The Obama Effect: Is Clean Energy Outperforming the Market?

A comparison of the charts for clean energy ETFs and broader market ETFs seems to show that clean energy funds have, if anything, underperformed the market as a whole in recent months. Nevertheless, the quarterly performance update for my 10 Clean Energy Stocks for 2009 showed my picks strongly outperforming the market, although the much riskier 10 Clean Energy Gambles was only performing in-line with the sector indices.

It's unlikely that my picks are due to stock picking skill. My personal experience has shown that I'm much better at picking sectors than individual stocks: my strength is in spotting trends, not picking individual companies which will outperform.

Trend Spotting

If my picks are not doing better because of stock picking, it's either because of luck, or because I spotted a trend. The relative performance of the two portfolios gives a clue as to what it might be. When Lehman Brothers declared bankruptcy, I began selling stocks that had weak cash flows or balance sheets, and I continue to believe that companies which can internally finance all their capital expenditures and expenses will outperform the rest for years to come. As such, my Ten Clean Energy Stocks all had strong balance sheets and cash flows, while most of the Ten Clean Energy Gambles will likely need to raise more money by the end of the year.

If I'm right about this trend, then clean energy stocks have indeed been outperforming the market, but this trend has been masked as the market as a whole fell by the fact that most clean energy stocks are young growth companies; they often have weaker balance sheets and cash-flows than older, more established companies.

Testing the Trend.

To test my hypothesis, I turned to the Capital Asset Pricing Model, or CAPM. CAPM accounts for the general riskiness of companies by means of a statistic Beta, which is a measure of how much a company moves in response to moves of the market as a whole. Because clean energy companies tend to be riskier than the market as a whole, they tend to have Betas greater than one, and hence tend to decline more than the market as a whole when it declines, but advance more than the market as a whole when it advances.

Some commentators think that green funds will outperform in a recovery solely because of the higher Beta, but I suspect there's more to it. Any difference between the performance of a stock and the expected performance given the performance of the market as a whole is called Alpha, and if my hypothesis is correct, clean energy stocks are likely to have had positive alpha over recent months.

I chose to test my hypothesis over three and six month periods, since that is how long I feel I have been seeing an outperformance of clean energy stocks (I think it started slightly before President Obama's election, when it became fairly clear that he was going to win.) The CAPM model says:

Alpha = Actual Return - (RFR + Beta*(RM-RFR))

Where RFR is the risk-free rate, usually taken to be a long term treasury rate of interest, and RM is the market return. On October 24, 2008, the ten year Treasury note was yielding 3.7%, and on January 27, it was 2.5%. The total return of the S&P 500 has been -1.2% and 2.4% for six and three months, as of April 24th. That means that for the 3 month period, RFR₃ = 2.5%/4 = 0.6%, and RM₃-RFR₃= 2.4%-0.6% = 1.8%, while for the 6 month period since October 24, RFR₆ = 3.7%/2 = 1.9%, and RM₆-RFR₆= -1.2%-1.9% = -3.1%.

With this data in hand we can now check to see if clean energy stocks in general have been outperforming.

Clean Energy ETFs

To understand how the sector is performing as a whole, I will use several Clean Energy ETFs: for the sector as a whole, the two domestic ETFs: The First Trust NASDAQ Clean Edge US Liquid (QCLN) and The PowerShares Clean Energy (PBW.)

ETF	Beta	3 month		6 Month
		Performance	Alpha	Performance	Alpha
QCLN	1.85	9.4%	5.5%	4.4%	8.2%
PBW	1.74	7.7%	4.0%	-1.4%	2.1%

Clearly, both these clean energy ETFs have been strongly outperforming the market since Obama was elected and assumed office. Until the recent market recovery, however, the general market downtrend, combined with the high Betas of alternative energy stocks have been obscuring the strong outperformance.

Subsectors: Solar, Geothermal, Efficiency, Smart Grid

There are also Solar ETFs and Wind ETFs, which would allow us to see how these subsectors are performing relative to the whole market, but this would require comparison with a global market index, and some time spent importing data into a spreadsheet to calculate beta. As I mentioned at the end of a recent article on clean energy mutual funds, I expect that the subsectors most likely to outperform are those on which President Obama has been emphasizing his policy: Energy Efficiency, Smart Grid, High Speed Rail and Transit stocks and those power generation sectors which are most likely to contribute significantly to his goal of tripling renewable energy, Geothermal and Wind. Solar has also been outperforming, but only over a much shorter time period.

