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October Overview

October brought a gentle fall to my Clean Energy model portfolio, and a slightly-less gentle decline for the clean energy sector and the stock market as a whole. Both the unhedged and hedged versions of my model portfolio fell 2.3% for the month, compared to a 4.1% decline for the widely held Powershares Wilderhill Clean Energy ETF (PBW), which I use as a benchmark for the clean energy sector as a whole, and a 4.0% decline in the broad market, as measured by the Russell 2000 ETF (IWM). All returns are as of Friday's close.

For the year, my clean energy model portfolio leads PBW by 25% but lags the broad market by 7%. The unhedged portfolio is up 4.3% for the year, while the hedged portfolio is down 2.6%, having lost money on the hedge as the broad market rose. For comparison, PBW is down 20.3% and the IWM is up 11.4%.

For details on the performance of my individual picks, see the chart and discussion below.

(click to enlarge)

Stock Notes

Among individual stocks, only Finavera Wind Energy (OTC:FNVRF) and Honeywell, Inc. (HON) had positive returns. Finavera's 6% gain came as the market continued to digest the prospect of an outright sale of the company, as I discussed in some detail in the October update. Analyst Felix Pinhasov thinks the company is worth about $1.10 per share, and expects investors will "receive a fair offer and a healthy premium" on the current price of $0.38 a share.

Honeywell's 2% gain seems largely due to a contract to equip new Cessna aircraft, and both Deutsche Bank and Barclays initiating coverage on the stock with Buy and Overweight ratings, respectively.

Battered Lime Energy (LIME) was down another 2% on a dilutive convertible note private placement to a group of investors led by Lime Director and largest shareholder Richard Kiphart. I thought the timing of this private placement unusual, given that the stock price is currently depressed due to an ongoing internal audit to clean up Lime's books after misreporting of income. If the placement could have waited until after the results of the audit were announced, the pricing of the placement would almost certainly have been better, making it less dilutive to existing shareholders. I contacted Lime's CEO, John O'Rourke on October 23rd, to see if he could explain the timing. O'Rourke stated that he was "not ready to have a conversation yet," but promised one "soon."

Lime management will have to communicate extensively with shareholders soon, since the company will have to seek shareholder approval for the transaction by Feb. 28 at the latest.

The most significant declines came from Alterra Power (OTCPK:MGMXF) (down 13%) and Veolia (VE) (down 8%). Alterra's decline did not seem to arise from any news, and even came in the face of an agreement with the Philippines based Energy Development Corporation (EDC) to fund the development six of Alterra's geothermal projets in Chile and Peru, subject to EDC being satisfied with the results of due diligence field work on the projects. While I would have expected a funding agreement with a global geothermal leader such as EDC to have given Alterra's stock a significant boost, this announcement only managed to halt the stock's decline, most likely because EDC has not yet committed to the projects. Given Alterra's current value pricing and the likelihood that EDC will choose to proceed with some of the projects in the next six months, now is probably a good time to buy Alterra if you have not already done so.

Veolia's decline seems mostly due a downgrade of the stock from HSBC Securities from Overweight to Neutral on October 9th. I took the opportunity to add to my position high dividend paying stock at $10.09 and $9.75.

I did not see significant news for any of the other stocks in the portfolio, most of which traded nearly flat. Their performance was as follows:

Western Wind Energy (OTC:WNDEF) -1%
New Flyer Industries (OTC:NFYEF) -1%
Waste Management (WM) +3%
Rockwool International A/S (OTC:RKWBF) -4%
Accell (OTC:ACGPF) flat
Waterfurnace Renewable Energy (OTC:WFIFF) -3%

Conclusion and Election Outlook

While October was a quiet month, the U.S. Presidential election promises to bring significant news both for clean energy and the market in general. Romney's hostile attitude toward clean energy and Obama's supportive policies mean that PBW is likely to decline significantly on a Romney victory, and gain from an Obama win, while results for the broader stock market will be much more dependent on Congress successfully tackling the looming fiscal cliff during its lame-duck session. I personally am worried that our dysfunctional Congress may not be up to the task, which is why I recently wrote about how to protect your portfolio with puts.

In terms of the model portfolio stocks, most are relatively immune to domestic politics because their operations are broadly international (ACCEL, VE, RKWBF, MGMXF, FNVRF), or likely to be dominated by company specific news (LIME, FNVRF). The exception to these rules is Waste Management, whose primary business is far enough removed from clean energy that changes in Federal policy toward renewable energy are unlikely to affect its returns. Western Wind, New Flyer, Honeywell, and Waterfurnace should all feel electoral effects to varying degrees.

Waterfurnace gets a boost the 30% Investment Tax Credit for geothermal heat pumps, which is currently expected to revert to 10% in December 2013. However, even an Obama administration is unlikely to be able to extend this in the current political environment, so I expect the stock to follow the real estate market more than the political cycle.

New Flyer's U.S. bus sales are heavily subsidized by the Federal government, and all mass transit subsidies will be at risk under a deficit cutting, car-friendly Romney administration. Expect NFYEF to gain from an Obama victory or fall in the event of a Romney win.

Western Wind Energy is currently in the process of auctioning itself to the highest bidder, but we can expect those bidders to place significantly more value on the company's wind development pipeline under a wind-friendly second Obama administration than under Romney, although this effect may not immediately show up in its stock price.

Although Honeywell is quite active in building automation and energy efficiency, the stock is more likely to get a boost from expected increases in defense spending under Romney than it is to be hurt by loss of support for energy efficiency.

Overall, this model portfolio might be helped slightly by an Obama win, but traders looking to speculate on the election result would probably do better to buy (Obama) or sell short (Romney) PBW than on any of my relatively stable picks.

Disclosure: Long OTC:WFIFF, LIME, OTC:RKWBF, WM, OTC:ACGPF, OTC:NFYEF, OTC:FNVRF, OTC:WNDEF, OTCPK:MGMXF, and VE.

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.

"November Update: What Will The Election Bring for Clean Energy Stocks?" was posted on AltEnergyStocks.com.

Source: November Update: What Will The Election Bring For Clean Energy Stocks?