The Roen Financial Report closely covers the universe of 30 alternative energy Mutual Funds (MFs) and Exchange Traded Funds (ETFs). We use a proprietary ranking method to pick the best funds, looking at measures that include fees, risk, tax liability, and the financial health of individual holdings within each fund. Subscribers can read a detailed report on green funds, including rankings and technical breakdowns, in both Excel and PDF format.
Alternative energy MFs and ETFs posted record gains in the past 12 months. Guggenheim Solar (TAN) and Market Vectors Solar Energy (KWT) are the top two performers out of more than 1,500 ETFs. Firsthand Alternative Energy (ALTEX) and Guinness Atkinson Alternative Energy (GAAEX) are in the top ten for over 28,000 mutual funds.
Returns overall have been spectacular for alternative energy MFs. Even the lowest performer is up 27% in the past 12 months. The best performers are those strongly invested in solar, specifically ALTEX and GAAEX, as the solar sector has been on an absolute tear. It should be noted, however, that some of these high fliers are still down from their highs of several years ago.
A new fund has been added to our ranking list, Green Century Balanced (GCBLX). It does not specifically invest in alternative energy companies, but instead has a broader green investment agenda. Its principal strategy is to invest in “environmentally responsible and sustainable U.S. companies, many of which also make positive environmental contributions.” There is a good Reuter’s article on GCBLX, recommending it for the fossil fuel divestment crowd. It comes onto the alternative energy mutual fund list as a Rank 2 (funds are ranked from 1 to 5, with 1 being the best).
Returns for alternative energy ETFs have been strong, like their MF counterparts, though gains have been much more variable. TAN has returned an astounding 240% for the year, and Market Vectors Solar Energy (KWT) gained 185%.
Of the two funds, TAN is higher ranked due to several factors. TAN is a much larger ETF, managing over $400 million as compared to about $30 million invested by KWT. This makes TAN a more stable investment platform. Additionally, TAN has somewhat better fundamentals in its underlying assets when looking at price/sales and forward price/earnings ratios.
On the down side, three of the alternative energy ETFs show a loss for the year. iPath Global Carbon ETN (GRN) is down by more than half, reflecting the continued struggle in European carbon markets.
Remember to always consult with your investment professional before making important financial decisions.
The latest earnings numbers released by SolarCity show a mixed bag of results. Total revenues have been rising for the past 4 quarters, and the number of customers SolarCity is signing up continues to soar. All is not rosy, though, as operating expenses relative to net loss continue to increase. This article dives into the reported numbers, looks at important customer trends, and asks whether SolarCity is still a stock worth investing in.
Revenues: Not a record, but steady growth
Revenues for the third quarter came in strong for SolarCity, at $48.6 million. This is a 52% increase in revenues over the same quarter last year, though it is still far below the record set in June 2012. Still, income has been rising in a straight-line direction for the past four quarters, and fourth quarter revenues are projected to be steady or rising.
Net income, on the other hand, has not fared so well. The first three quarters of 2013 have shown large losses. SolarCity reveals that in the most recent quarter it hemorrhaged $34.6 million. Total current assets have remained steady for the company since the last quarter at around $312 million. However, the cash portion of those assets dropped 17% to $133 million. So while it looks like SolarCity can sustain losses for a few more years on its current tack, this trend of negative net income must turn around in order for the company to remain viable for the long-term.
Revenues projected to rise
Revenues are projected to continue a steady increase for SolarCity on an annual basis. According to the company’s latest guidance, money coming in from leases and sales are expected to grow to between $157 million to $163 million for all of 2013. That means about a 25% increase over 2012 revenues, and about five times the revenues of just three years ago.
Expenses continue to increase
Since the revenue side of the equation is solid for SolarCity, high expenses are the cause of continued losses for the company. Total operating expenses deepened for each quarter of 2013, now at $46.2 million. So far for 2013, expenses are greater than for all of 2012.
Know your customer
In order to understand when a mass-market company like SolarCity is likely to become profitable, one must understand the nature of its customer base. Questions to be answered include how fast is the customer base growing, how much does it cost to get a new customer, and how much money does each customer generate.
Customers have been added at a steady clip the past three quarters. In fact, the third quarter of 2013 added almost twice as many clients as were added in the first quarter of the year. Already year-to-date, SolarCity has added almost as many customers as it did in the banner year of 2012.
Revenues per customer, however, have remained flat, at around $600 per customer per quarter. (Note that revenues per customer look much larger for the annual data on the chart, but those numbers account for a full four quarters of income. When revenues per customer are projected out for all of 2013, it lands in the $2,500 range).