The boost to solar came from China, not Obama, and so it has only been felt for the last month or so. Since I don't have appropriate sector ETFs, I used a selection of individual stocks I hoped might be representative of their sector. I mostly chose stocks which are not in one of the two sets of ten stocks for 2009 discussed above.

Some of these stocks follow the patterns I would expect if their performance is being driven by the new administration's policies, but with just a few companies to choose from, I hesitate to draw conclusions about clean energy subsectors. Probably the best fit is the battery manufacturer Enersys (ENS). Battery manufacturers received a large boost from the stimulus package, and, this was more of a surprise than with other clean energy sectors. If you look at my discussion of the likely components of the stimulus package from December, you will see that I expected investment in the electric grid (including smart grid), energy efficiency, wind, and geothermal.

Batteries were not on my radar, and the large investment in battery technology seems to have come as a surprise to most other investors as well. Enersys slid in the three months after the election but before the stimulus was unveiled, but then took off in the last three months. In contrast, the gains in my wind stock, smart grid, rail, and energy efficiency stocks were spread out over the whole 6 month period. The geothermal stock saw most of its gains early on, perhaps because there was little explicit boost for geothermal in the American Recovery and Reinvestment Act.

Stock	Beta	3 month		6 Month
		Performance	Alpha	Performance	Alpha
FSLR (solar)	1.99	4.5%	0.3%	22%	27%
AMSC (wind)	1.87	51.7%	48%	123%	127%
ORA (geothermal*)	1.21	-.6%	-3.3%	35%	36%
PEIX (ethanol)	1.55	-27%	-30%	-47%	-44%
ENS (batteries)	1.16	56%	53%	29%	31%
ENOC (smart grid)	1.52	74%	71%	190%	193%
POWI (energy efficiency)	1.14	8.0%	5.4%	25%	27%
PRPX (rail)	1.39	11%	8%	41%	43%

* Ormat (ORA) is in my Ten Clean Energy Stocks for 2009, but there really is no other choice for a representative geothermal stock.

DISCLOSURE: The author has long positions in AMSC, FAN, ORA, PRPX, and POWI.

Comments

[ginchinchili:]

Maybe the best of the clean energy stocks is a company that nobody ever mentions, to my amazement, even though it hit a low of $6.73 in November and is now trading at $25.27, and still only a P/E of 6.21. That company is the cable giant General Cable (BGC). All of the alternative energy plays are going to require power cable, and lots of it. Obama specifically mentioned the need for miles and miles of power cable in his de facto State of the Union speech.

Perhaps it isn't listed among the clean energy stocks because people don't associate cable production with clean energy, but surely if you're going to mention a company like American Superconductor or even the battery companies, then General Cable should no longer be ignored.

General Cable is not only a great play on the Obama stimulus plan, but over the next several years the whole world will be moving to alternative energy and this clean tech revolution can't be done without cable. It is the most diverse cable company both in terms of the type of cable they produce and in terms of their worldwide locations. I just wish this company would get the recognition it is due.

Apr 27 09:21 AM

[Shotei:]

This guy (Tom Konrad) once posted an article here dragging down a company basiclly saying the stock wasn't worth having. Turns out the CEO of the company had been to busy to give him an interview and it made him mad. I wouldn't trust anything this guys says.

Apr 27 10:39 AM

[jack kreg:]

the Obama effect is surely destroying future wealth in the stock market in many regards, an important one to retiree's is utility stocks and dividend income. Utilities have been getting hammered as investors worry that the Obama energy tax will cut into demand for energy and further depress the already dismal economy. The Obama plan for higher taxes on retiree's dividend income is further depressing this critical part of the markter for America's retirement population.
So, I think Konrads article is all about a grain of sand on the beach, when he should look up and see the tidal wave coming, Obama energy taxes, and the incredible negative effect they will have on the whole economy, not just clean energy stocks, which amount to an infintesimal amount of the market.

Apr 27 11:54 AM

[Hazel Hende...:]

Perhaps Wall Street is finally catching on to the need to update their " fossilized " asset allocation and sector models , and break out the new Sustainability Sector as I have been uging at Seeking Alpha and EthicalMarkets.com

Apr 27 12:39 PM

[Ferdinand E...:]

If Wall Street is turning down nuclear in favor of 'sustainable', which some people have claimed, then I say to Hell with Wall Street. I'm a democrat and definitely prefer this government to the alternative, but the new president's energy team - which is actually an environmental team - should be ditched as soon as possible.

