Category Archives: Strategy

Pop Goes the Clean Energy Stock Bubble

by Tom Konrad, Ph.D., CFA

2020 ended with a massive spike in clean energy stock prices.  From the end of October, election euphoria drove Invesco WilderHill Clean Energy ETF (PBW) from $63.32 to $136 at the close on February 9th, a 114% gain in 100 days.  

Joe Biden is as strong a supporter of clean energy as Donald Trump was a supporter of big fossil fuel companies, but even with control of the presidency and both chambers of congress, there is a limit to what a president can do in a short time.  This is especially true when their top priority is (as it should be) dealing with a pandemic.

Acknowledgement of this reality seems to be setting in. as I write on March 5th, PBW is now down almost 35% from its high.  If the Dow Jones Industrial Average or S&P 500 had fallen 35%, this would be the depths of a bear market.  Clean energy stocks are generally much more volatile than the broad market, but, even so, a 35% decline should make investors sit up and take notice.

I focus on clean energy income stocks because they tend not to be subject to such wild swings.  The benchmark I use, the Global X Renewable Energy Producers ETF (RNRG – formerly YLCO) is also down significantly- 26% from its high of $20.20.

PBW
Year to date (3/5/21) chart for PBW and RNRG. Source: Yahoo! Finance

Pop! Goes the Bubble

With these large declines, it’s time to assess what’s next.  Large drops like this don’t happen without some panic among investors.  As always in a panic like this one, we need to assess:

  1. Has anything fundamentally changed which would justify the declines and possibly further declines.
  2. Is the panic approaching capitulation, when there is no one left to get scared and sell, or does the panic have farther to run?

Fundamentals

The biggest fundamental change is that interest rates are creeping up. This is in reaction to the expected spending in the Biden rescue package, and fears that we may see a surge of pent-up consumer spending as the vaccine allows the end of lock-down measures this summer.

These higher interest rates make stocks, especially income stocks like the ones I focus on, less attractive compared to bonds.  Higher interest rates also make it harder for companies to use debt to finance new investments, and so can reduce future earnings expectations.

While all these things are true, I expect their long term impact to be limited.  Most importantly, I do not expect interest rate increases to be large.  Interest rates have been historically low: It would take a much larger rise than I expect to bring them to a level that is not still low.  

There may also be some demand driven inflation in the summer, but I do not expect the demand or inflation surges to persist.

Similarly, the effect on future earnings from higher interest rates is also likely to be limited.  Most companies have been very active refinancing in the recent low interest rate environment, often bringing plans for future debt offerings forward.  This means that most will have the flexibility to reduce borrowing in the short to medium term if interest rates rise significantly.

Will Panic Lead To More Panic?

This is just a feeling based on having watched many market panics over the years, but I feel that the panic seems to be reaching its maximum.  I think the short term bottom will happen in the next couple weeks.  

I’m buying (actually selling slightly out of the money cash covered puts), especially clean energy infrastructure stocks like Yieldcos that I had been selling because of high valuations in December and January.  These include AY, NEP, AGR, and CWEN/A.  The amounts of each depend mostly on the size of my current positions- this is less a call about individual stock valuation and more one of market timing.

Conclusion

It’s time to bring much of that cash I’ve been telling people to keep on the sidelines for the last several months back into the game.

DISCLOSURE: Long positions all the stocks mentioned.

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.

The post Pop Goes the Clean Energy Stock Bubble appeared first on Alternative Energy Stocks.

SALT: Buying the Balitc Dry Dips

by Tom Konrad, Ph.D. CFA

The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel.

Since the BDI is a measure of the income which firms that own dry bulk cargo ships can earn, changes in the BDI tend to drive changes in the stock prices of such companies.

Stock Price Correlation

Until recently, one such company was Scorpio Bulkers (SALT), one of my Ten Clean Energy Stocks for 2021 picks. The chart below shows the last 5 years, with changes in the BDI leading to changes in SALT’s stock price.

5 year BDI/SALT chart

There is also one notable exception to these correlated moves in June 2020, when the company recapitalized in a secondary offering.

On August 3rd, SALT announced its new strategy of investing in the next generation of offshore wind turbine investment vessels and selling its fleet of dry bulk carriers.

As SALT’s dry bulk fleet is sold, the company’s future earnings become increasingly independent of BDI. If the market were acting rationally, the correlation of the stock with BDI should also fall over time.

We’re not seeing that.

6 month BDI/SALT chart

In October, 50-ish percent moves in the BDI led to 25-ish percent moves in SALT. In January, we saw two 30-ish percent moves in the BDI, and the corresponding moves in SALT were around 10 percent to 20 percent.

Vessel Sales

In both cases, the stock moves were approximately half the size of changes in the BDI. Between the start of October and the end of January, SALT announced the sale of 22 Vessels: 7 in October, 3 in November, 6 in December, and 6 in January. The company has sold approximately two-thirds of its fleet since the new strategy was announced on August 3rd, but the stock is still following the index..

Why is BDI Still Driving the Stock?

The continued correlation between SALT and BDI is likely due to quantitative hedge funds using programmatic trading to take advantage of correlations between BDI and all dry bulk shippers. Some of these programs (which may rely entirely on machine learning) have not yet been updated (or updated themselves) to reflect SALT’s declining dependence on dry bulk shipping for its future earnings.

Timing

When a stock falls for reasons that do not have to do with its fundamentals, I call it a buying opportunity.

BDI and SALT have both fell in late January. Enough said.

DISCLOSURE: Long SALT.

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.

The post SALT: Buying the Balitc Dry Dips appeared first on Alternative Energy Stocks.

Voting and GameStop

Only a couple weeks ago, I quoted the market aphorism, “In the short-run, the market is a voting machine, but in the long-run, it is a weighing machine.”

It comes to mind again now that Robinhood types are short squeezing hedge funds with GameStop (GME) and other nostalgia stocks.  

GameStop liquidation by Keith C – https://www.flickr.com/photos/146847719@N04/50768525393/, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=99378657
It’s another example that any strategy that relies on valuation affecting prices in the short run (like stonks betting that GME would go down because it lacks a viable business) is incredibly risky.  It’s also incredibly risky to bet that any trend driven by popularity will last.  Eventually, there are going to be a lot of people who bought GameStop at incredibly inflated prices who also lose a lot of money.
If Donald Trump didn’t teach us that an incredible number of people can get together and vote for what is essentially a prank candidate or stock, blindsiding everyone who expects the world to be a rational place, we’re currently getting another lesson with GameStop.
At least this time around, the internet trolls are not playing games with the future of our country and the planet.  If some overconfident Wall Street types lose their shirts to the trolls, I can get behind that.  The only way to justify the ridiculous amounts of money most hedge fund managers are paid is by claiming that they are smart enough to outwit other market participants.
How’s that working out?
My only worry is that a lot of other people are going to be hurt in the crossfire.  But I do hope GameStop’s managers have their act together enough to do a secondary offering before the bubble bursts.  Even though it could be the secondary offering announcement itself that bursts the bubble.

The post Voting and GameStop appeared first on Alternative Energy Stocks.