Best stock to invest in
Tom Konrad CFA
The History and Future of the “10 Clean Energy Stocks” Model
2016 will be the eighth and possibly final 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 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 managed accounts), 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 has been only one intra-year trade so far, in
2013 in the event of a bankruptcy.
Despite (or perhaps because of) the lack of trading, the model
portfolios have performed well, at least relative to clean energy
stocks in general. The model portfolio has outperformed its
benchmark every year since 2008 except 2013. That year it
returned 25% compared to the benchmark’s 60% return.
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
The move to less risky stocks has also been a function of my
growing personal focus on high yield Clean Energy stocks.
The only current Clean Energy mutual fund or ETF is the Global X
YieldCo ETF (YLCO),
which was launched in May. Its low liquidity and worse
performance will probably prevent it from gathering enough assets
for long term viability.
I’ve been talking to investment advisory groups and mutual fund
companies about possibly launching a mutual fund or other pooled
fund based on a Global Green Equity Income Portfolio (GGEIP) which
I’ve been managing in a seed account since the end of 2013.
The seed account has had excellent returns (up 6.6% in 2014 and
12.6% in 2015) while YLCO and fossil fuel based income
alternatives have mostly fallen.
If I am successful in making GGEIP available to retail investors,
SEC rules will likely prevent me from continuing to update the
list regularly. That is why this may be the last such model
portfolio. Or it may continue in a slightly different form:
Windenberger has offered to continue the updates if I am
The Making of 10 for 2016
Not only are income stocks my personal focus, but I believe that
late 2015 will prove to be to be the best buying opportunity for
clean energy Yieldcos. Yieldcos are public companies that
own long term contracted clean energy assets such as solar and
wind farms, and use the cash flows to pay a high dividend to
shareholders. Many Yieldcos are listed subsidiaries of
larger renewable energy developers. These stocks became
market darlings in 2014 and early 2015, when investors flocked to
them because they had seemingly created a magic formula to combine
high current dividends with a high dividend growth rate. In
fact, as I pointed
out shortly before the bubble burst, the current dividends
were unimpressive, and the cheap capital provided by seemingly
endless investor enthusiasm was essential for the high dividend
The Yieldco bubble popped over the summer, and I believe we have
already seen the lowest point to which the sector as a whole will
fall. That said, many Yieldcos remain amazingly cheap on an
absolute basis, and so the best valued Yieldcos will form the core
of this list. I recently wrote an article
looking at Yieldco valuations using the dividend discount
valuation model. An updated version of the most
important graph from that article follows; the Yieldcos in this
list will be selected because of their attractive valuations on
Read the article linked above for a full explanation of how to
interpret the chart.
What Is A “Clean Energy” Stock?
Many followers of this series have noted that I tend to stay away
from well-known green stocks, like Tesla (NASD:TSLA)
and the solar
manufacturers and installers most people think of first when
they think of clean energy. This is not just because I
prefer less volatile stocks. It’s also because I believe that
avoiding well-followed stocks gives me a better chance of finding
great values that other investors have overlooked. While
some of these stocks may indeed be good values, they clearly have
not been overlooked.
For any investor with limited time to do research (i.e. all
investors), deciding where that limited time can (and can’t) be
spent most productively may be the most important part of the
research process. Investors who skip this step will
inevitably squander valuable time researching stocks that are
already well priced by the market. I try to avoid such
stocks with some quick tools that help me quickly eliminate most
stocks as potential candidates for further research, which I wrote
about here. One of those tools is simply eliminating
any company that might make good cocktail party
conversation. Whenever I tell people I what I do, those who
are interested in investing always bring up Tesla and/or solar
stocks. Which is precisely why I seldom have much to say
about such stocks, and you won’t see any of them in this
While I don’t try to be a boring conversation partner, I do try
to keep my portfolio as boring as possible. Two other tools
I use are looking for buying by company insiders, and low
beta. Among less followed stocks with limited public
information, I believe that the actions of insiders is a very
important indicator of a company’s prospects. Low
correlation with the overall market, or “Beta,” not only
indicates less risky stocks, but much recent research has found
that (contrary to traditional market theory) that low volatility
and low Beta stocks tend to outperform the market as a whole over
For similar reasons, there are a couple stocks in this list that
are not obviously “Clean Energy” stocks. For my purposes, if
a company’s products or services reduce the use of dirty energy
(i.e. fossil fuels), then it is a clean energy company.
