vehicles, automatically adding to MiX’s subscriber base. If large industrial companies are involved in promised infrastructure investment or border-wall building, this will also add to the growth of the fleets of MiX’s current customers, easily adding to MiX’s top line growth without the cost of new sales.
Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.
Aspen Aerogels manufactures one of the highest performing types of insulation available with current technology. The company’s largest markets are in the most demanding industries where aerogel’s high R value, moisture resistance, and ability to withstand extreme temperatures command a substantial premium. The company’s largest applications are in refining. petrochemical processing, liquified natural gas (LNG), and power generation. The company is expanding into building products through a license agreement with Cabot Corporation.
2016 earnings have been disappointing for Aspen because of low oil and gas prices (which affect its refining and subsea markets), and because it has had to pursue patent enforcement actions at the US International trade Commission and in German courts.
The general uncertainty in the energy industry and the slowdown in its subsea markets has led Aspen to delay plans for a new manufacturing plant. Construction of this plant had previously been planned to begin this year. Management will commence ordering long lead time items needed for construction when they are again confident that end markets will support the additional supply.
Aspen and Trump
Recovering oil markets and offshore drilling should cause demand for Aspen’s products to follow suit, but its status as
a supplier to the oil industry means that an oil industry revival is not yet reflected in the stock price.
The disappointments of 2016 give investors the opportunity to purchase this company with its leading energy efficiency technology at a substantial discount to its 2014 IPO price of $11.
What’s Not In The List
I emailed a draft version of this article a day to a number of paying subscribers, and asked for their feedback. (I’m thinking about launching a premium service, and wanted to get a feel for demand from people who were actually willing to pay. One common question was about the stocks that did not quite make it, and the changes from the 2016 list. I will write a Year in Review article discussing the stocks in the 2016 list soon.
The reason I don’t typically mention stocks other stocks that I consider is simply to keep the workload down. There are five stocks that almost made it and are also in my portfolio. Here are the tickers: TSX:PIF, TSX:AXY, TSX:PUR, BEP, and AGR.
The incoming Trump administration and Republican Congress promise a weakening of federal support for many types of clean energy and stronger support for its fossil fuel competitors. This has not been lost on investors, who have been selling most well known clean energy stocks since the election.
Despite investors’ understandable fear, many if not most clean energy companies are unlikely to be harmed by the actions of a Trump administration. US support for clean energy has always been tepid, with the Republican Congress blocking most of the Obama administration’s efforts for the last eight years. The US has never given clean energy the support it deserves given the severity of the climate crisis, and coming attempts to withdraw what little support there is and bolster fossil fuel industries will come as advancing clean technology is increasingly making those fossil technologies obsolete. The transition to a clean energy economy can be slowed, but at this point it is inevitable.
Green minded investment advisors and climate activists I have been speaking to have also noticed another effect of the election. Voters who understand the challenge of climate change are reacting to frustration at the ballot box by looking for other levers they can pull to create change. Environmentally responsible investing is one such massively underused lever. The fossil fuel industry’s market cap is gigantic, while the market cap of all clean energy companies is tiny in comparison. A small shift of investment out of fossil fuels into clean stocks will not do much to hurt fossil fuel companies, but it can do a lot to help their clean energy cousins.
Selecting lower-risk clean energy companies such as most of the ones in this list means that the environmental investment lever can be pulled without increasing the risk of most investors’ portfolios. And it can do a lot for the companies you buy. Most of the Yieldcos in this list were beginning to issue new shares to acquire more assets and grow last summer, when stock prices had only recovered to a fraction of their losses from the popping of the 2015 Yieldco bubble. Bringing their stock prices back up to those levels will mean their growth will resume, and continue to finance new wind and solar farms.
It’s even harder to predict what will happen to the stock market in 2017 than usual. Certain market sectors like banking seem overvalued, but when I look at these stocks, I think they are undervalued. The broad market is overdue for a correction, but Yieldcos have already had one. With this backdrop, I am buying well valued stock opportunistically, but keeping a large allocation of cash in reserve in case we have a real market crash.
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Tom – What are your thoughts on EVA? I noticed this was absent from the list this year.
I’ll talk about it in my upcoming “Year in Review” article, along with the other ones I dropped. Getting dropped from the list does not mean I don’t like the stock, just that I like others more.
SSW is container ship. Why in clean energy?
@Me_Xman: Quoting from my in-depth article on Seaspan from November:
“Regular readers may wonder why I’m interested in Seaspan at all, given that I do almost exclusively green investing. Global container shipping is a key part of world trade, the antithesis of the “buy local” movement. Buying local is often seen as green, but in my opinion, that depends on what you are buying and how it was made.
I admit that this is very subjective, so if you think that global trade is always bad, you should avoid investing in Seaspan. That said, here is why I consider Seaspan green:
Shipping is, pound for pound, the most fuel efficient way to move goods over long distances.
Seaspan’s ships are among the world’s most efficient.
Fuel efficiency can be further improved by “slow steaming,” a.k.a. going more slowly. Slow steaming requires more ships to move a fixed number of goods the same distance in the same amount of time, and so this easy way to reduce fuel use has the effect of increasing the demand for ships, which in turn benefits Seaspan.
In short, I expect that Seaspan should be a net beneficiary of worldwide efforts to reduce greenhouse gas emissions and fuel use. This precisely my definition for a “green” stock. I invest in companies I believe will gain from efforts to fight climate change and other environmental problems.”