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Underrated Small-Cap In Renewables

We sent this piece to subscribers of our new free underrated small-caps newsletter last week . Renewable energy is sexy right now. As sexy as energy can be. However, when it comes to investing in renewables, it’s tricky business. Case in point. US Geothermal (NYSE: HTM ) is a small-cap stock, to say the least, trading at less than a $1 per share and $60 million market cap. Trading at a 55 cent handle, it checks a number of boxes on our Six Small-cap Laws . Often overlooked and orphaned because there isn’t enough money in covering and reporting on small-caps, US Geothermal is still an exciting stock, yet misunderstood, as so many renewable plays are. US Geothermal operates three geothermal plants in the U.S. Part of what adds to the obscurity of US Geothermal, if the fact that it trades at a $60 million market cap, is that it’s in the geothermal business. Now, geothermal is a form of energy that demands some of the highest pay rates from utilities. You’ve got long-term contracts and inherent value in the plants that underpin the valuation. Growth is the big story for US Geothermal, however, with the potential to increase its geothermal output. Its current output of 50 megawatts is a fraction of what US Geothermal could manage in just a few years and it has the management bandwidth to get it done – with Dennis Giles as CEO. Giles managed an 800-megawatt portfolio for Calpine in the past. It’s already hired an investment bank to advise on strategic alternatives, with a go-private deal a possibility. One small hedge fund, Artko Capital , has 10% of its funds invested in US Geothermal. Naturally bullish, Artko is encouraged by the strategic review, with the private equity interest offering some “downside protection.” Activist Investor Now Involved Now, Artko Capital has some company. JCP Investment Management, the small activist hedge fund, revealed a 5% stake in US Geothermal earlier this month. They are invested at an average cost of $0.58 a share. Industrials, utilities and the likes are JCP’s sweet spot. JCP took on Gas Natural a couple years ago, as well as Smith-Midland in 2012, where the fund saw annualized returns of 100% and 200% on over the campaign holding period. JCP believes that US Geothermal shares are cheap and may engage with management about capitalization, ownership structure, board structure or operations. The End Game There are risks here, with US Geothermal needing cash to fund the various projects and cash isn’t always readily available. This could mean diluting shareholders with equity capital raises. US Geothermal operates in a niche business, which is good and bad. The bad actually working for them in this market. The company needs a lot of cash to support its projects, making tapping the equity and debt markets increasingly challenging. Rather, a private equity buyer can inject cash and operate the tremendous business model outside the guise of the public markets. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Best And Worst Of January: Nontraditional Bond Funds

Nontraditional bond mutual funds and ETFs had a tough month in January, losing 1.13% on average. This extended the category’s one-year losses through January 31 to -2.57%, consisting of -2.76% alpha and a -0.47 beta, relative to the Barclays US Aggregate Bond Total Return USD Index. Mutual funds and ETFs in the category averaged a -0.66 Sharpe ratio for the year ending January 31, with volatility of 3.53%. The nontraditional bond fund category is a mixed bag of long/short credit funds, non-traditional income funds and unconstrained bond funds. In total, there are 150 funds (only 63 have a track record of 3 years or more) in the category and $129.3 billion of assets. Below is a look at the top and bottom performers for January. Top Performers in January The three best-performing nontraditional bond funds in January were: Navigator Tactical Fixed Income Fund A (MUTF: NTBAX ) BTS Tactical Fixed Income Fund A (MUTF: BTFAX ) Counterpoint Tactical Income Fund A (MUTF: CPATX ) NTBAX was the top-performing nontraditional bond fund in January, posting gains of 2.38%. This was enough to push the fund’s one-year returns through January 31 into the black, at +0.34%. These returns consisted of 0.49% alpha and a 0.76 beta, yielding a Sharpe ratio of 0.09 with standard deviation (volatility) of 3.90%. BTFAX ranked second for the month, with gains of 2.00%. Its one-year returns, however, remained in the red at -0.16%, with -0.02% alpha and a 0.65 beta. BFTAX’s one-year Sharpe ratio stood at -0.04 through January 31, with annualized volatility of 4.15%. Finally, CPATX was the month’s third-best performing nontraditional bond fund in January, with gains of 1.31%. Its 12-month returns through January 31 stood at +2.10%, with 2.09% of alpha and a low 0.15 beta. CPTAX’s Sharpe ratio of 0.60 was by far the best of any fund reviewed this month, and its 3.41% volatility was the lowest. Bottom Performers in January The three worst-performing nontraditional bond funds in January were: Driehaus Select Credit Fund (MUTF: DRSLX ) Putnam Diversified Income Trust A (MUTF: PDINX ) Altegris Fixed Income Long Short Fund A (MUTF: FXDAX ) FXDAX was January’s worst-performing nontraditional bond fund, with its shares falling 5.17% for the month. Through January 31, FXDAX’s one-year returns stood at -9.82%, consisting of -10.50% alpha and a -1.59 beta. This gave the fund a one-year Sharpe ratio of -1.60, with annualized volatility of 6.33%. PDINX, the month’s second-worst performer at -4.83%, also had bad-looking one-year numbers. Its losses of 5.47% were made up of -5.86% alpha and a -2.05 beta, yielding a -0.76 Sharpe ratio and 7.15% volatility. Although it outperformed FXDAX and PDINX in January, DRSLX looked worst of all over the year ending January 31. In those 12 months, the fund lost 11.18%, with -11.97% alpha and a -1.55 beta. Its one-year Sharpe ratio stood at -1.70, and its annual volatility was 6.85%. Even over three- and five-year terms, DRSLX was down an annualized 4.58% and 1.66%, respectively. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article. Note: The MPT benchmark used for the above calculations was the Barclays US Aggregate Bond Total Return USD Index.

Bumps In The Road

There are frost-heaves ahead. Is your portfolio ready? Click to enlarge Photo: Kevin Connors . Source: Morguefile At this time of year in New Hampshire, we have to deal with frost heaves. Rain and melt-water from winter storms seep into the roadbed, then lift the road when the water re-freezes. How we deal with the bumps says a lot about what kind of people we are. Some folks sail blithely through, figuring that their car’s shocks can handle the stress. That’s fine as long as they have a good suspension – and strong stomachs! Some of the bigger bumps can really rattle you. Others slow down, picking their way through, creeping over the biggest heaves. That’s fine as long as you don’t need more momentum later, like when you’re going uphill on a snowy day. Still others start to cruise moderately through, but they seem to find perfect speed to maximize effect of the bumps. Their vehicles shake more and more violently, until it looks like their cars are skipping and hopping. From behind, you can see them bouncing inside the car. My engineer daughter tells me that they’ve found a resonance frequency that does the maximum damage. It’s like this in investing. If you see a rough patch ahead, you can just cruise through, riding down and riding back up, if you have the stomach for it – and no loose fillings! Or you can raise cash, lowering your expected return in the short run in exchange for the peace of mind that comes from having dry powder. That’s the go-slow approach. But you really don’t want to be shaken around and panic, selling as the market tanks and buying back in after things get more expensive. That’s a sure way to bottom out – or get launched right off the road! Click to enlarge S&P 500 over the last 20 years. Source: Bloomberg Frost heaves present us with bumps in the road – like the squiggles and jiggles of the market. It’s good to know how to deal with them. Because after they subside, it will be time for mud season.