What are we looking for?
Renewable-energy companies that could be attractive long-term investments.
The screen
Last week, two European energy giants – Germany's Siemens and Spain's Gamesa – merged. The main motivation was to achieve scale in their renewable-energy businesses, specifically wind turbines. Renewable energy is becoming a bigger slice of the global energy pie, with an especially large focus on implementing this technology in emerging markets. This combination of a rapidly developing technology in developing markets could be very lucrative for investors with a longer time horizon and the ability (and nerve) to handle risk.
Investing directly in foreign markets comes with obvious challenges, but a lot of renewable-energy companies in developing countries are listed in North America for access to capital. We screen for companies listed in North America and we also look at "primary country of risk," a Thomson Reuters metric that shows the country that is the source of the majority of revenue and growth opportunities for the company.
Next, we consider relative valuation and look for only companies with a forward price-to-earnings ratio of fewer than 15.
To mitigate risk, we filter out the smaller companies and include only those with a market cap greater than $200-million (U.S.).
Finally, we consider short interest. When a stock is sold short an investor has made an active bet that it will decrease in value. Short interest measures the percentage of shares outstanding that have been sold short, and we filter for a short interest not exceeding 6 per cent.
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What did we find?
This screen produces seven companies, with either the United States or China as the primary country of risk for six of them.
One Chinese company that is particularly interesting is Daqo New Energy Corp. Daqo uses a process developed by the aforementioned Siemens to produce polysilicon for use in solar panels. Last year, it reached an annual capacity of more than 12,000 tonnes and it has a profit margin significantly higher than the rest of its domestic competition.
Those not ready to take direct exposure to China may want to look at Enviva Partners, based in Maryland. Enviva sells utility-grade wood pellets to customers in Northern Europe for use in power generators. Earlier this month, it signed new long-term contracts with customers that bring its average length of contract to more than eight years.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.