I've been creating model portfolios of clean energy stocks since 2008. At first, it was just a list, but in 2009 I started tracking it as a model portfolio for a small stockmarket investor. With the exception of last year, clean energy stocks have had fairly miserable returns, as measured by my sector benchmark, specified at the start of each year. I've been using the Powershares Wilderhill Clean Energy ETF (PBW) for all but the first couple years. I plan to continue using PBW going forward, since it is the most widely held sector ETF, and so is a good measure of how the average clean energy investor might do over the course of the year.
As you can see from the chart below, 2013 was the first year that my model portfolio did not beat its benchmark...and also the first year that benchmark returned more than 12 percent. The last year PBW returned 60 percent was 2007, the year before I started publishing these portfolios.
The chart also shows trailing three and five year annualized returns. All of the three year returns are negative for both the benchmark and a little less so for my model portfolios. Among the five year returns, only that of the model portfolios from 2009 to 2013 is even slightly positive at an average annual return of 3 percent per year.
2013 in Review
Despite a 25 percent return in 2013, I was disappointed my model portfolio has not matched the benchmark's stellar returns. While the portfolio included two stocks which more than doubled, the portfolio's returns were significantly reduced by the inclusion of Lime Energy (NASD:LIME) and Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). These two, along with the worst-performing alternate pick, Ram Power (TSX:RPG, OTC:RAMPF) all suffered from specific business setbacks which had large negative impacts on their stock because of their small size and lack of internal sources of funds. As I wrote earlier this month, I plan to avoid such companies in this list going forward.
The portfolio was also held back by accounting problems at Maxwell Technologies (NASD:MXWL). While I warned readers to sell Maxwell on my Forbes blog at only a 2 percent loss at the start of March, I manage the model portfolio as a buy-and hold investor would, and only switched Maxwell out at the start of April, when it was down 39 percent, replacing it with Ameresco (NASD:AMRC). Both stocks subsequently recovered, but the delayed swap was a drag on portfolio performance. Had I swapped the two stocks on March 13th, the day after publishing my article on Maxwell, the Maxwell/Ameresco combination would have gained 17 percent rather than falling 19 percent, and the portfolio as a whole would have risen 29 percent rather than 25 percent.
Ten Clean Energy Stocks for 2014
My list for 2014 contains a large number of hold-overs from the 2013 list which did not participate in the general rise of clean energy stocks despite strong business prospect. This year, I will present my picks in rough order of risk, from the rather safe income stocks to a couple deep value stocks. I will also include two price targets, a low target for reflecting what I would expect to happen in a worst-case scenario, and a high target, if everything goes as planned. I expect well over half of these stocks will fall between the low and the high targets at the end of 2014.
1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
Current Price: $13.85. Annual Yield: 6.4%. Low Target: $13. High Target: $16.
I've written extensively about sustainable infrastructure REIT Hannon Armstrong since its IPO in the spring of 2013. Despite its recent run-up on the news of its $0.22 quarterly dividend, I expect the current yield and expected further dividend increases in 2014 will keep the stock from falling, and will likely drive more appreciation.
2. PFB Corporation (TSX:PFB, OTC:PFBOF).
Current Price: C$4.85. Annual Yield: 4.9%. Low Target: C$4. High Target: C$6.
Green Builder PFB returns to the list after 2013, when it paid C$1.24 in dividends, but gave back almost as much in share price. This stock is fairly illiquid, so it's best to only buy or sell using limit orders. In addition to its dividend payout, the company has been actively repurchasing stock since the start of December.
3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
Current Price: C$3.55. Annual Yield: 8.5%. Low Target: C$3. High Target: C$5.
Capstone is a Canadian power producer which is currently selling at a discount because of extended negotiations with the Ontario Power Authority over the renewable of the electricity purchase contract for its largest facility, a gas co-generation plant in cardinal, Ontario. The new contract is unlikely to be favorable to Capstone, but the stock market already seems to be pricing in a significant dividend cut, so even a "not horrible" contract could cause the stock to rebound. If not, the current C$0.075 quarterly dividend should offset most of the losses in even the most pessimistic case.