It is a bit hard to tell from the chart, but net loss per customer has been shrinking in 2013. It is down 30% since the first quarter, from a loss of $601 per customer to a loss of $421 in the third quarter. Likewise the acquisition cost per customer is dropping, down 29% from the first quarter to just under $2,000. These are both positive trends, and if they continue, will play an important role in bringing about profitability.
Is SolarCity still a good investment?
Though it is in the solar business, SolarCity is essentially a finance company. It uses billions of dollars of variable interest entity (VIE) investments, long and short-term debt, tax credits and stockholder equity to create leases, notes and other equities to generate income. As I have stated before, SolarCity as an energy stock is a speculative investment any way you slice it. It has yet to turn a profit, and consensus estimates are betting that it will still have negative earnings in 2014 and 2015. Because earnings results were good but not stellar, the stock has given up about 15% of its value from its high a week ago.
Having said that, there is no doubt that SolarCity is a well-positioned company in the growing field of solar installs. Last quarter alone it deployed 78 megawatts of photovoltaics. That is greater than what was installed in all of 2011, and about 70% of all megawatts SolarCity installed in 2012. If acquisition cost per customer drops below the $1,000 range, and if the company continues to grow its bottom line to swing net revenues per customer in a positive direction, then current prices for SolarCity will likely be justified. As such, I see SolarCity as a long-term hold for the investor that can stomach volatility, rather than a traders stock.
The reboot of the electric grid is an exciting investment opportunity that promises to be one of the biggest energy transformation stories of the early 21st century. Bloomberg New Energy Finance projects that by 2018 global smart grid investments should grow to $25.2 billion per year.
This article will give a brief overview of what the smart grid is, which companies are involved in the smart grid industry, and what strategies the effective smart grid investor can utilize. Click here for a free copy of my full report Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape.
What Is the Smart Grid?
By integrating two-way communication and feedback into the power system, the smart grid will efficiently distribute power to where it is need, when it is needed. This is very different from just delivering electricity everywhere all the time, which is the current grid model. Additionally, the smart grid will better integrate alternative energy producers such as wind, solar and other renewable sources.
Most of what drives the grid now is ensuring that there is enough electricity during peak usage times so the system will not fail. That means that there is plenty of excess capacity during non-peak periods, which means tremendous room for increasing efficiencies. One example of this relates to electric vehicles. Vehicle battery systems could be set to charge at night, when peak demand is low and there is plenty of capacity. Cars that are parked during the day could then feed power back into the grid when electricity demand is higher.
Below are some of the characteristics of a smart grid according to the National Institute of Standards and Technology (NIST):
• Improves power reliability and quality
• Optimizes facility utilization and averts construction of backup (peak load) power plants
• Enhances capacity and efficiency of existing electric power networks
• Improves resilience to disruption
• Enables predictive maintenance and “self-healing” responses to system disturbances
• Facilitates expanded deployment of renewable energy sources
• Accommodates distributed power sources
• Reduces greenhouse gas emissions by enabling electric vehicles and new power sources
• Reduces oil consumption by reducing the need for inefficient generation during peak usage periods
• Presents opportunities to improve grid security
• Enables transition to plug-in electric vehicles and new energy storage options
What makes the smart grid a must-do endeavor is the synergistic potential of greatly reducing carbon emissions and other pollutants, while at the same time lowering electric costs.
The Roen Financial Report tracks almost 60 publically traded smart grid companies. We take a broad view of the smart grid when placing companies in this category. Included are those that work in advanced power transmission, energy storage, grid software and other areas. Companies we follow, therefore, range widely in size, industry, business model and other aspects.
It is hard to find a “pure play” smart grid stock. However, six companies the Roen Financial Report covers are involved in smart grid and have a very strong alternative energy focus, indicated in bold (note that Ecotality has filed for bankruptcy, so caution for that company is advised). Many of the larger companies on the list, in contrast, work in a variety of enterprises. They are important to take account of, however, if they have a strong presence in one or more smart grid business areas.
Click here for smart grid investment details on each company that the Roen Financial Report tracks.
Smart Grid Investments – Two Stocks and One ETF
One of the most ubiquitous communications equipment company is Cisco Systems, Inc. (CSCO). As the internet grew in the 1990s, Cisco grew along with it into one of silicon-valley’s giants. Its routers, switches, security devices and related equipment move mountains of digital information for virtually everything from raw data to video. As such, Cisco is one of the backbone companies in creating a robust two-way smart grid communication system.
