Ten Clean Energy Stocks for 2014: March Update

After a rough January, the stock market recovered in February, while clean energy stocks partied like it was 2013.

My annual Ten Clean Energy Stocks model portfolio also had a good month, rising 6.0 percent, and is now up 4.7 percent for the year in dollar terms, and up % in local currency terms. My broad market benchmark (the iShares Russell 2000 index) is up 7.5 percent for the period and 1.5 percent for the year. Clean energy stocks soared higher, with the Powershares WilderHill Clean Energy ETF (NYSE:PBW) up 16.3 percent for the period and 15.7 percent for the year.

Turning to individual stocks in the model portfolio, several companies have reported 2013 results. I cover this and other significant news below.

Individual Stock Notes

(Current prices as of February 3rd, 2014. The "High Target" and "Low Target" represent the ranges within which I predicted these stocks would end the year, although I expect a minority will stray beyond these bands due to unanticipated events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
Current Price: $14.05. 12/26/2013 Price: $13.85. Annual Yield: 6.3%. Low Target: $13. High Target: $16.
YTD Total US$ Return: 1.4%

Sustainable Infrastructure REIT Hannon Armstrong announced full year results. While management reaffirmed their 13 percent to 15 percent target for core earnings and dividend growth, the company took a provision of $0.69 per share on investment in a geothermal loan, which was a larger write-down than I had anticipated. Some of this may be recovered in future quarters.

Because of the loss, management presented significant details about the credit quality of its other assets in the conference call, 96 percent of which is investment grade. This seems to have reassured investors, as the stock has been rising to bring its yield more in-line with other clean energy income stocks.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
Current Price: C$5.30. 12/26/2013 Price: C$4.85. Annual Yield: 4.5%. Low Target: C$4. High Target: C$6.
YTD Total C$ Return: 10.5%. YTD Total US$ Return: 6.8%

Green Building company PFB scaled back its stock repurchase program in February, but board member and large shareholder, Edward Kernaghan has continued his purchases, buying 3,700 shares since the last update. The company paid its regular C$0.06 dividend in February.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
Current Price: C$3.84. 12/26/2013 Price: C$3.55. Annual Yield: 7.8%. Low Target: C$3. High Target: C$5.
YTD Total C$ Return: 10.3% . YTD Total US$ Return: 6.6%

Independent power producer Capstone will hold its annual results conference call on March 7th.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
Current Price: C$5.44. 12/26/2013 Price: C$4.93. Annual Yield: 4.1%. Low Target: C$4. High Target: C$7.
YTD Total C$ Return: 11.5% . YTD Total US$ Return: 7.8%

Waste heat recovery firm Primary Energy announced the long-anticipated recontacting of its largest facility on Friday. In the two trading days since, only 920 shares have traded, compared to a three month average daily trading volume of over 20,000 shares. This reflects a lack of willing sellers as shareholders await the company's annual results, to be released on March 18th.

5. Accell Group (Amsterdam:ACCEL, OTC:ACGPF).
Current Price: €14.27. 12/26/2013 Price: €13.59. Annual Yield: 3.9%. Low Target:€11.5. High Target: €18.
YTD Total € Return: 5.0% . YTD Total US$ Return: 5.0%

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Earnings Season For 10 Clean Energy Stocks

The third quarter earnings season has been quite eventful for my Ten Clean Energy Stocks for 2013 and six alternative picks model portfolios, so much so that writing about them has taken a back seat to keeping up with the announcements. There were a number of earnings disappointments and earnings announcements which were in line with my expectations but the market treated like disappointments. These resulted in an overall decline of 2.5 percent for the portfolio since the last update, even as my industry benchmarks, the Powershares Wilderhill Clean Energy (PBW) and my small cap benchmark (IWM) were up 1.0 percent and 3.9 percent over the months since October 15th.

Individual Stocks

The only good news came from ground-source heat pump manufacturer Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF.) Waterfurnace reported earnings up 51 percent compared the previous-year period. The strong results arose from a large increase in sales to Canada, as that market recovered from the end of a federal incentive program in March 2012. Also benefiting earnings was a decrease in operating expenses due to successful cost reduction efforts in 2012. Analysts at Canaccord Genuity raised their price target for Waterfurnace from C$25 to C$29 in response to the results. Waterfurnace rose 18 percent for the month.

Leading environmental services firm Waste Management (NYSE:WM) also rose significantly, up 10 percent for the month, despite the fact that earnings were in line with analysts' expectations. While I consider Waste Management a long term hold as a reliable dividend stock, I've taken advantage the recent price appreciation to increase my income from the position by selling covered calls.

