Tom Konrad, CFA
My annual mini-portfolio of clean energy stocks which I expect to outperform in 2011.
This is my fourth annual list of renewable energy and energy efficiency stocks since I began the series in January 2008.
The Purpose of this List
For myself, these lists serve as a record of my thinking on the market which I can look back on and learn from over the following year. When I publish the list, I state my reasons for selecting each stock, and then track the portfolio’s performance over the following year in quarterly updates. This allows me to not only track how well the portfolio performed, but to check that performance against what I expected over the previous year.
For the reader, these annual lists are meant as a mini-portfolio of individual stocks that a small investor can buy to get exposure to clean energy without the high expenses of clean energy mutual funds, or the historical poor performance of clean energy Exchange Traded Funds (ETFs).
Each year, I have measured my success at stock picking against two benchmarks: a broad market index, and a clean energy index fund. My strategy has changed somewhat since the first list in 2008, as I have gained in my understanding of the sector (I have only been following clean energy closely since the end of 2005.)
Past Performance
The period over which I have been publishing these lists has been a very bad one for clean energy. All the public clean energy ETFs are down since the start of 2008, and all but one of the clean energy mutual funds are also down.
In 2008, my ten picks fell 55%, compared to the clean energy index, which fell 67%. In 2009, my picks were up 57%, compared to the benchmark which was only up 12%, while the most recent list in 2010 was up 3%, compared to the benchmark, which fell 7%. All told, if you’d invested in the ETF benchmarks, you would still be down 66%, while an investor in my ten picks would only be down 27% over the same period.
Outlook
As I told Stephen Lacey in a recent Renewable Energy World podcast, if the overall stock market does not collapse and drag clean energy with it, I believe that 2011 has the potential to be an excellent year for clean energy stocks after these three years of heavy selling. Yet I continue to worry that a broad market decline would hold the sector down or drag it lower.
Clean Energy Sector Selection
As long-time readers know, I favor the less exciting clean energy sectors (and enabling technologies) that make few headlines but have higher current profits. Chief among these are energy efficiency and conservation (where the greatest short-term potential for reducing the reliance on fossil fuels lies), the electric grid (an enabler for variable renewable resources such as wind and solar), and alternative transportation technologies that can reduce the use of the electric car.
I prefer the most cost effective renewable energy technologies, which are biomass, wind, and geothermal. Wind and Geothermal power are particularly interesting this year, because the sectors have fared particularly badly in recent years. I’m putting more emphasis on renewable energy sectors (as opposed to efficiency and the electric grid) in 2011 than I have in the past because I’m more bullish about clean energy in general. While not as volatile as renewable energy’s poster boy, solar power, Wind and Geothermal tend to be more volatile than the relatively defensive efficiency and supporting technology sectors.
Company Selection
When picking individual stocks, I gravitate towards value stocks with low Price/Earnings and decent dividends, where available. Since financing is still hard to get in the current climate, I also like companies that can fund their operations and investment plans from internal resources if they are not currently profitable. Finally, I tend to gravitate towards companies with charts that look like they are bottoming.
Without further ado, here are my picks, with prices as of the 2010 close (December 30.)
Energy Efficiency and Smart Grid Stocks
Waterfurance Renewable Energy (WFI.TO, WFIFF.PK US$24.77) is a long time favorite because it’s the only pure-play geothermal heat pump stock I know. David Gold made the case for geothermal heat pumps as an investment in October, so follow the link if you’d like the details. This is the third year running that Waterfurnace has been in my list, and while it has not appreciated much in that time, it has consistently paid a dividend over 3% (C$0.22 per quarter, or 3.6% annually) while the business has continued to grow.
Comverge (COMV $6.92) is a leader in providing Demand Side Management solutions to electric utilities, both in the form of Demand Response(DR), and energy efficiency. Demand Response allows utilities to maintain less peak capacity while still maintaining a stable grid (see Drawing the Right Lessons from the Texas “Wind” Emergency) while Comverge’s energy efficiency solutions allow utilities to build less base load capacity. Both DR and Efficiency can be delivered at much lower cost than new baseload or peaking plants, and have the added advantage of no carbon emissions.
The stock has been badly beaten up since its 2007 IPO and can now be bought for one third of the IPO price, and less than one fifth the smart-grid euphoria induced 2007 peak. While Comverge is still not profitable, they have enough cash on hand to fund the current level of operations for three years, giving them time to raise future funds while negotiating from a position of strength.
EnerNOC (ENOC $23.91) also provides Demand Response to electric utilities, but unlike Comverge, they are currently (if marginally) profitable. With no net debt and plenty of cash in the bank, EnerNOC has not been beat up quite as badly as Comverge since they both IPO’d in 2007, so this is a safer pick than Comverge with somewhat less upside potential.
Electric Grid and Clean Transportation Stocks
CVTech Group (CVT.TO, CVTPF.PK $1.30) provides electricity system construction and maintenance to electric utilities, as well as efficient continuously variable vehicle transmission systems for small vehicles such as the Tata Nano. The company is profitable and pays a C$0.02 annual dividend, for a yield of 1.5%.
Telvent Git S.A. (TLVT, $26.42) provides management solutions to infrastructure markets including electric utilities, pipeline operators, and transportation authorities. Better management in these sectors has great potential to lead to large cost and energy savings.
I covered both of these stocks in considerable detail in my Best Peak Oil Investments series. The article about CVTech is here, and the article about Telvent is here. The reason neither of these stocks made my list of four top peak oil stocks but are included here is that most of those four have since risen considerably, and I also wanted to limit this list to stocks that are easily purchased by a North American investor.
Biomass Stock
Potlatch Corp (PCH, $32.55) is a US Timber REIT which is a leader in seeking stringent FSC sustainability certification for its timberland. I wrote about Potlatch in late 2009 in an article highlighting the role of forestry in a clean energy portfolio. Potlatch has a 6.3% forward annual dividend yield.
Geothermal Stocks
Geothermal exploration and production stocks seem to have bottomed in the fall of 2010, but they have not yet really taken off. I think that could easily happen in 2011, so I include two of my favorites here: Nevada Geothermal Power (NGP.V, NGLPF.OB $0.76) and Ram Power Corp. (RPG.TO, RAMPF,PK $2.22.) I’ve recently written about both of these companies in my
Geothermal Stocks Overview and in Three Top Geothermal E&P Companies.
Wind
American Superconductor Corporation (AMSC, $28.59), despite its name, is largely a wind component supplier to Chinese wind manufacturers. Yet it also has an intriguing electricity transmission business based on its eponymous superconducting cables. The company is profitable, although it trades at a fairly hefty multiple of 45x trailing earnings based on widespread expectations of continued high growth.
Others
Veolia Environnement SA (VE, $29.36) is a global conglomerate providing water, waste water, energy systems (including renewable energy), and transportation system management. As such Veolia provides services in a wide variety of clean energy sectors, and is a good balance to the usual volatility of a clean energy portfolio with its relatively stable earnings and high 4.1% dividend yield.
As usual, I’ll provide quarterly updates on this list throughout 2011.
DISCLOSURE: Long WFIFF.PK, CVTPF.PK, RAMPF.PK, NGLPF.OB.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
