Investors fall for green equities, but do they deserve the love?
Leaders in this sector are poised to grow with expanding demand, advisers say
By: JOEL SCHLESINGER
Date: September 13, 2016
Green equities often take a back seat in investment portfolios. But they are increasingly de rigueur among institutional investors who are divesting themselves of climate-change-inducing industries such as oil, gas and coal.
Although the selection of investments in wind and solar power and other so-called clean technologies is better than even just a few years ago, it still pales in comparison to the industry it aims to replace. That means investors should be able to find leaders in this sector that are poised to grow with expanding demand, says Tom Konrad, editor of AltEnergyStocks.com in New York.
“The one thing to point out about the whole divestment movement is that the number and size of investments that foundations and funds are moving out of is creating a pool of money much larger than the substitute: clean-tech,” he says.
“So if even a tenth of this pool is put into green investments, it could cause the prices of those investments to skyrocket.”
But not all clean-tech investments are equal. Here are a few to consider.
TransAlta Renewables Inc. (RNW)
This company was spun out by its parent firm, TransAlta Corp., a major electricity provider, to focus solely on production of renewable energy. Its assets include 18 wind facilities with a 19th being added in Quebec, and 13 small hydro facilities across Canada and the United States.
It’s “a major player in the alternate energy sector and Canada’s largest wind energy producer,” says Stephen Whipp, managing director of responsible asset management at Leede Jones Gable Inc. in Victoria.
Since its inception, TransAlta Renewables has produced steady income with dividend growth of about 25 per cent. Like many income oriented companies, however, it is sensitive to rising interest rates that affect its bottom line and ability to pay a competitive yield.
Pattern Energy Group Inc. (TSX-PEG or NASDAQ-PEGI)
Listed in both the U.S. and Canada, Pattern is one of the larger players among renewable income investments in the U.S., referred to as yieldcos. The industry recently hit a rough patch as less conservatively run yieldcos benefitting from growing investor demand struggled to remain profitable amid expectations of rising dividend yields.
Among the notable firms to crash and burn is SunEdison Inc., now valued at about five cents down from its peak price of more than $30 a share in mid-2015. As one of the larger and more conservatively run yieldcos, Pattern has been able to buy stressed assets from firms such as SunEdison while still paying a yield north of 5 per cent.
“There is some leverage involved, so there is interest rate risk,” Mr. Konrad says, “but Pattern is a very conservative investment, which is what I like about it.”
Hannon Armstrong Sustainable Infrastructure Capital Inc. (HASI)
This New York Stock Exchange-listed company separates itself from other income earners in the clean-tech space by financing projects rather than owning assets.
“They’re financing clean-tech and demonstrating the net benefits of taking that approach,” says Cary Krosinsky, sustainability adviser with RLP Wealth Advisors LLP in New York, and a lecturer at Brown, Yale and Concordia universities. “The downside is the company has done really well, so it may be at a valuation peak.”
Offering a dividend yield of about 5 per cent, Hannon Armstrong still likely makes sense for those seeking steady income.
Renewable Energy Group Inc. (REGI)
A global leader in production of biodiesel fuel, Renewable Energy Group is weathering the storm of low oil prices that has dampened demand for alternative fuels. Because of the way subsidies and regulations work, “a certain amount of biodiesel still has to be sold,” Mr. Konrad says. For example, in the U.S., regulations stipulate that 36 billion gallons of renewable fuel must be blended into domestic fuels annually by 2022.
Among the largest players in its respective industry, Renewable Energy Group has “been able to consolidate its position” and should remain profitable even if oil remains low, he says.
“If the cycle turns, the company has potential for humongous growth,” and would particularly benefit from a supply-and-demand pinch where demand for biodiesel outstrips supply. But he cautions its upside may also be limited by an eventual lack of supply on the input side, in which rising feedstock prices, for example, eat into profitability.
GreenPower Motor Company Inc. (GPV)
The Toronto-listed firm may be ideal for investors seeking to add a little more risk to their portfolios in exchange for potential high growth, says Mr. Whipp.
This company has moved from offering one model of electric vehicle (EV) bus to offering several, including a double-decker. The Vancouver-based company is still in its early stages, and a lot can go wrong as it seeks to win larger contracts, he warns. Moreover, it still relies on other companies’ facilities to manufacture. But it plans to increase its capacity.
Most importantly, GreenPower is selling buses – albeit in small numbers – and is an early industry leader. “Like most early industry adopters, it is usually the first to prove reliability,” and in turn, profitability, Mr. Whipp says.
What about ETFs?
Exchange-traded funds offer diversified exposure to the clean-tech sector at low cost. But Mr. Krosinsky does not favour them.
“They are not well-suited to the clean-tech space,” he says. “If you’re investing in the whole space, you’re picking up too many losers that [may] go belly up.”
Moreover, clean-tech ETFs tend to have small market capitalization, are less liquid than individual securities and often pay a lower yield, Mr. Konrad says. Even one of the largest ETFs in this sector, the PowerShares Cleantech Portfolio, has a market capitalization of only about $74-million and a dividend yield of less than 1 per cent.
Another, Global X YieldCo Index ETF (YLCO), yields more than 5 per cent but has a market cap of about $7-million. “It follows companies that are like Pattern Energy Group,” Mr. Konrad says.
But, he adds, he prefers individual stocks to ETFs such as Global X because it is so small. “You actually get more liquidity buying Pattern” for a similar yield.
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