Back in 2007 it was easy to invest in clean energy. The challenge was to get to know all the new companies piling onto the public markets, but they all did well and seemed to have bright futures.
Over the last few years, we’ve seen the opposite situation, with companies struggling to stay afloat and investors fleeing the space.
Here are money manager’s Tom Konrad’s picks for 2013.
Every year since 2008, I’ve published a list of ten (or eleven in 2012) clean energy stocks I expect to do well over the coming year. The list is intended as a model portfolio which could be used by a small investor looking to avoid the relatively high costs of clean energy mutual funds, most of which have expense ratios around 2%, in addition to the trading costs they incur with fairly high turnover ratios.
My list also reflects my belief that the best returns and least risk in clean energy stocks are to be found in relatively boring companies involved in using energy and resources more efficiently, rather than from the sexier but less cost effective renewable technologies such as solar manufacturing. Rapid price declines have served to make solar an attractive investment in many places given current subsidies, but the industry remains vulnerable to subsidy cuts.
An equally weighted portfolio of my ten stock picks has beaten the clean energy ETF I’ve used as a benchmark for each of the last four years, often by a substantial margin.
My benchmark is Powershares Wilderhill Clean Energy ETF (PBW), which is the most widely held and liquid clean energy ETF and hence likely to be the best indication of the results of the average clean energy investor. Since I tend to favor small and micro-cap companies, I also use the small cap focused iShares Russell 2000 Index ETF (IWM) to track my portfolio’s performance against the broad market.
My portfolio had a positive return in 2012, despite the significant decline of clean energy stocks in general. This year, I have another opportunity to pick stocks from an even broader selection of deeply discounted value and dividend paying clean energy stocks.
Energy Efficiency
Waterfurnace Renewable Energy (TSX: WFI; OTC: WFIFF
Lime Energy (Nasdaq: LIME)
PFB Corp (TSX:PFB; OTC:PFBOF)
Transportation
Maxwell Technologies (Nasdaq:MXWL)
Accell Group (Amsterdam:ACCEL)
Zoltek Companies (Nasdaq:ZOLT)
Kandi Technologies (Nasdaq:KNDI)
Renewable Energy Developers
Finavera Wind Energy (TSX-V:FVR; OTC:FNVRF)
Alterra Power (TSX:AXY; OTC:MGMXF)
Environmental Services
Waste Management (NYSE:WM)
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For those of you wondering why Tesla (NASD:TSLA), Solazyme (NASD:SZYM), Solar City (NASD:SCTY) and other household names are missing from my list, this reflects my belief that the best values are to be found among stocks that few people have heard of. These stocks have significant potential to gain as a broader pool of investors become familiar enough with them to invest. With a stock like Tesla, there is a much smaller pool of new investors.
Widely known stocks are also followed by more analysts and professional investors, meaning that it requires much more time and effort to learn something about a stock that other investors are not already familiar with. Given limited time, I choose to focus my research time where it’s liable to be most effective at unearthing the new information that might give me an investing edge.
I chose to focus on the Energy Efficiency and Efficient/Alternative Transportation sectors because these are the most cost-effective alternative energy opportunities, as well as the least reliant on government subsidies. My third sector of focus is renewable energy developers. These stocks are currently deeply out of favor, and have reached such low valuations that mainstream companies and utilities are beginning to see them as very attractive investment opportunities based solely on the reliable cash flows they receive from sales of clean energy.
In the past, I’ve generally avoided illiquid stocks like Lime Energy and PFB Corp, because it’s hard for all but the smallest investors to buy such stocks without significantly moving the price. This year, I’ve instead chosen to publish a short list of alternative picks which readers can substitute for stocks they consider too illiquid or otherwise risky for their portfolio.
Another advantage of this approach for smaller investors is that they can use these stocks to substitute for foreign companies that do not have a US listing, for which brokers often charge a much larger commission than they do to trade US stocks or foreign stock with an OTC ticker. Accell Group is one foreign stock in this year’s list that is probably only practical to buy for larger investors.
My six alternatives are and the stocks they would substitute for:
New Flyer Industries (TSX:NFI; OTC:NFYEF): Accell, Kandi
LSB Industries (NYSE:LXU): PFB Corp, Zoltek, WaterfurnaceAmeresco (NYSE:AMRC): Lime Energy, Zoltek, Maxwell
Power REIT (NYSE:PW): Waste Management
US Geothermal (HTM): Finavera, Alterra
Ram Power (TSX:RPG; OTC:RAMPF): Finavera, Alterra
Read about the companies in the original article.
Conclusion
I’m very optimistic about the prospects for these 10 stocks this year. Two of them (Finavera and Lime) are trading at significantly depressed prices by what I expect are temporary situations; I would be surprised if both are not up 50% by the end of the first quarter. The other eight seem to be temporarily out of favor, driven not so much by company specific events but by the general economic weakness leading them to disappoint previously inflated shareholder expectations. Yet the revised outlook for these stocks is more than enough to justify their current prices, and good news or a more realistic appraisal of their prospects could drive significant prices rises as well.
Even if the world economy worsens or these stocks remain out of favor, Waterfurnace, PFB, Accell, and Waste Management all have high yields (averaging 5.65%) which should provide return and protection against large price declines even if the market tanks. All except Lime, Finavera, and Alterra have profitable operations which should protect them even if the world economy worsens.
That said, the goal of this portfolio is to produce a return that is significantly better than my chosen clean energy benchmark, PBW. If clean energy has another horrible year like 2008 or 2011, we’re liable to see a negative return from this portfolio as well. On the other hand, PBW has recently reversed it former trend, and significantly outperformed the broad market in December. Clean energy stock prices are currently so depressed that I would not be surprised if clean energy stocks gain in 2013 even if the broader stock market falls.
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Tom Konrad is a financial writer and money manager. Read his Green Stocks blog on Forbes.
Read more about each of the 10 stocks:
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