The financials for Cisco look very good as of fall 21013. Earnings are at a seven-year high, and sales have been steadily growing for the past eight quarters. Returns on Cisco stock have been very good relative to value and risk. It also has low debt. For this and other reasons, Cisco is a component of the Roen Financial Report Paradigm Portfolio, making it one of our top picks.
On the down side, Cisco is considered overvalued at current trading levels. As can be seen on the Fair Value chart below, Cisco has been trading at the top of its fair value range since July 2013 (the dark blue line shows the weekly closing stock price, and the shaded area is the fair value range for the company).
The stock price has continued to drop since reaching its overvalued status. Though this may be a good stock for the long-term investor, waiting until the price looks more attractive is a good strategy.
Quanta Services, Inc. (PWR) is a specialty contractor in the energy industry that has a large role to play in the smart grid build out. This Texas-based company offers infrastructure solutions for electric power, telecommunications, and other industries. Services include work on renewable energy facilities, electric power transmission and distribution networks, and substation upgrades.
Also a Paradigm Portfolio stock, Quanta Services has had nicely growing annual sales since the economic meltdown in 2009. It also has very low debt, and is well liked by analysts. Free cash flow for the company has been positive for four out of the past eight quarters.
Back in early 2011 PWR was trading at upper levels of its fair value channel, so investors would have been paying top dollar for the stock in our estimate. Currently, however, Quanta Services is trading at the bottom of its fair value channel, so looks more attractive as a buy.
Another way to efficiently diversify in smart grid investing is through an Exchange Traded Fund (ETF). One of the more highly rated green funds is First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID). The Roen Financial Report rates GRID as a Rank 2 fund on a scale of one to five, one being best. Relative to other alternative energy ETFs, GRID has a good risk/reward ratio, is very tax efficient and has low management fees.
Overall, I believe smart grid companies will prove to be an excellent long-term investment if you are strategic in picking the right companies.
The Paradigm Portfolio is a select list of green investments that are considered best positioned to benefit from the energy paradigm shift away from foreign oil and polluting coal and toward cleaner power alternatives. These leadership companies are culled from a list of nearly 250 alternative energy stocks that play an important role in redefining our energy future.
Accounting for additions and removals from the Paradigm Portfolio since inception in January 2013, returns* have profited 35%. This greatly outpaces returns of the overall market – the S&P 500 was up 24% and the tech-heavy NASDAQ gained 27% over the same time period.
It is no coincidence that the two biggest gainers in the portfolio to date are both solar installers. This is one of the hottest investment themes of the year, as dropping panel prices, assorted government incentives and a plethora of financing options has dramatically increased the number of solar installs.
SolarCity Corp. (SCTY) is the best performer by far, having gained 335% in price since entering the portfolio in January 2013. The stock has surpassed its peaks back in May on the announcement of underwriting of new shares. In addition, SolarCity reported solid third-quarter numbers and even better guidance.
SunPower Corp (SPWR), the second largest gainer, is a more integrated solar company that both manufactures and installs photovoltaic panels. SunPower has gained 120%.
Seven companies out of the 36 in the Paradigm Portfolio have shown a loss since entering the portfolio. The average loss of these stocks, however, is very small, around 4%.
Paradigm Portfolio Update
One company is being added to the Paradigm Portfolio, and one is being removed.
COMPANY ADDED: The smart grid company MYR Group, Inc. (MYRG) provides a range of services to the electrical infrastructure market, including design, engineering, procurement, construction, upgrade, maintenance and repair. This relatively small Midwestern company has 3,300 employees and operates throughout the continental U.S. MYR is involved in several renewable energy projects, including transmission lines for large-scale wind farms and solar arrays.
The financials of MYRG look very good. It rates well in earnings per share growth, sales growth, return on capital and cash flow. In addition, MYRG has very low debt. We measure MYRG to be trading at fair value at current prices, so this is a good time to add it to the Paradigm Portfolio.
COMPANY REMOVED: Renewable Energy Group Inc. (REGI) is an Iowa-based biodiesel business with over 220 million gallons of production capacity. REGI is a profitable company with excellent sales growth, and has performed very well in the portfolio, gaining 86% since January 2013. There are several other companies in the Paradigm Portfolio involved in renewable fuels, including The Andersons, Inc. (ANDE) and Darling International (DAR).