Renewable energy manufacturers, installers, and owners (such as
Yieldcos) obviously qualify, but so do companies that sell
insulation or help others manage vehicles more efficiently, even
if those companies’ primary customers are fossil fuel companies
The following table shows this year’s list in rough order of
riskiness (by my own subjective assessment) along with market Beta
and a summary of recent insider trading activity.
|1||PEGI||6.7%||1.22||More buying than selling|
|2||RNW.TO||8.0%||0.63||Buying, no selling|
|3||EVA||11.25%||N/A*||No trades since IPO|
|4||GPP||10.51%||N/A*||No trades since IPO|
|5||NYLD/A||5.8%||1.02||Buying, no selling|
|6||HASI||6.3%||1.22||Buying, no selling|
|7||MIXT||4.3%||-0.13||More buying than selling|
|8||GLBL||22.4%||1.22||No trades since IPO|
|9||REGI||–||1.01||More buying than selling|
|10||AMRC||–||1.1||Buying, no selling|
*EVA and GPP have not been public long enough to calculate
This year’s list consists of eight income stocks and two
value/growth stocks. As in 2015, the benchmark for the
income stocks will be YLCO, and the benchmark for the value/growth
stocks will be the Powershares/Wilderhill Clean Energy ETF (PBW).
I will benchmark the 10 stock model portfolio as a whole against
an 80%/20% blend of the two, and also compare it to the Russell
2000 index ETF (IWM) to show how its performance compares to the
broader universe of small cap stocks.
Income Stocks Added for 2016
Pattern Energy (NASD:PEGI)
12/31/15 Price: $20.91. Annual Dividend: $1.488
(7.1%). Beta: 1.22. Low Target: $18. High
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.
The higher cash flow yields of Pattern’s projects are in part due to
its emphasis on wind projects, and stronger independence at the
Yieldco. Wind farms 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. That
said, the risk of variable production from wind farms is easily
diversifiable. Since average wind speeds in one location have
little correlation with wind speed in locations on other parts of
the globe, let alone with solar production or the stock market in
general, wind production risk production risk will have little
effect on a highly diversified stock portfolio, and so the higher
returns from owning wind farms come without significant added risk
for the stock market investor.
The stronger independence of Pattern Energy from Pattern Development
is by design. When Pattern Development offers Pattern Energy a wind
farm for potential purchase, a committee of independent board
members uses outside consultants to value that farm before price is
ever discussed. The purchase only takes place if the eventual
price falls within the range of that initial valuation.
Enviva Partners, LP
12/31/15 Price: $18.15. Annual Dividend: $1.76
(9.7%). Low Target: $13. High Target: $26.
Enviva Partners is a Master Limited Partnership
(MLP) which owns wood pellet manufacturing and transportation
infrastructure. Unlike wind and solar, the IRS considers wood
products to be natural resources, allowing Enviva to use the tax
advantaged MLP structure. The advantage of this structure is
that returns to investors can be higher because MLPs avoid taxation
at the corporate level. The disadvantage is that MLPs are
partnerships, and limited partners (shareholders) receive K-1 tax
forms which usually include Unrelated Business Taxable Income (UBTI)
which, if the MLP is owned within an IRA or other taxable account,
means that the account will have to file a separate tax return with
the IRS. The added paperwork means that most investors will
prefer to own MLPs in taxable brokerage accounts.
Most of Enviva’s customers are European power companies, which buy
the partnership’s wood pellets under long term contracts. This
market is expected to continue to grow quickly because converting
coal plants to burn sustainably sourced wood pellets is easily one
of the most cost effective ways for an electricity utility to reduce
its carbon footprint. Enviva has most of its plants in the US
Southeast, where the warm climate and plentiful rainfall results in
fast growing forests which lend themselves to sustainable
Some newspaper articles have questioned Enviva’s sustainability
practices with allegations of wood from clear-cutting old growth
hardwood forests. While I believe it is possible that some
wood from such clear cutting may have found its way into Enviva’s
plants, I am confident that sale of wood to Enviva was not the
motive for such clearcutting, and the company’s presence as a long
term source of demand is more likely to encourage sustainable
forestry than the opposite. First of all, Enviva’s plants
cannot accommodate large logs, just the small trees and branches
which might otherwise be burned in place or left to decay (and
release its stored carbon) on the forest floor. Second, the
vast majority of Enviva’s plants have FSC certification, which I
consider to be the gold standard of sustainable certification for
wood products. They would not be able to achieve this
certification if they made a practice of accepting wood from
unsustainable forestry operations.
Hence Enviva easily meets my green criterion that the company’s
operations have the net effect of reducing greenhouse gas emissions.
Plains Partners, LP (NYSE:GPP)
12/31/15 Price: $16.25. Annual Dividend: $1.60
(9.8%). Low Target: $12. High Target: $22.
