by Harris Roen, Editor
Roen Financial Report
January 14, 2014
Alternative energy stocks had an epic year in 2013. The widely watched Ardour Global Alternative Energy Index Composite (AGIGL) was up 53% in 2013. That’s double the 26% return for the S&P 500. In fact, 2013 marked the largest annual return for the AGIGL since 2007. In January 2013, I predicted that “…low interest rates and plenty of corporate cash will be a strong driver of stocks in 2013, including the growth industries within alternative energy.” That forecast turned out to be true and then some.
This report drills down into the data to better understand what happened to alternative energy stocks in 2013, and considers where cleantech investments may go in 2014.
Alternative Energy Stock Returns for 2013
For all of the +/-250 alternative energy companies that the Roen Financial Report tracks, stocks were up an average of 59% in 2013. The highest returning stocks did exceptionally well, with the top ten companies averaging a gain of 414% for the year! More than Half of the top ten gaining stocks are in solar.
Canadian Solar Inc. (CSIQ) was by far the largest gainer, up almost 800% in 2013. This solar cell and module company has been rebuilding its capacity over the past year, with choppy but growing sales. It also posted its first profitable quarter since 2010. Though Canadian Solar is technically based in Ontario, all of its manufacturing facilities are in China.
Of the bottom ten stocks, the worst performer was Ecotality (ECTYQ), which went bankrupt in September. Three other of the lowest performers were delisted to the pink sheets.
Half of bottom ten returns are in different business segments of the fuel alternatives industry. One is a biofuel company, BioFuel Energy Corp (BIOF), a former ethanol producer that has been selling plants and reducing its workforce. Chilean-based Sociedad Quimica y Minera (ADR) (SQM), the world’s largest producer of lithium for batteries, suffered from massive insider selling back in August. Cereplast Inc (CERP) is a very volatile startup with flagging sales. CERP develops bio-based resins as a renewable substitute for petroleum-based plastics.
Comparing returns of the various alternative energy industries confirms that solar was the best performer in 2013. The average return for the 67 solar stocks that the Roen Financial Report tracks was an impressive 81%. Solar investing has taken off for several reasons, rising impressively from its oversold lows in August 2012.
Energy efficiency stocks were the next best performers on average, up 60%. The market likes a business that can reduce a client’s fossil fuel consumption, curtail pollution and save money. When executed well, this business model is low hanging fruit in the alternative energy world.
When looking at returns globally, Asia was by far the most profitable region for alternative energy stocks. Though North America and Europe also had respectable returns on average, the Asian region was lifted mightily by Chinese solar stocks.
The above chart shows average alternative energy stock returns by size. Smaller companies did better overall, with a sweet-spot in the mid-cap companies. We define mid-cap as companies with annual sales between $1 billion and $10 billion.
Stocks that were the most volatile had the best returns in 2013. This is not surprising, since in a robustly up market year, volatile stocks will swing way above the averages. Conversely, stocks with the lowest volatility had lower average returns.
This next chart shows how stocks did when looking at sales compared to the same quarter last year. The graph clearly illustrates that the stocks with the highest sales growth had the best performance on average. Lowest sales growth companies had smaller average returns by a huge margin compared to the highest sales growth stocks.
What to Look For in 2014
The economy is setting up 2014 to be another good year for the stock market. Profits remain adequate, interest rates are low, and most importantly, the U.S. housing market continues to improve. Additionally, price momentum in the stock market is very good, so I expect additional money that retail investors have been keeping on the sidelines to flow in. I doubt growth will match that of 2013, however, since prices and valuations are not as depressed as they were a year ago. This means that even if a company continues to have a good year, comparisons to previous years data will look less impressive.
Since 2014 should be a year of steady growth, larger cap stocks that are lower on the speculative level will likely be the best performers. It is often the case that in the maturing stages of a bull market, large cap stocks do better. If the stock market falls dramatically, I would expect the more volatile stocks to experience accelerated losses, but I do not believe this will be the case in 2014.
Energy efficiency should continue to be a high returning industry for the reasons mentioned above. A. O. Smith Corp. (AOS), the Milwaukee-based water heating company, is one of my favorite picks in this industry.
Solar should also continue to be strong, especially for the upstream companies involved in installation. The two strongest choices here are SunPower Corp (SPWR) and the much ballyhooed SolarCity Corp. (SCTY). Of the two I think the stock price of SCTY has gotten ahead of itself, so SPWR may be the better choice at current prices.
Picking the right stocks will remain important in 2014, so investors are urged research alternative energy stocks carefully to ensure the best returns.