Apr 27 01:21 PM

[Chris B:]

Your observations on Beta and Alpha are spot-on. However, like you, I do best identifying trends rather than companies that individually will outperform.

The source of Alpha is often the winning of a contract, and unpredictable technological breakthrough, or the best marketing mix in the sector. Those of us who do not work full time as sector analysts would be hard pressed to identify the best of class. Then, even if we did pick the best companies in each sector, our investments would have still lost half their value in the past 1.5 years due to the bursting bubbles and resulting credit crunch.

Why not seek positive Beta then? In hindsight, the one thing that could have saved us from the 2008-09 bear market would have been awareness that the housing and commodities bubbles were about to collapse. The warning signs were all there - skyrocketing prices, euphoria, the entrance of ameteurs in real estate and futures trading. Trend watching Beta seekers should have done better than Alpha seekers, presuming they weren't afraid to sit in cash for a year or so and weren't romanced by individual companies.

We should be asking... what trends can be predicted now? If recovery is around the corner, we'll want to be in high beta stocks as they are predicted to rise faster than the market rises. If you switched from low beta to high beta stocks at the bottom, you would make money off a V or U shaped recovery (go down 1X and up 2X for example).

Unfortunately, most individual investors are doing exactly the opposite - moving to low beta stocks now that their high beta shares have lost so much.

Apr 27 04:55 PM

[INVESTGROUP:]

J

n Apr 27 11:54 AM jack kreg wrote:

> the Obama effect is surely destroying future wealth in the stock
> market in many regards, an important one to retiree's is utility
> stocks and dividend income. Utilities have been getting hammered
> as investors worry that the Obama energy tax will cut into demand
> for energy and further depress the already dismal economy. The Obama
> plan for higher taxes on retiree's dividend income is further depressing
> this critical part of the markter for America's retirement population.
>
> So, I think Konrads article is all about a grain of sand on the beach,
> when he should look up and see the tidal wave coming, Obama energy
> taxes, and the incredible negative effect they will have on the whole
> economy, not just clean energy stocks, which amount to an infintesimal
> amount of the market.

Apr 28 12:53 AM

[INVESTGROUP:]

THIS IS A RESPONSE TO THE COMMENTS OF JACK KREG,,
COME ON OLD TIMER, STOP LIVING IN THE "GOOD OLD DAYS "... IT IS TIME FOR CHANGE...
THE USA IS SO FOR BEHIND IN HAVING THE NEW ENERGY TECHS WORKINGS.. WE SHOULD BE LEADING THE WORLD BY HAVING THE GREEN ENERGY IN PLACE AND WORKING YEARS AGO. OH, HELL NO, SAY'S THE CORP GIANTS, WE LOSE MONEY..
HEY OLD TIMER, BE HAPPY ,,IT JUST SO HAPPENS THAT YOUR STILL ALIVE TO WITNESS THIS CHANGE.... .I TRUELY AND HONESTLY WISHING YOU WILL STILL BE AROUND TO SEE ALL THE STAR TRAC GOODIES THAT THE MOVIE PLAYS AND SEE THE NEXT UNIVERSE..
SO DON'T GET MADE AT OBAMA. HE JUST LOOKING OUT FOR THIS COUNTRY AND THIS WORLD FOR YOUR GREAT GRAND KIDDS TO COME.
YES THEY WILL HAVE A DEBT MAYBE OR MAYBE SOME OTHER CHANGE WILL HAPPEN IN THEIR GENERATION AND THEY WILL HAVE NO DEBT,, MAYBE THE WORLD WILL BE COME ONE AND EVERYONE LIVES IN PEACE OR JUST MAYBE THAT ONE OF YOUR GREAT GRAND CHILDREN WILL BE ABLE TO FLY TO THE NEXT UNIVERSE AND BACK.. NOW WOULDN'T THAT BE COOL!!!!!
SO OLD TIMER, GIVE THE MAN THAT YOU WITNESS HISTORY MAKING AND, MAYBE YOU WERE A PART OF IN SOME WAY, DO CREDIT IN TRYING TO BRING THIS COUNTRY TOGETHER AND TO MAKE US AMERICANS A PROUD COUNTRY AGAIN WHERE THE REST OF THE DOEN'T WORLD HATES US.. BITE THE BULLET AND PAY THOSE HIGHER TAXES TO MAKE THE WORLD A COOLER PLACE TO LIVE FROM THE GREEN HOUSE AFFECT..,
BUT OLD TIMER , IF YOU WANT TO CHANGE THINGS IT'S NOT WITH OBAMA THAT YOU SHOULD BE BAD MOUTHING TOO.. YOU NEED TO DO SOME RESEARCH AND REALLY FIND OUT WHOS CONTROLLING THE WORLD AND YOUR TAXES.. BELIEVE ME IT'S NOT OBAMA.. HE JUST LOVES THIS COUNTRY AND IS TRYING TO STRIAGHTEN OUT WHAT HE TOOK OVER WHEN HE STEP IN TO OFFICE..
COMMENTS FROM A WHITE GUY GOOD TRADING EVERYONE!

