Best stock to invest in – Yieldcos: Calling The Bottom | Alternative Energy Stocks



Best stock to invest in –

by Tom Konrad Ph.D., CFA

On a podcast

recorded on September 14th, I said I thought that Yieldco stocks
had bottomed at the end of September.  Two weeks later, that
call still looks like a good one (see chart.)

I’m starting to hear optimistic
noises

from other Yieldco observers, although the general tone remains
quite bearish.

Why do I think September 29th was the likely bottom?

  • End of quarter.  Some institutional investors such
    as mutual funds reshuffle their portfolios at the end of the
    quarter so that they don’t have to report losing stocks as
    holdings.
  • Market

    capitulation

    .  Although the chart of the
    thinly traded Global X YieldCo Index ETF (YLCO),

    above, does not show the high volume selling of a typical
    capitulation bottom, most of the largest and most liquid Yieldco
    stocks do.  NRG Yield (NYLD), Terraform Power (TERP), and
    NextEra Energy Partners (NEP) all show high volume trading on
    September 28th or 29th.  The pattern is most dramatic for
    NRG Yield:

  • Valuation.  Valuation is usually useless for
    market timing, including calling bottoms.  Undervalued
    stocks can grow even more undervalued.  That said, Yieldcos
    are much easier to value than most stocks, especially if we
    assume that low stock prices will prevent growth through
    acquisition.  In that case, a Yieldco should be worth
    approximately the same as its assets.  Those assets are
    solar and wind farms, or other clean energy infrastructure will
    long term contracted cash flows.  Since most Yieldco assets
    have been acquired recently, the current value of those assets
    should not be too different from what the Yieldco paid for
    them.  Hence, Yieldco prices per share should never fall
    far below invested capital per share.  If a Yieldco
    recently bought its assets at near market prices, tangible book
    value per share will be a good measure of invested
    capital.  If the asset were acquired for in kind
    contributions of Yieldco stock, we may still be able to value
    them using a discounted cash flow analysis.

The newest Yieldco is Terraform Global (GLBL),

which went public at the start of August.  At the IPO,
Terraform Global had a
net tangible book value of $9.47 per share,
compared to a
$15 IPO price.  At the recent price of $7.50, GLBL is trading
at a 21% discount to net tangible assets, or more than a fifth
less than the recent purchase price of solar farms it
owns.   In other words, investors seem to be assuming
that any future acquisitions will fail to create (or potentially
destroy) value for current shareholders, and that GLBL
significantly overpaid for its current assets. 

Terraform Global seems priced for nearly everything to go
wrong.  Even assuming that everything does go wrong, I’m
happy holding the stock at $7.50 and collecting the $1.10 (15%)
annual dividend.

8point3 Energy Partners (CAFD)
went public in June with a net

tangible book value of $5.99 per share, compared to a $21
IPO price.  The reason for this low tangible book value was
because its sponsors First Solar (FSLR)
and Sunpower (SPWR)
contributed solar farms at cost.  The actual value of those
farms would be significantly higher if sold to unrelated
parties. 

Tangible book value is not particularly useful for valuing
8point3’s assets, but my colleague Jan Schalkwijk,
CFA
of JPS Global Investments has done a discounted cash
flow analysis of 8point3 under the assumption of absolutely no
revenue growth after 2026, and his estimates of nearer term
revenue growth without the addition of new assets before that
date.  At a 7% discount rate (which seems appropriate given
the low risk of 8point3’s contracted cash flows, he arrived at a
value per share of $12.99.  In other words, at the recent
price of $13, the market is placing no value on 8point3’s
potential future acquisitions, or the chance that this high
quality Yieldco will recover from the current sector
downturn. 

So there is plenty of potential upside in CAFD shares, and we get
paid an $0.84 (6.5%) annual dividend while we wait for that upside
to materialize.

Conclusion

Many Yieldcos are currently trading at or below the value of
their current assets.  Even investors who believe that the
Yieldco model is broken should consider buying and holding these
stocks at current prices.  If Yieldcos stay in the doldrums,
and stock prices will never again recover, investors do not need
the new acquisitions and dividend growth which could follow to
earn an attractive risk-adjusted return.

 Disclosure: Long NYLD/A, GLBL, CAFD, FSLR.

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.

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