Like Enviva, Green Plains is a new MLP. The company
owns ethanol production and transportation infrastructure. All
of its facilities have long term contracts which protect the
partnership from direct exposure to the commodity cycle.
Like wood pellets, corn ethanol has also been the subject of
questions regarding its sustainability. Ethanol’s
detractors often cite studies from the 1990s and early 2000s which
showed that it required more energy inputs (in the form of
fertilizer, fuel for harvest and transport, and heat for
fermentation) than it produced when used to power vehicles.
While there may have been truth to such arguments a decade ago,
ethanol production has become much more efficient since then.
Ethanol production is a commodity business, and as the industry has
grown, ethanol and other biofuel producers have become the main
source of marginal demand for commodity crops such as corn. With the
price of ethanol effectively set by the price of oil, and the price
of ethanol effectively setting the price of corn, only the most
efficient ethanol producers can survive and make a profit.
This market process has increased the industry’s overall efficiency,
leading to net energy and greenhouse gas benefits from ethanol
I’m not going to argue that corn ethanol is as green as
solar, wind, or even biodiesel. Nevertheless, it reduces
greenhouse gas emissions and the use of oil in transportation in the
existing vehicle fleet. Solar and wind cannot compare to
ethanol in transportation until we have much higher penetration of
electric vehicles, while biodiesel’s contribution is more
constrained by the supply of suitable feedstock.
Yield, A shares (NYSE:NYLD/A)
12/31/15 Price: $13.91. Annual Dividend: $0.86 (6.2%).
Beta: 1.02. Low Target: $11. 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. Three of these (Hannon Armstrong, TransAlta
Renewables, and Capstone Infrastructure (TSX:CSE, OTC:MCQPF)
were in the 2015 list. While NYLD fell more than 50% in 2015,
Hannon Armstrong, TransAlta Renewables, and Capstone produced total
US dollar returns of 40.5%, -18.4%, and 2.9%, respectively.
Now NRG Yield, and especially its A shares, have fallen so far that
it has one of the best valuations in my DDM model.
Offsetting its very attractive valuation is the turmoil at its
parent, SunEdison (SUNE),
where the CEO recently stepped down because of investor skepticism
about his aggressive green initiatives. NRG Yield’s low share
price and likely lack of management support at SunEdison may reduce
its future ability to grow, but not so much as to significantly
undermine its valuation.
The reason I include 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.
Investors who do face liquidity constraints should consider
splitting their purchase between the two share classes.
Terraform Global (NASD: GLBL)
12/31/15 Price: $5.59. Annual Dividend: $1.10. Beta:
1.22. Low Target: $4. High Target: $15.
Terraform Global had its IPO in late July, just as
the Yieldco bubble was beginning to pop. It is easily the
riskiest of all Yieldcos. It invests in relatively risky clean
energy projects in developing markets like Brazil, China, India, and
Brazil. Another significant contributor to its risk is its
sponsor, SunEdison (SUNE).
In order to avoid bankruptcy, SunEdison took complete control of
both Terraform Global and its sister Yieldco, Terraform Power (TERP)
in November. GLBL’s new management promptly announced that it
would focus on acquisitions from SunEdison. The independent
directors on the Terrafroms’ conflicts committees promptly resigned,
stating that they could no longer ensure that all transactions
between they Yieldcos and their parents would be to the advantage of
the Yieldcos’ shareholders.
With the departure of the independent directors, TERP and GLBL
shareholders must now rely on shareholder activism and class action
lawsuits to make sure that SunEdison does not abuse its power at the
Yieldcos. TERP’s shareholders found their champion in activist
investor David Tepper, who seems to have been the impetus behind the
renegotiation of SunEdison and TERP’s agreement to acquire Vivint (VSLR.)
The revised agreement was to both SunEdison’s and Terraform Power’s
advantage, but, in my opinion, the Yieldco got the best of the deal.
While Terraform Global is undoubtedly risky, it is also a great
value. At the end of the third quarter, it held $9.50 in cash
per share, well above the current share price of $5.59. The
declared dividend is $1.10 annually, or 20%, so even though there is
a risk that SunEdison will use GLBL’s cash to bail itself out of its
financial difficulties, the threat of future lawsuits should ensure
that that cash is exchanged for clean energy projects at something
close to market prices. As long as those projects are
sufficient to support the current $1.10 dividend, there should be
significant upside for shareholders who buy at the current price.
