With the markets in free fall since the start of the year, many investors are rightfully worried about their portfolios' rapid declines. Although one of the biggest drivers of recent declines has been the fall in fossil fuel (especially oil) prices, clean energy investors have been far from immune.
Is it time for clean energy investors to run for the hills, or time to buy cheap clean energy stocks just when a number of drivers are turning in their favor?
Which clean energy sectors are best positioned to weather a worsening storm -- or recover the most if the clouds finally clear?
I asked a panel of professional green money managers these questions. Here is what they had to say.
Market trends
My panel is conservative to bearish on market trends. Tom Moser, portfolio manager at High Impact Investments, is particularly pessimistic.
"We are in the early innings of a multi-year bear market, with the S&P 500 set to be chopped in half," he said. "[This] will take three to five years to play out fully."
He does not think cleantech will be spared. But he does think the sector “will be one of the leaders when a new, secular bull market emerges, just as biotech led coming out of the 2008 financial crisis.” A three- to five-year bear market does not leave much room for good performance in 2016, however.
“It will take patience and smarts to navigate through the coming S&P 500 carnage," said Moser.
Oil prices
Many managers see low oil prices as a weight dragging down the sector.
Robert Wilder, a co-manager of the WilderHill New Energy Global Innovation Index and manager of the WilderHill Progressive Energy Index, expressed worries about fossil fuel prices across the board.
“Perhaps the biggest hurdle across clean energy has been oil dropping near $30, something hardly predicted by anyone a couple of years ago. Natural gas continues to look cheap and abundant too far over the horizon, while coal too is fetching very low prices. All this has meant dirty fossil fuels are very tough competition, since natural gas, for instance, could readily fire new power plants, and oil can cheaply fuel traditional cars," said Wilder.
Wilder still holds out hope for solar, wind, efficiency, electric cars and advanced batteries.
“It has long been said the cure for cheap oil is cheap oil -- and at some point, declining rig counts are likely to have some impact. More important though, is that clean energy, unlike fossil fuels, is on a long-term and unwavering trend toward ever-greater cost-competitiveness," said Wilder.
"Once solar unsubsidized gets as cheap as fossil fuels, all bets are off in terms of support for dirty energy. That notion, which not long ago seemed very far off, is quickly becoming a more real threat to vested interests."
Shawn Kravetz, president at Esplanade Capital and manager of the solar-focused hedge fund Electron Partners LP, called the connection to oil prices “senseless" -- particularly for solar stocks.
Top clean energy sectors
Managers agree that solar will have a very good year in the U.S. and around the world.
“The extension of the Investment Tax Credit extends the runway for solar dramatically in the U.S.," said Kravetz.
“A more sustainable U.S market, combined with a robust global market, should propel solar stocks. Leading solar companies will see sustainable revenue and earnings growth in 2016. Perhaps more importantly, they should see multiple expansions as investors re-rate them based on a more predictable medium-term outlook," he said.
Wilder agreed, and said that the global climate agreement in Paris will provide tailwinds for the sector. However, in 2015, the solar industry was "unable to overcome strong headwinds that include a fast-weakening China, low energy prices, opposition to solar continuing in some domestic fronts, and solar profit margins upstream to downstream being squeezed ever harder.”
Moser thinks larger stocks are better positioned to survive the extended downturn, and is weighting his portfolio accordingly. His two favorite companies are Toyota Motors (TM), priced at $110 and Hydrogenics (HYGS), priced at $6.75. (Readers should note that HYGS is a microcap name, implying that Moser weights TM much more heavily in his portfolio.)
“These two companies are involved in development and selling of hydrogen fuel-cell technologies. This sector seems to me to be a bit under the radar of many cleantech money managers and investors. The growth prospects are much brighter now than a decade ago," said Moser. Of course, many people would strongly disagree with this thesis, given the poor track record for fuel-cell companies.
Like Moser, I think that investors should focus on safety to combat the effects of an extended downturn, and balance it with an off-the-radar sector that could benefit from a sooner-than-expected oil price rebound.
For safety, I prefer to focus on the safety of a company's cash flows, rather than its size. Only utilities have cash flow as reliable as clean energy YieldCos. YieldCos own clean energy projects such as solar and wind farms, and the electricity they generate is mostly sold under long-term contracts to investment-grade offtakers, usually utilities. Even the highest-quality YieldCos are trading with sustainable dividend yields around 7 percent.
Like solar, biodiesel also got a tax credit extension in December. Furthermore, the targets for biodiesel production under the Renewable Fuels standard were set in November and will help the industry grow through 2017. These supports should make the increasingly consolidated industry profitable in 2016, no matter what happens to the oil price.
If, on the other hand, the oil price rebounds, industry players are likely to see windfall profits.
Conclusion
The current market correction has not spared clean energy, despite very attractive valuations in many clean energy sectors. The best times to buy stocks are when periods of market turmoil end. But even the professionals often fail at timing the market.
If we can't call the timing, it never hurts to buy quality companies at great prices. Companies with the financial strength to weather any storm can form a solid core for a portfolio, while companies set to benefit from economic trends allow investors to benefit when conditions eventually improve.
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Tom Konrad is a portfolio manager and freelance writer with a focus on clean energy income investments. He manages the Green Global Equity Income Portfolio and is editor at AltEnergyStocks.com. He and his clients have no positions in any stocks mentioned.