Q3 portfolio review: a floor for clean energy developers?

Tom Konrad, Contributor
October 09, 2013 |

In the third quarter, clean energy stocks in general continued their upward trend, turning in a 27 percent gain for the quarter and a 64 percent gain for the year as a whole, as measured by my benchmark and most broadly held clean energy ETF, Powershares Wilderhill Clean Energy (PBW.) This brings PBW back up to levels last seen in September 2011.

The broad market and my model portfolio of Ten Clean Energy Stocks for 2013 have also done well. My small cap benchmark (IWM) is up 10 percent for the quarter and 31 percent for the year, while my model portfolio is up 10 percent for the quarter and 21 percent for the year. I am disappointed, however, that my model portfolio now looks virtually certain to under-perform its sector benchmark for the first time since I started writing about in 2007, and the odds don't look good for beating the broad market, either.

Sectors

While some of my under-performance can be attributed to my long-term avoidance of the solar sector and stocks which are household names (which has served me quite well over the last several years,) the poor performance of renewable energy developers and internationally listed companies (mostly in Canada) have also been a significant drag on the model portfolio.

Along with my model portfolio, I also included a list of six alternative picks of clean energy companies I liked, but which I did not include in the main list because I felt they were not as well valued as the others. I intended that readers who were uncomfortable with any of my top ten picks to substitute from this alternative list, instead. For instance, some of my picks are rather illiquid, and so larger investors would be unable to buy them without moving the share price too much. Similarly, readers who were not unwilling or unable to buy stocks which only trade internationally could put together a portfolio of nine U.S.-listed stocks.

The chart above shows what the effects of such substitutions would have been, and also shows the performance of the clean energy sub-sectors (Efficiency, Efficient and Alternative Transportation, and Renewable Energy Developers) that account for at least four stocks among the sixteen.

As you can see, readers who decided to only use the highly liquid stocks from the two portfolios (the "Liquid" portfolio) or the U.S.-Listed stocks (the "Domestic" portfolio) did somewhat better than those who decided to use my ten top picks. This is typical of the early stages of investor interest in a sector: The easy to buy and research stocks advance first and investors become familiar with a new (to them) sector. If investors' renewed interest in clean energy stocks persists, we can expect its effects to spread to less liquid, lesser known, and more esoteric parts of the sector.

You can't get much more esoteric than my collection of small and micro-cap Canadian renewable energy developers with listings on the Toronto Stock Exchange (TSX): Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF), Alterra Power (TSX:AXY, OTC:MGMXF), US Geothermal (NYSE:HTM, TSX:GTH), and Ram Power Group (TSX:RPG, OTC RAMPF). This group declined an average of 22 percent for the year (including the effects of the declining Canadian dollar.) All have operations outside Canada, but only one (US Geothermal) also has has a U.S. listing, and has significantly outperformed the other three. The three TSX-listed developers were down an average of 34 percent for the year, although they were up 1 percent in the 3rd quarter, while US Geothermal is up 16 percent year-to-date, despite having been, in my opinion, less undervalued in January.

I think the enthusiasm for U.S.-listed clean energy stocks is largely driven by the resurgence of solar and other "story" stocks such as Tesla Motors (NASD:TSLA.) Investor enthusiasm for the Tesla story may also deserve credit for some of the strong performance (30 percent for the quarter, 53 percent for the year) of the transportation-related stocks in my portfolio (which does not include Tesla).

Developing a Bottom

I included the four developers in the lists because, at the start of the year, I felt they were all trading at significant discounts to what their assets would fetch on the open market. Most stark of these was Finavera, which had recently reached a deal to sell most of its wind farm developments to Pattern Energy Group (NASD:PEGI). Unfortunately, two of the four wind developments Finavera was planning on selling turned out to be nearly impossible to permit, and then and a few delays shrunk my C$0.80 valuation at the time to just C$0.22, about what the stock was selling for in January. At C$0.13 it's still a good value, but we're unlikely to make a profit on this one.

The news at the other three developers, US Geothermal, Ram Power, and Alterra Power, in contrast, has been better, yet only US Geothermal has advanced. All three have been producing power and positive cash flow, yet can't seem to catch investors' attention. Yet given the current valuations, they don't need investor attention to produce handsome returns from current prices. Including Pattern, there are a number of publicly traded renewable energy power producers would could buy US Geothermal or Ram Power outright and increase their cash flow per share. Given the exercise of Pattern's over-allotment option, the company has over $60 million it can use to purchase renewable energy companies projects.

At Pattern's current price of $23.29, it is trading at a forward dividend yield of 5.4 percent, at the low end of the 5 percent to 8 percent range of the five Canadian Power Producers discussed here. If US Geothermal's distributable income were valued on the same basis, it would be worth $0.66 per share for an 8 percent distributable income yield, based on management's projections for 2013 EBITDA and my interest estimates. Ram is in the process of remediating some of the wells at its San Jacinto-Tizate project, and this seems to be progressing well. When this is complete, the projects should be able to resume distributions to Ram. Hedge fund manager Keubiko valued Ram at $1 per share based on this one project in July.

Alterra is currently generating C$55 to C$60 million in annual EBITDA, and has debt service obligations of C$36 million for the next three years (after which they decline.) That leaves C$20 million of distributable income, or over 4 cents a share, which would lead to a value per share of C$0.54 at 8 percent, or C$0.86 at 5 percent, valuations which assign no value to the company's development projects and rapidly declining debt service in 2017 and beyond. Given the conservative nature of this valuation, I think C$0.86 is closest to Alterrra's true value, despite the fact that the stock is currently trading at C$0.30. Alterra would not need to be bought out to achieve this valuation, all it would need to do would be to start paying a dividend, and get a U.S. stock market listing (as Brookfield Renewable Energy Partners (NYSE:BEP)) recently did.

