Tom Konrad CFA
This article is intended as a companion piece to Ten Clean Energy Stocks for 2012.
In the past, I’ve generally avoided illiquid stocks like Lime Energy (NASD:LIME) and PFB Corporation (TSX:PFB, OTC:PFBOF) which are included in this year’s list. The reason is simple: 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 (Amsterdam:ACCEL) is one foreign stock included in this year’s list that is probably only practical to buy for larger investors.
You can, of course, use this list any way you like. Investors looking for a more diversified portfolio might consider buying all sixteen.
My six alternative are:
||Good substitute for
|New Flyer Industries (TSX:NFI, OTC:NFYEF)||$8.69||Accell, Kandi|
|LSB Industries (NYSE:LXU)||$35.42||PFB Corp, Zoltek, Waterfurnace|
|Ameresco (NYSE:AMRC)||$9.81||Lime Energy, Zoltek, Maxwell|
|Power REIT (NYSE:PW)||$9.90||Waste Management|
|US Geothermal (HTM)||$0.362||Finavera, Alterra|
|Ram Power (TSX:RPG / OTC:RAMPF)||$0.257||Finavera, Alterra|
About the Picks
New Flyer Industries (TSX:NFI, OTC:NFYEF)
New Flyer has been in my list of annual picks more often than not because of its high yield and leading position in a very sustainable business: manufacture of heavy duty buses. It was the star performer of the 2012 list, producing a 67% total return for the year. While the stock was extremely depressed last year, I left it off the list because of the reduced potential for price appreciation. However, with a yield of 6.75% and a recovering industry, it remains in my portfolio and could easily produce a respectable return in 2012.
LSB Industries (NYSE:LXU)
LSB is a manufacturer of chemicals for agriculture and mining, as well as geothermal heat pumps under its Climatemaster brand. The chemicals business accounts for about two-thirds of revenue, and the climate control segment accounts for about one third.
LSB’s chemical business suffered an explosion and a pipe rupture at different plants last year, but the company’s insurance is expected to cover the majority of the costs, including business interruption. The work stoppages put a big dent in earnings in 2012, but the insurance proceeds will mostly be paid in 2013, giving a big boost to earnings. I don’t think the company’s stock price fully reflects the expected insurance payments, making LSB an excellent buying opportunity at $34.60.
Despite my optimism about LSB’s prospects for the year, there are two reasons I chose not to include it in my annual list of clean energy stocks. First, only 1/3 or revenue comes from clean energy, and, second, because of the acquisition of a working shale gas interest in October. Natural gas is a significant part of LSB’s cost structure, and the intent of this acquisition is to create a natural hedge against rising natural gas prices. However, LSB already has something of a natural hedge against rising gas prices in their climate control business: geothermal heat pump sales tend to be stronger when natural gas prices are high, because high natural gas prices make geothermal heating look relatively attractive.
Ameresco is a leader in Performance Contracting: making energy efficiency and renewable energy improvements for institutions which are financed and then paid for out of the subsequent cost savings. Ameresco’s price is currently low because its earnings have been hurt among government entities which have been delaying decisions in the climate of uncertainty surrounding the fiscal cliff. While Congress remains deadlocked as I write, Ameresco’s services often help budget-constrained government entities pay for necessary improvements they otherwise would be unable to afford. I expect the coming era of fiscal austerity will likely be improve Ameresco’s long term prospects, rather than hurt them.
I chose to leave Ameresco out of this year’s picks only because the price had spiked from $9.43 to $10.03 in the thin holiday market on December 28th, the day I compiled my list, and I anticipate that that spike will be reversed over the next day or two, which would be a 6% drag on the company’s annual performance. If the price had stayed near $9.50, where it had been trading over the previous few days, I would have included it in the list.
Power REIT (NYSE:PW)
Power REIT is a railroad infrastructure REIT with plans to expand into renewable energy real estate. It’s currently involved in a civil case with Norfolk Southern (NYSE:NSC) and Wheeling and Lake Erie Railroad which I discussed in detail here. The short version is that Power REIT could collect payments worth several times its market capitalization if they win, and even if they lose on all counts, it will result in a tax write off which will allow the company to designate its current $0.40 annual dividend a return of capital (and hence tax-free to investors) for the foreseeable future.
The prospect of a tax-free dividend is enough to fully justify Power REIT’s current price of slightly over $10, but it does nothing to account for the very real chance of even a partial victory in the civil case, or for the potential dividend increases which would come from its expansion plans. I only chose to leave Power REIT out of this year’s list because it is very illiquid and the timing of the resolution of the NSC case are unknown.
Ram Power (TSX:RPG / OTC:RAMPF) and US Geothermal (HTM)
Ram and US Geothermal are geothermal power developers which, after two years of declines are currently trading at very attractive valuations. As Ram and Nevada Geothermal Power (TSX-V:NGP, OTC:NGPLF) have shown over the last two years, such companies can lose a great deal of their value from unexpected development risk. I try to compensate for development risk by holding relatively small stakes in several renewable energy developers at once. With only ten slots to fill in my list, I could not include these two in addition to Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF) and Alterra Power (TSX:AXY, OTC:MGMXF), which are in the list this year.
Of the four, I currently consider Finavera and Alterra to be the least risky, but I think including a little Ram and US Geothermal along with Alterra and Finavera would reduce overall portfolio risk through the added diversification.
The abundance of great values among clean energy stocks this year bodes well for the performance of my annual model portfolio in 2013. For the first time, it also left me with an abundance of clean energy stocks to choose from. I hope you, my readers, will be able to use these six extra picks to build portfolios more suited to your particular needs than you might otherwise have been able to do.
DISCLOSURE: Long NFYEF, RAMPF, LXU, AMRC, PW, HTM, FNVRF, MGMXF, ACCEL, LIME, PFBOF
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.
Thanks as always for your careful suggestions. In the geothermal space, what ever happened to Ormat? Once upon a time, it was a top pick! Also, would you agree with John Petersen that Axion has substantial prospects, but of course is still in the risky/speculative category?
Ormat is still the leading company in the space, but it’s too expensive for me, and has been for a long while.
Axion needs to raise money this year, so I’m staying away from it for now. For me, strong financials are more important than the potential of the technology. John’s that way, too, but I feel he has a blind spot when it comes to Axion.