The market reacted negatively to strong earnings at utility demand-side management contractor Lime Energy (NASD:LIME). The company has been making excellent progress shedding unprofitable business lines and focusing on its utility business, with revenue from continuing operations jumping 55 percent and gross profit up 125 percent compared to the comparable quarter a year ago. Unfortunately, liquidity still remains a significant issue at Lime, despite its September raise of $2.5 million and conversion of debt into preferred stock in September. The liquidity section of Lime's third quarter report states, "While it is possible that our current capital will be sufficient to carry us until we reach profitability, it is also possible that we will need to raise additional capital before our cash flow turns positive and we are able to internally fund our operations."

Investors are most likely selling in anticipation of another round of funding which could further dilute existing shareholders. The company is fortunate to have a number of large shareholders who see the potential of its utility business and have been willing to repeatedly step up to cover its cash needs. Given the strength of its utility business, I anticipate that they will only need to come back for one more round.

Although turnkey Energy Service Company (ESCO) Ameresco, Inc. (NASD:AMRC) continued to grow its backlog at a 15 percent rate compared to the previous quarter, conversion rates continue to disappoint. Last quarter Ameresco’s CEO, George Sakellaris stated that he saw conditions improving, but revenue grew only 9 percent year over year, in large part due to five delayed renewable energy projects and customer delays in both the US and Canada. Historically, it has taken six to 12 months for Ameresco to convert projects in the backlog to revenue.

Although this is the fifth consecutive quarter that Ameresco has missed earnings, I don't think there is anything fundamentally wrong with its business model. Navigant predicts that the energy service business will grow 8 percent next year and reach $8.3 billion by the end of the decade from $4.9 billion this year. Ameresco is already seeing a pick-up in both its revenue and backlog, while rivals such as Johnson Controls (NYSE:JCI) have yet to see improvement. I took the opportunity of the sell off to add to my position.

Kandi Technologies (NASD:KNDI)

Chinese EV and off road vehicle manufacturer Kandi Technologies has been growing its legacy off road vehicle business rapidly, but sales of EVs have yet to take off, with only 494 sold during the quarter. I expect the pace of EV sales to pick up significantly in the fourth quarter. EV sales should be driven by now that China's much-delayed subsidy for "New Energy Vehicles" has been renewed. This seems to favor makers of low-speed electric vehicles like Kandi. The roll-out of a public EV sharing system using Kandi vehicles in the city of Hangzhou should also contribute to EV sales this quarter, as could its joint venture to build EVs with Geely Automotive.

On the other hand, I found the announcement on October 28th that Kandi was purchasing $30.3 million worth of batteries for the roll-out of the Hangzhou public EV sharing system concerning. Under the original agreement, the batteries were to have been supplied by Air Lithium (Lyoyang) Co. Ltd.and paid for by the local utility. The capital-light model of getting others to pay for the most expensive EV component, the battery, was one of the things which attracted me to Kandi in the first place. Now Kandi seems to be buying the batteries itself.
With current liabilities already exceeding current assets by $133 million to $89 million, I would not be surprised if Kandi has to raise more capital soon in order to increase the pace of EV sales significantly.

I still hold the short $10 KNDI calls expiring in December that I mentioned in the last update.

Alterra Power (TSX:AXY, OTC:MGMXF)

Diversified renewable power operator and developer Alterra had a strong quarter, producing a profit of 3 cents a share for the quarter compared to 2 cents for the prior year. More importantly, EBITDA is rising as a result of Alterra's investment program. At C$0.30 a share, the company has an Enterprise Value of only 9-10 times 2013 EBITDA. More mature Canadian power producers trade Enterprise Values of at 15 to 20 times EBITDA. Alterra's low multiple might be understandable if it were unable to cover its debt payments, but these are comfortably below Alterra's free cash flow.

Six Alternative Clean Energy Stocks

In the interest of getting this out in a timely manner, I plan to write a separate follow-up article discussing the results of the stocks in my alternative portfolio.

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Ten clean energy stocks for 2013: first mid-term review

I missed my regular monthly update on my ten clean energy stocks for 2013 model portfolio last month, and many happen in individual companies since. For this reason, I be divided this half-yearly update in two parts. This part will look at the performance of the portfolio as a whole and the reasons why it is lagging the benchmarks. The next part, the performance of specific stocks will look at news.

Since the last update on the 5th of may, my portfolio made progress 3.0 per cent for a 10.5 percent in the first half back. The portfolio continues to however both measured the mass market of small-cap stocks on my scale the iShares Russell 2000 index (IWM) and the outstanding performance of the clean energy stocks, measured on the leading clean energy ETF, the power shares WilderHill clean energy index (PBW) left behind.

