Scalper1 News
Summary The renewable energy market is growing and yieldcos are gaining traction. The Global X YieldCo ETF remains insulated from the Chinese stock market weakness. Better performance than peers. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is an ETF investing in YieldCos. This ETF provides a good chance of increasing investor returns, since it invests in the high yielding yieldcos as their underlying asset. In addition to investing in yieldcos which are considered a less risky way of earning stable dividends, this ETF also provides the benefit of diversification. The renewable energy market is set to grow at a rapid pace and will account for the lion’s share of electricity capacity going forward. YLCO has been battered recently due to a sharp fall in the overall energy sector. This has led to a jump in their yields as prices have declined. After drawing strong investor interest, the situation has reversed with investors shunning these securities. SunEdison (NYSE: SUNE ) which runs 2 yieldcos has said that it will not drop further projects into its yieldcos, given the sharp price erosion. Other companies such as Trina Solar (NYSE: TSL ) have also halted their plans of listing a yieldco. However, my view is that this is a temporary hiccup due to a combination of high exuberance for yieldcos and an overall selloff in energy prices. YLCO is currently trading down 27% since its listing in May 2015. Given the current slump in yieldco prices, I think it should be a good time to build some position in this safe bet. Why you should invest in this YieldCo ETF Underlying assets are yieldcos, which are growing – YieldCos are considered a safe bet given their low risk profile and ability to generate stable and predictable cash flows. They are also less volatile than renewable energy stocks. Even when the entire energy market is going through a severe downturn, I believe yieldcos are a good bet as they should continue paying their dividends since their cash flows are relatively immune from recessions. The growth story is also strong as the renewable energy industry is set to continue over the long term. No exposure to the Chinese market – The Chinese market turmoil has strongly affected the global commodity industry, with many commodity producers trading at multi year lows. There is a fear that the Chinese economy may face a hard landing leading to global slowdown. The global YieldCo ETF does not have any exposure in the Chinese market. The ETF has its maximum exposure in the U.S. market followed by the U.K. These two economies are performing well relative to other regions, such as Japan and Europe. A better shield to downside risks than individual holdings – YLCO has lost 27% since inception. Given below is the YTD performance of some of its top holdings, suggesting the ETF’s performance was better than most of its constituents. % of Holding YieldCos YTD performance 12.45 Brookfield Renewable Energy Partners (NYSE: BEP ) -10% 8.32 Terraform Power (NASDAQ: TERP ) -38% 7.68 NRG Yield Inc (NYSE: NYLD ) -45% 7.36 Nextera Energy Partners (NYSE: NEP ) -27% 6.53 Abengoa Yield (NASDAQ: ABY ) -27% Data as on 13th October’15 closing The renewable Energy Market is booming – There is an increased awareness about the renewable energy usage and its benefits in reducing the effects of global warming. Countries like India have large power deficits and rely on coal for their energy needs. Now these countries are at the forefront of an energy revolution, shifting largely towards solar, wind and other renewable forms of energy for their power needs. The U.S. has also made its stand clear by passing its recent ‘Climate Action Plan’. All of this speaks of a booming renewable energy demand. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. The market for yieldcos is growing – YieldCos have proven to be a success amongst the shareholders, primarily due to their stable dividend growth and relatively lower risk profile. With the growing renewable energy market, more yieldcos are coming into existence. After the success of SunEdison’s ( SUNE ) Terraform Power, the company has also listed another yieldco specializing in developing economies – Terraform Global (NASDAQ: GLBL ). There was also a joint yieldco by SunPower (NASDAQ: SPWR ) and First Solar (NASDAQ: FSLR ) called 8point3 Energy Partners (NASDAQ: CAFD ). Likewise, Canadian Solar (NASDAQ: CSIQ ) is also thinking of forming a yieldco before year end. Stock performance & Valuation YLCO gave better returns than some of its top holdings, as shown in the table above. The YTD performance was also better than solar ETFs like the Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vectors Solar Energy ETF (NYSEARCA: KWT ). The stock is currently trading at ~$11 which is 26% low than its all-time high price. The ETF was listed in May 2015 with an expense ratio of 0.65%. (click to enlarge) Source: Google Finance What could go wrong The energy stocks have taken quite a beating in recent days and yieldcos have not been immune to this fall. The slowdown of the Chinese economy has not only hurt the Chinese energy demand growth, but also the growth in other countries due to secondary indirect effect as their exports to the Chinese economy has declined. As we can see from the graph above, the stock price decline has happened in line and is following the trend in the broader energy market. If conditions get worse, the ETF could also lose more value. The project business is a highly capital intensive business, where developers resort to large amount of debt. Any problems in the sponsor company to honor their debt might lead to a slowdown in the yieldco business. Some of the yieldcos are now adopting a more prudent growth strategy to take into account the market turmoil. Some of the solar companies have also put their plans to do yieldco in cold storage. This might help YLCO as the competition for renewable energy assets will reduce, thereby making existing yieldcos more attractive. Conclusion The current weakness in the energy sector has caused major downturn in the energy sector. I believe this will cause the weaker players to close shop and only good quality stocks would survive. The major advantage of YLCO is that it does not have any exposure in the Chinese market, which is experiencing a major slowdown. Though it will not be totally isolated from the Chinese slowdown effects, it will still not be very drastic. Also the investment case for renewable energy market continues to be strong and YLCO insulates its investors from the volatility of directly investing in this sector. I think this is a good time to build a position in this yieldco ETF. Share this article with a colleague Scalper1 News
Scalper1 News