Growth Stock Added for 2016
Renewable Energy Group
12/31/15 Price: $9.29. Annual Dividend: $0. Beta:
1.01. Low Target: $7. High Target: $25.
Renewable Energy Group, or REG, is the leading producer of
biobased diesel with a US listing. It replaces smaller
biodiesel producer FutureFuel (FF)
from the 2015 list. FutureFuel combined a biodiesel business
with a large chemicals business which helped shield the company
from the continued decline of the biodiesel industry and allowed
it to produce a modest 5.5% total return while REG fell
4.5%. This year, all the factors are in place for a strong
industry recovery, and so I’m switching my emphasis to the
The factors driving the decline of the biodiesel industry were 1)
regulatory uncertainty, 2) declining diesel (and hence biodiesel)
prices, and 3) declines in the price of biodiesel feedstocks which
lagged the declines in biodiesel. Regulatory uncertainty was
reduced when the EPA set target renewable fuel standard
(RFS) volumes for 2014, 2015, and 2016 and reinstated the
$1-per-gallon tax credit for biodiesel. While ethanol
producers were generally unhappy with the new targets, biodiesel
producers fared better.
Low crude oil prices are beginning to cut into production,
especially shale oil production in the US, a trend which will
mitigate future declines and set the stage for a potential
rebound. Slower oil price declines will allow declines in
the price of biodiesel feedstocks to “catch up,” which will
improve biodiesel industry profitability. REG has used the
industry downturn to consolidate its position as an industry
leader, leaving it extremely well positioned to capitalize on any
improvement in the market.
Returning Income Stocks
Sustainable Infrastructure (NYSE:HASI).
12/31/15 Price: $18.92. Annual Dividend: $1.20 (6.3%).
Beta: 1.22. Low Target: $17. High Target: $27.
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 was
my top pick for 2015 as well as one of the three top performing
stocks. I nearly dropped it from the list this year because
so many other Yieldcos are more significantly undervalued, but in
the end chose to keep it because of the company’s unique niche in
financing clean energy which I believe gives it a significant
competitive advantage over all other Yieldcos.
Renewables Inc. (TSX:RNW,
12/31/15 Price: C$10.37. Annual Dividend: C$0.77
(6.7%). Low Target: C$10. High Target: C$15.
TransAlta Renewables produced disappointing returns in 2015,
although its performance was much better than practically all
other Yieldcos. It remains solidly in the list because it
remains attractively valued. Its stock trades at an
approximate 30% discount to my dividend discount valuation.
Returning Growth Stocks
MiX Telematics Limited
12/31/15 Price: $4.22 / R2.80.
Annual Dividend: R0.08 (2.9%). Beta:
-0.13. Low Target: $4. High Target: $15.
MiX provides vehicle and fleet management solutions customers in
112 countries. The company’s customers benefit from increased
safety, efficiency and security. Like Ameresco, MIXT
stock has fallen despite progress in the business, which has been
regularly posting annual subscriber growth around 15%.
I attribute the stock decline to a combination of the oil price
decline, the fall of the South African rand, and flat
earnings caused by falling hardware sales as MiX shifts from a
sales model to a bundled subscription model.
The oil price decline hurts MiX because a large proportion of its
customers are in the Oil & Gas sector, and the falling rand
hurts because South Africa is the company’s home market.
Both oil and the rand could go up as easily as down in 2016,
having a positive effect on the stock. Also, as more and
more of MiX’s revenues come from subscriptions, earnings are
becoming less sensitive to hardware sales.
MiX also reinstated its dividend in 2015, a move which did not
seem to please the market, but makes it even more attractive to
Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25. Annual
Dividend: $0. Beta: 1.1. Low Target:
$5. High Target: $15.
Energy service contractor Ameresco had been suffering for two
years because its clients, mostly government entities, had been
slow to finalize contracts. That has been turning around in 2015,
and Obama’s recent initiatives to further improve energy
efficiency in government buildings should help as well.
Further, Ameresco has diversified its business into commercial
solar installation, and that business will benefit over the next
few years from the long term extension of the Solar Investment Tax
Despite all this, the stock fell again in 2015. Company
insiders, especially CEO and controlling shareholder George
Sakellaris, maintain their faith in the company by continuing to
buy the stock in quantity. If other investors fail to
recognize Ameresco’s potential in 2016, the stock has fallen low
enough that he may decide to take it private.
Many income investors are particularly cautious now that the Federal
Reserve has begun to slowly increase interest rates. But any
interest rate rise promises to be very gradual, and the recent
decline of Yieldco prices and the long term extensions of the Solar,
Wind, and biodiesel tax credits should all help clean energy stocks
in 2016. I expect this year to be a strong one for clean
energy stocks in general, especially recovering Yieldcos.
Disclosure: Long HASI, CSE/MCQPF, AMRC, MIXT, FF,
RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL.
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
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