IWM inched 2.7 percent total 17.9 percent return, while PBW first half year back scored an extra 13.9 percent total 34.9 percent.

Clean energy boom

Leading clean energy stocks such as Tesla (NASD: TSLA), SolarCity (NASD: SCTY) and other solaren stocks such as first solar (FSLR) have investors attention and production were recently fishing by stellar returns.

The former seem high riding are, because they have put the naysayers in the shadow, through the provision of better than expected. Electric cars such as the Tesla model S may not be big financial investments, but by all reports, they are great cars. The skeptics could could well remind you that much more than total cost of ownership (TCO) of the car purchase is decision. If TCO all car buyers would ever taken into consideration, we would all be driving small business and municipal budget with an SUV would not exist.

The stronger solar stocks such as first solar gains have more to do with the extreme lows, in that in this sector declined in recent years. While excess capacity still threatens the industry has begun to consolidate and module prices, if not increase, have at least finished descent. The company, which is expected to survive the Shake-Out look like are recovered.

Both of these trends have led to a strong rally for clean energy stocks, which as we have not seen since the financial crisis.

Portfolio performance

Along with my model portfolio I also a list of six alternative tips of the clean energy companies, I gladly recorded that, but I do not in the main list contain that, rated because I felt they were not as good as the others. I wanted that readers who were uncomfortable selects ten with one of my top instead these alternatives to replace list. For example my picks are more illiquid, and larger investors would not be able to buy them without the share price too much movement. As well as readers who were not able to buy shares, unwilling or not could the only international trade a nine publicly traded US stock portfolio put together.

The above table shows, what would have been the impact of such replacements, and the performance of its clean energy subsectors (efficiency, efficient and alternative transportation and renewable energy developers) also this account for at least four stocks shows sixteen.

As you can see, a focal point of the most liquid stocks have produced the same half-year return as a model portfolio and a purely domestic portfolio would have performed only slightly better. But as a purely international portfolio quite badly made had driven partially by the 5.6 percent decline of the Canadian dollar: five of six listed shares trade in Canada as Toronto Stock Exchange has a large proportion of clean energy companies all over the world.

The core of the problem was that renewable energy developers: Finavera wind energy (TSX-V: FVR, OTC: FNVRF), Alterra power (TSX: AXY, OTC: MGMXF), US geothermal energy (NYSE: HTM, TSX: GTH), and RAM performance group (TSX: RPG, OTC RAMPF). This group dropped an average 23 percent for the year (including the effects of the declining Canadian dollar), despite a number of positive developments for the individual names. All are trading a a substantial discount to the value of their assets with Alterra and RAM power cash flow positive, and us geothermal profitable on a GAAP basis. Finavera, is now in the possession of its assets for sale and I expect that it the current stock price equal money more than double by the end of next year to have.

A bright spot was the performance of my taking alternative transportation and clean transport. I think less by tailwind of Tesla as individual factors in specific enterprises; I'll have the information in the next part of this update.

Conclusion

I hope that the current has clean energy rally continues. This is the case, I am sure that it will bring my less flashy yet more dust will go out for dinner. On the other hand, if the stock market starts excitement for renewable energy companies continue to spread, perhaps renewable energy developers a bit of fairy dust. I would rather fly and eat a little dust than drown in the mud.

The rally "Falter", or even reverse my picks should relatively better, as they have in the last few years. We hope that this happens not: my last years performance was small consolation for some rather gloomy times in terms of clean energy.

Stay tuned for my summary of the last few months of the individual stock news performance and company.

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Is something good buying clean energy stocks?

As someone who helps people invest in green stocks, I can tell you from first hand experience that investor enthusiasm has everything to do with recent financial returns, and not much to do with the good we’re doing.

In 2007, when practically any stock which could be labeled green was going stratospheric, my phone was ringing off the hook. Then came the crash in 2008, with green stocks falling more than the market as a whole. Worse, they failed to participate in the market recovery since then. Green investors are a dedicated lot. Many of my clients worried that the slump might never end, but none left. But the calls from new clients became very few and far between.

Finally, in late 2012, green stocks began to rally. The leading clean energy ETF, PBW, is up 40 percent from its November low. The leading solar ETF, TAN, is up 65 percent from its low.

The phone is ringing again.

Why the Difference?

To judge by the comments from Volt owners, their enthusiasm has a lot to do with the regular thrill they get driving by a gas station without stopping. Whenever they drive, they are reminded that they’re doing good for the environment. This makes them feel good, and that feeling keeps them feeling good about their cars, even without positive financial returns.

