by Harris Roen, Editor
Roen Financial Report
November 20, 2015
The Roen Financial Report Paradigm Portfolio is a hand-picked group of alternative energy stocks considered to be top choices in the sector for long-term investments. These companies are positioned to benefit from the clean energy paradigm shift that is a large and growing part of the global economy. This update includes two promising additions to the portfolio, the removal of a problematic penny stock, and thoughts on long-term prospects for the new energy economy.
Alternative Energy Stock Portfolio Returns
The Paradigm Portfolio is up 25.7% from inception on January 2, 2013, after accounting for additions, removals, and rebalancing*. This is in spite of the portfolio being down 9.8% since the update a year ago in November 2014. Still, this is not as bad a drop as what occurred in the Wilder Hill New Energy Global (NEX), which is down 11.4% over the same time period.
The best performing stock in the Paradigm Portfolio remains solar developer SolarCity (SCTY), up 161.1% after rebalancing. SolarCity continues to be an excellent performer for the portfolio despite a recent price drop brought on by an ill-received earnings report in late October.
The poorest performing stock was the biofuel and food waste recycling company Darling Ingredients Inc (DAR), down 41.0%. Although sales have been solid for this company, earnings per share came in slightly negative in its most recent financial release, below the consensus analyst estimates.
Fuel Efficiency Company, Solar Play Added
Increased fuel efficiency is a critical enterprise in the new energy economy. About 27% of greenhouse gas emissions in the U.S. come from the transportation sector. Because of this, engine and drive train efficiency company BorgWarner, Inc (BWA) shows excellent promise as an addition to the Paradigm Portfolio. BorgWarner has robust sales, good cash flow, solid earnings, and we consider it to be undervalued at its current stock price.
The second addition to the Paradigm Portfolio is Corning Inc (GLW), a global supplier of silicon products used in photovoltaics, pollution control and other applications. We like Corning because the solar industry can be very volatile. This defensive industrial company has had positive earnings, consistent dividends, positive cash flow and relatively low debt for at least the past seven years. Solar is still a growth industry, and Corning has a proven track record of supplying silicon products to photovoltaic manufacturers. Corning will almost certainly be supplying solar materials well into the future regardless of other players that may come and go.
Micro Cap Wind Stock Removed From Portfolio
Wind turbine and tower company Broadwind Energy, Inc (BWEN) has taken a hit since entering the portfolio in April 2014. The stock price has suffered due to low return on assets, a depressed price-to-sales ratio, and continued negative earnings that have consistently come in below analyst estimates. It is deemed best to remove this volatile penny stock from the Paradigm Portfolio before its price declines further.
Sunshine or Clouds? Alternative Energy Investment Prospects
As my faithful readers know, I am bullish about viability of alternative energy as a long-term investment story. There is no doubt in my mind that the continued growth of solar installations is all but assured. For example, according to GlobalData, the total global installed capacity of photovoltaics increased 29% from 2013 to 2014, and is slated to increase another 27% to 223.2 gigawatts in 2015. Wind power development has slowed down for the moment, but there is a big push to develop large-scale offshore wind in North America and abroad. And infrastructure needed to transform the energy landscape, such as smart grid improvements, energy storage, and increased efficiency, are all developing at a rapid pace. Additionally, it is important to look at the broader economic drivers that affect this sector.
There was a time when most analysts, myself included, pegged the prospects of alternative energy to fossil fuel pieces. The thinking went that since developing wind, solar, etc., are an “alternative” to fossil fuel energy development, when oil and gas prices go down, less solar and wind will get built. There is some truth to this, especially since natural gas is the fuel of choice for base-load electric. Going forward, though, I believe overall economic growth will drive alternative energy development more so than the price of fossil fuels. Part of the reason for this is that oil prices had become a proxy for how speculators thought the economy would perform, and that connection has started to decouple.
The charts above show crude oil prices broken down into two time periods, from 2003-2013, and 2014 to the present. The price of oil is graphed against the S&P 500 stock market index. The stock market is a forward-looking economic indicator, so is a good overall measure of the economy.
The left chart shows a clear correlation between the price of oil, and the S&P 500. A 1.00 correlation factor would be a perfect congruence, but a 0.66 correlation is significant. This is the epoch that investors started buying oil futures not because they were interested in crude supplies, but because they thought as the economy improved, more oil would be consumed, which would increase demand and lift oil prices.
This investment trend started to fall apart in mid 2013, and continues to diverge. This can be seen in their strong negative correlation factor of -0.72. The most likely trend going forward is that the economy will continue to expand and retract regardless of the direction of fossil fuel prices.
It is true that as the economy grows, the need for energy will grow with it. Because of this, the push for clean energy will likely remain strong. This thrust for expanding renewable energy investment is seen through efforts like the United Nations Paris Climate Talks, concerns about energy security, and increasing economic viability of renewables. This push away from fossil fuels will only benefit sectors such as solar, wind, smart grid and other green investments.
*Hypothetical gain from portfolio recommendations. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on this list. For an explanation of how hypothetical returns are calculated, please see the Returns section under How Investments are Picked in the Roen Financial Report User Guide.
Remember to always consult with your investment professional before making important financial decisions.