Apr 28 01:50 AM

[INVESTGROUP:]

;>)

Apr 28 02:01 AM

[schminkie:]

a lot of cost savings is due to the lower price of lead. really a lot by ens reports.

Apr 28 01:05 PM

[frflyer:]

Ferdinand

Nuclear power has a limited role to play in our energy future. It is expensive and slow to build, leads to nuclear weapons, has serious waste issues, requires enormous amounts of water, has no accountability, uses a finite resource that will run out just like oil, doesn't give us energy independence since we import 90% of uranium, and will produce electricity at high prices that won't be able to match those from solar and wind in ten years when we might see the first new reactors completed. It also faces shortages of key components to build reactors.

web.mit.edu/nuclearpower/
MIT study The Future of Nuclear Energy

climateprogress.org/20.../

I'm not saying we won't or shouldn't build any new nuclear but it isn't the panacea that is claimed. We don't have 10 years to wait for new reactors to begin helping with CO2 emissions, nor for carbon capture for coal. With the right political will, we can have 40% wind and solar power by 2030 and at least a few hundred gigawatts by 2020. By 2020 all solar and wind power will be priced in the low to mid single digit cents/kWh, while new nuclear and CCS coal will be in the mid teens cents/kWh.

The potential just for solar thermal. in just California's deserts, is the equivalent of hundreds of nuclear reactors, and over ten times as much energy as now generated in California. And that's the low estimate. If built with heat storage, it's dispatchable power will be more valuable than base load power, because it facilitates balancing the grid better. There's a good argument that a grid with more dispatchable power and less base load will be a better grid.

www.altenergystocks.co...

Wind energy is growing at a rate that will yield 100 GW by 2020, and that rate should increase over the coming years. Electric prices from wind are already in the mid single digit cents/kWh. PV solar will be there before the end of this decade.

Any plan that isn't sustainable will not give us much of a future. We are operating beyond the carrying capacity of the earth, and not just in energy.

Apr 29 12:55 PM

[DHI:]

I agree entirely and a company General Cable has helped foster, Composite Technolog(CPTC) is selling a lot of cable to China. It is younger company but has multiple green products and is totally being missed on the American stock rader.


On Apr 27 09:21 AM ginchinchili wrote:

> Maybe the best of the clean energy stocks is a company that nobody
> ever mentions, to my amazement, even though it hit a low of $6.73
> in November and is now trading at $25.27, and still only a P/E of
> 6.21. That company is the cable giant General Cable (seekingalpha.com/symbo...).
> All of the alternative energy plays are going to require power cable,
> and lots of it. Obama specifically mentioned the need for miles and
> miles of power cable in his de facto State of the Union speech.<br/>
>
> Perhaps it isn't listed among the clean energy stocks because people
> don't associate cable production with clean energy, but surely if
> you're going to mention a company like American Superconductor or
> even the battery companies, then General Cable should no longer be
> ignored.
>
> General Cable is not only a great play on the Obama stimulus plan,
> but over the next several years the whole world will be moving to
> alternative energy and this clean tech revolution can't be done without
> cable. It is the most diverse cable company both in terms of the
> type of cable they produce and in terms of their worldwide locations.
> I just wish this company would get the recognition it is due.

May 06 04:18 AM

[JosephN:]

Your final comment to the article says you cannot find another geothermal play besides ORA. You might want to consider Raser Technologies (RZ). Their modular geothermal plant in Utah, the Hatch plant, has already won a 2009 award and is easily replicated to new fields. With their advanced technology and shovel-readiness I believe they will garner the lionshare of the collective 'geothermal stimulus' coming out of the government.

Joseph

Jun 20 04:41 AM