All three might reach higher valuations than I outlined above by continuing their strategies of developing projects and improving cash flows, but that would likely be a much longer term proposition.

Conclusion

With these developer stocks having stopped declining, and conservative valuations of their assets worth two to six times their current stock prices, I've been adding to my positions in Ram Power and Alterra. Potential buyers are multiplying as renewable energy power producers get access to cheap capital on the U.S. markets, meaning more money will be chasing a limited pool of assets. These under-priced TSX-listed developers should become increasingly attractive acquisition targets for the likes of Patten and Brookfield, which memorably bought Western Wind Energy earlier this year.

While such buyouts take time, an offer or two later this year could do a lot to bring my model portfolio's performance up closer to its benchmarks.

I plan to follow up with a discussion of recent news events affecting the rest of the stocks in my model portfolio soon.

Disclosure: Long FVR, AXY, HTM, RPG, BEP. Short TSLA 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 obtained from sources believed to be reliable, but not guaranteed.

This article was originally published on AltEnergy Stocks and was republished with permission.

View the original article here

Solar: A High-Yield, Low-Risk Financial Instrument for Your Investment Portfolio

Recent talk about the upcoming fiscal cliff has caused many investors to reflect upon the real long-term threats to their own portfolios. It occurred to me that there are some striking similarities between the current rate of return on a solar investment and the rate of return one would have earned on a bond investment during the high-interest-rate era of the late 80s. Many people are dead set against bonds right now and for good reason — the fact is that bonds, or any interest-bearing vehicles for that matter (especially ones that are guaranteed like U.S. Treasury Bonds, the most secure bonds in the world), are just not paying anything. This certainly was not always the case.

In the late 80s, the investing public was typically earning 8.5–9.0% (and even more on high-risk bonds). Not surprisingly, many portfolios at that time were 100% invested in bonds. Today, the nominal interest rate is a paltry 1.0% and people are staying away, but imagine if rates were much higher. It's fair to say that if investors could, for instance, make 8.0% or 10.0% on their money, they would come back to the bond market in droves.

One can still earn such a high rate of return on such a low-risk investment. It’s called solar. Here’s how that scenario would unfold.

Consider a $15,000 investment in a hypothetical 8.0% yield, low-risk, 5-year bond vs. the same dollar amount invested in a solar purchase for a home or a business. The bond would yield $1,200 in dividends annually ($100/month). An average sized solar residential system (5 kW) would cost about $15,000 installed (after 30% Federal Tax Credit and utility rebate) and would routinely save owners around $125/month on their electric bill. Since the electricity generated from the system would be covered under warrantee, it’s fair to consider solar low risk — unless you think the sun might not rise tomorrow morning or that your utility might go bankrupt. Notice how money saved on the electric bill could be looked at as a dividend. Now, when the 5-year bond matures, investors would cash-in that bond and receive their $15,000 back.

Comparing this idea of cashing in a bond at maturity to a solar investment, let’s say the investor wants to sell his or her home after five years. A recent study from Berkeley Lab looked at 72,000 homes sold in California from 2000 to 2009 and concluded that, as far as an investment goes, solar homeowners are able to increase the resale value of their homes by more than the system’s installed cost. In other words, they get their money back. (Click here for the full report). Prior to this study, solar investments were frequently compared to home improvement investments like remodeling a kitchen or bathroom, where owners do not get their money back (also of note: the higher assessed value of a solar property is not subject to taxation per California state law). The Berkeley Lab study was a powerful finding and made it easy for investors to see the similarities between funds gained on the maturity of a bond and gains attributed to the addition of solar realized from the sale of a home.

Also, by adding solar, a homeowner is able to hedge against the decreased purchasing-power effects of future electricity rate increases. In California, the cost of electricity has risen at the rate of 6.7% per year during a 30-year period (Source CPUC Electric Rate Compendium Nov. 2001). Nationwide, electricity rates are expected to increase 12.64% on average (according to Southern California Edison’s AEE 2013 Electricity Outlook). Take our example again, looking beyond year five and factoring in future expected electricity rate increases. To be conservative, we will assume electricity costs increase by 5% per year. Let’s look at the money saved (which looks like a dividend, right?) as well as Return on Investment. Whereas the homeowner saves $1,500 in year 1, he or she saves $1,575 in year 2 because of the increased cost of future electricity, and so on. Thus, a 10% ROI in year 1 increases to an eye-popping 24.2% in year 20. The table below shows that a homeowner who adds solar today will have saved (earned) $49,597 in twenty years. By the same token, a homeowner who decides not to go solar today, will end up paying $49,597 extra for electricity in that same time period.

Forward-thinking investors tend to be good stewards of their resources while extrapolating what the future will hold. They would undoubtedly see that investing in solar is not only judicious for the investor but extremely practical. As the cost of electricity predictably rises, negatively impacting the purchasing power of future money, solar energy becomes an attractive, financially appealing investment. Those whose portfolios factor in longevity as well as diversification will wisely venture into areas that bode well for their economic futures. Solar thus serves as an intelligent and expedient choice for economically prudent individuals concerned about their financial growth.

I would be happy to help you to go solar. Call me at 773-802-0606 and I will patiently guide you through the entire process and help you get the best deal, regardless of your geographic location, from the best company in the market. Take care, Mark

View the original article here