REGI and other biofuel companies have benefited greatly from the Renewable Fuel Standards (RFS) put in place by the EPA. These standards mandate that specific volumes of renewable fuel be sold, and those percentages are set to increase before the end of the year. A lawsuit recently filed by the influential American Petroleum Institute against the EPA poses a serious challenge to the 2013 RFS. There may be some fallout for biodiesel companies if the lawsuit is successful and biofuel companies loose the incentive to continue to scale up. Although we believe in the future of renewable fuels as part of the clean energy mix, it makes sense not to overweight the portfolio in this area. Since we see REGI as overvalued at current stock prices, it is prudent to remove it from the portfolio at this time.
*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.
A significant alternative energy investment theme with potential for growth over the next few years is offshore wind. This article looks at the promise of marine based wind, potential pitfalls, and names three investments that could benefit from large-scale offshore wind development that is likely coming.
The Potential of Offshore Wind
In 2011, the U.S. Department of Energy and the U.S. Department of Interior jointly published a national offshore wind strategy. According to the report, in areas with less than 100 feet of water the generating potential of offshore wind equals the entire generating capacity of the current U.S. electric system. If you include all of the potential offshore wind capacity, marine-based windmills could generate four times the current U.S. electrical demand!
A big plus is that some of the best offshore wind sites are near major population centers of New England, the mid-Atlantic, Gulf of Mexico and mid-Pacific coasts. The strategy estimates a deployable offshore resource that could generate 10 gigawatts of electricity in less than 10 years, at a cost of $0.10/kWh. This projection increases five-fold by 2020, to 54 gigawatts generated at $0.07/kWh. This would make offshore wind very competitive with both fossil fuel and renewable based generators.
So far, there have been two successful auctions of offshore wind leases in the U.S.—in Virginia and Rhode Island. Together, these auctions have generated $5.4 million by the Bureau of Ocean Energy Management (BOEM), leasing out 277,369 acres that could generate gigawatts of clean power. The fact that these two auctions generated positive action is a very good sign. Accordingly, BOEM plans to auction off leases in New Jersey, Maryland and Massachusetts in 2014.
Offshore Wind Challenges
Pun intended, but there are some significant headwinds to successfully executing offshore wind in the U.S. and abroad. The farther off the coast you go, the stronger the wind speeds. However, this means deeper depths, which increases technical challenges. Even at a large scale, offshore wind costs more to build and maintain than its land-based counterpart.
Another limiting factor pointed out by PennEnergy Research is the shortage of suitable operation and maintenance vessels. In order to tug large payloads, secure offshore towers, lay cables and the like, you need costly specialty ships. The competition for these ships is especially acute because of the increase in new offshore oil and gas fields. Oil and gas can offer better prices to gain access to this limited specialized fleet.
Another concern is that federal tax credits favorable to wind are set to expire at the end of 2013. Though there is a real risk that these credits will dry up, I believe there is a good chance the tax credits will be extended. Developing domestic sources of clean energy is a white-hat issue for both parties. Even during the fierce budget battles at the tail end of the Great Recession of 2012, congress had the votes to extend the credit.
Offshore Wind Investment Strategies
Two companies and an Exchange Traded Funds (ETF) are worth a look at as investments in offshore wind. Keep an eye on price, though, given the current frothy condition of the market.
ABB Ltd. (ABB) is a Swiss company whose products and services include power transmission, distribution and power-plant automation. Its systems are key in addressing the challenges of constructing, transporting and connecting large, distant offshore wind platforms. As a result, ABB recently secured a large offshore wind order. ABB has solid earnings and growing annual sales, but looks overvalued at current trading levels in the mid 20s. This stock looks more like a buy in the mid to high teens.
Parker-Hannifin (PH) is a large, diversified industrial manufacturing company that has a wide array of products. Of interest here is that Parker-Hannifin is a key supplier of underwater high-voltage power cables. We believe it is well positioned to take advantage of the growth of offshore wind with its subsea power cables. This well run, profitable company has excellent cash flow, but seems overpriced at current trading levels. The stock would look more interesting if it traded back down in the low to mid 80s.
Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an alternative energy ETF. A good wind-oriented ETF is First Trust ISE Global Wind Energy Index Fund (FAN). Compared to other alternative energy ETFs, this fund has a relative low expense ratio and management fee structure. On the other hand, FAN has a high potential capital gains exposure. Though this fund has been beat up in the past, it has posted an astounding 74% return in the past 12 months.
Even though the price of solar photovoltaics continues to drop dramatically, wind power is still one of the most economical forms of clean energy. Though offshore wind is much more expensive to develop than its onshore cousin, the potential for large amount of steady generation cannot be ignored. The long-term clean energy investor would be wise to have a strategic position in this sector.