A green stock portfolio is different. Few investors make the emotional connection between their green stocks and the success of green companies.

Too Cerebral

Green money managers, in general, are not much help. I asked my panel of thirteen green money managers, ranging from investment advisors to hedge fund managers how buying green stocks helps green companies. Here is a sample of their responses:

Investment advisor Jan Schalkwijk, CFA at JPS Global Investments:

In theory, higher demand for green stocks — to which small investors would contribute by purchasing green stocks, mutual funds, and ETFs — should decrease the cost of capital for these companies, thus improving their ability to expand. Additionally, to the extent that the purchase is funded by a redemption of a non-green stock, this should increase the cost of capital for that company; thus reducing its scope for expansion. However, I don’t think small investors have enough clout to make this theory pan out in reality. It really requires big buy-in from large investors to make a dent.

Solar hedge fund manager Shawn Kravetz at Esplanade Capital:

[T]he small investor is in effect providing capital to the green company and depriving capital of other alternatives. While the green company has already raised the actual capital, the market purchase fuels demand for that sliver of ownership and in essence rewards the green company, making it easier and lower cost for them to raise more capital in the future and thereby spread their greenness. One investor does not move the needle per se, but the sum of multiple such investors indeed does.

That’s all true, but it does not exactly get the heart racing. Schalkwijk, Kravetz and I are immersed in the stock market on a daily basis. To us, moving the price of a stock a smidgen is very real, we do it and see its effects regularly. To the average small investor, however, this logic must seem hopelessly abstract.

Your Money, Direct to Clean Energy Projects

Fortunately, it’s not the whole story.

With the arguments for investing in green stocks so intellectual, it’s no surprise that even the most environmentally minded prospective investors are more interested in last month’s returns.

On Monday, I spoke to John Fullerton is the Founder and President of Capital Institute. The Capital Institute’s mission is to transform finance to effect a more sustainable economy. Its focus is on large institutional investors such as pension funds and endowments, but he agreed to speak with me about my personal focus: small investors.

In general, Fullerton thinks that the focus on trading in the stock market makes it very difficult for the sustainable investor to affect change. But he sees some exceptions. In particular, Master Limited Partnerships (MLPs) and REITs return their cash flows to investors, so they need to conduct secondary offerings (sell shares) whenever they make new investments. Investors in these vehicles are buying the future cash flows derived from the expansion of the enterprise, not just speculating on a future stock price.

At the moment, the MLP structure is limited to depleting resources such as fossil fuels and their transport, and so are not likely to be of interest to green investors. However, the MLP Parity Act, which was designed to correct this imbalance, has been re-introduced in the Senate with bipartisan support. If the act passes, small investors will have the opportunity to invest in publicly traded MLPs which will directly use the money to fund solar, wind, geothermal, and other clean energy projects.

For now, there are two publicly traded REITs investing in clean energy projects. The larger of the two is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), which went public last month and is investing the proceeds in eight clean energy projects that it had lined up in preparation for the IPO. Since Hannon Armstrong is a leading financier of clean energy projects, investors can be confident that secondary offerings to fund other projects are not too far in the future. By buying and holding HASI, they increase the amount of money the company can raise for new projects with a fixed amount of stock. The profits from those projects will then be returned to the investors as dividends.

With the second clean energy focused REIT, Power REIT (NYSE:PW), the connection between the small investor and the clean energy project they are financing is even more direct. Power REIT has just signed a term sheet for the acquisition of 100 acres of California land underlying approximately 20 MW of to-be-constructed solar projects for $1.6 million. PW will fund that purchase with a combination of debt and equity.

The equity will be raised by the company selling stock through a broker on the New York Stock Exchange under PW’s existing At Market Issuance Sales Agreement. In other words, if you buy the stock today, there is a good chance that the money won’t go to another investor; it will go straight to Power REIT to fund a solar farm. Even new investors who buy from other investors are directly helping by keeping the price up and ensuring that for every share PW sells as much money as possible helps finance the solar farm. Profits from the solar farm will then flow back to Power REIT and be returned to investors as dividends.

Venture Capital

Many small investors wanting to make an impact envy the venture capitalists (VCs) who can fund a start-up green technology company with a better battery or a more efficient wind turbines design.

They should not be jealous. VCs take their cues from the stock market, not the other way around. Without the stock market and the ability to sell a company to ordinary investors in an IPO, the only ways for venture capitalists to get a returns on their investments would be to sell them to other companies, or wait for the start up to generate enough profits to pay them back itself.

