Best stock to invest in – 10 Clean Energy Stocks For 2016



Best stock to invest in

Tom Konrad CFA

The History and Future of the “10 Clean Energy Stocks” Model
Portfolios

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
benchmarks.

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:
Aurelien

Windenberger has offered to continue the updates if I am
unable to.

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
growth rates.

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
this chart.  


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
list. 

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
time. 

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
themselves. 

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. 

Ticker Yield Beta Insider Buying?
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
Beta accurately.

Benchmarks

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
Target: $35.
 

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
(NYSE:EVA)

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
forestry. 

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.

Green
Plains Partners, LP
(NYSE:GPP)

12/31/15 Price: $16.25.  Annual Dividend: $1.60
(9.8

– Best stock to invest in

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