Many VC-backed companies are sold to other firms, but this is a second choice option, mostly used when stock market valuations are low. Waiting for a start-up to pay back its initial investors is simply not an option of VCs: the returns take too long. They prefer the money sooner, in five to ten years at most, so they can move on and fund the next promising start-up.

Because VCs count on IPOs for their best returns, they’re much more likely to fund start-ups in sectors with high valuations. When solar stocks are in the stratosphere, VCs fund solar start ups. When Smart Grid stocks are all the rage, VCs will be looking for the next great smart grid technology.

It’s not only First Solar’s (NASD:FSLR) management and shareholders who are paying attention to FSLR’s share price. It’s VCs, and all the entrepreneurs hoping to get those VCs to fund the next breakthrough solar technology.

We’re Invested in More Ways Than One

In addition to pointing out that buying a green company helps its stock price, Shawn Kravetz made another point:

[W]hen people own stocks they tend to patronize and talk about those companies. This vested interest and evangelism, when aggregated, does move the needle.

Fullerton makes a similar point in a recent blog post. He argues that we should understand investment in the context of a holistic decision-making process that seeks to harmonize (not trade off) financial, social, and ecological objectives.

Both are saying that it’s too simple to just look at the effect our investment are having on companies, we also have to consider the effect our investments have on us. People whose retirement depends on the continued profits of a coal companies are much more likely to give those companies a sympathetic ear when they complain that regulations to limit mercury emissions (or any other environmental harm) are too expensive and will undermine their profits.

If we invest in companies that stand to lose from the shift to a sustainable economy, the vested interests we are fighting are our own. Much better to invest ourselves, both financially and emotionally, in companies that will benefit from the changes we know must be made to protect our planet and our children.

Conclusion

Even the smallest investors’ green investments make a difference. This is most direct when they buy the shares of companies in the process of raising money for green investments. Yet they also makes a difference to a company’s ability to reward valuable employees with shares or options, and to the prospects of start-ups in similar industries. Higher prices for green stocks mean more green companies having successful IPOs, and more green start-ups secure funding.

Perhaps most important are the effects owning a slice of a green company has on the investor. It is much easier to make the right decisions for the planet and our future when we know the stocks we own will benefit from those decisions as well.

When green investors understand the very real changes their investments are having on the world, perhaps they’ll love their portfolios as well, like Volt owners love their cars.

Disclosure: HASI, PW

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Energy Efficiency Stocks Rally on Shaheen-Portman Bill

Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH) are reintroducing their Energy Savings and Industrial Competitiveness Act, supported by a broad range of industry leaders, energy efficiency advocates, and environmental stakeholders. A similar bill passed the Senate Energy and Natural Resources Committee in the 112th Congress with broad bipartisan support, but drew fire from Republicans for expanding a Department of Energy loan program. This bill eliminates that provision, along with another revolving loan program which had been intended to fund energy efficiency upgrades.

A representative of insulation manufacturer Owens Corning (NYSE:OC) applauded the bill. She said,”Energy efficient buildings must be a cornerstone of National Energy Policy as the building sector remains the nation’s single largest energy consumer. As the residential insulation market leader for over seven decades, we are keenly aware of the energy savings, environmental improvements, and job creation opportunities derived from strong energy efficient buildings policies and practices.”

Owens Corning’s shareholders cheered as well. Although the broad indexes were down at mid-day, Owens Corning stock was up 0.2 percent.

More specialized energy efficiency companies were also rallying. Waterfurnace International (TSX:WFI, OTC:WFIFF) rose 0.2 percent, while turn-key energy solution provider Ameresco (NYSE:AMRC) was up 3.7 percent. Energy efficiency LED lighting players Cree (NASD:CREE) Revolution Lighting (NASD:RVLT), and Phillips (NYSE:PHG) were also up, although broader conglomerates with a strong energy efficiency focus, such as Honeywell (NYSE:HON) and Johnson Controls (NYSE:JCI) followed the broader market down.

The Bottom Line

The bill’s success is not guaranteed, but the senators have spent months of negotiations getting buy-in from more than 200 groups and organizations, from the Union of Concerned Scientists to the U.S Chamber of Commerce.

If the Senators have or will gather enough support for a version of this bill to make it into law, expect many of the energy efficiency stocks listed above to rally further, although that is far from the only factor which will be affecting these stocks over the next several months.

Disclosure: Long AMRC, WFIFF, JCI

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.

A previous version of this article was first published on the author's Forbes.com blog, Green Stocks on April 18th and on AltEnergy Stocks and was republished with permission.

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