Our featured stock this issue is a company in transformation, from a niche recycling business to a green energy operation that will generate 14 times the revenue next year than it did last year, with profits. The stock price hasn’t caught up yet.

We also take the measure of Greentech and see signs it could be ending the bear move. As always, we update our portfolios and offer further suggestions to examine with our ESG Three.

Cabot SX Greentech Issue: June 1, 2022

Greentech Outlook

Greentech rallied strongly at the end of last week to finish over its 40-day moving average, a sign the market is potentially turning around. Last week, 93% of the Greentech universe of stocks were higher on the week and 58% higher over the past month. Both percentages are a lot less bearish than things have tended to be this year. Consider that even with the recent bounce, just 38% are higher over the past three-month span.

Another sign of a potential turnaround is a divergence in the accumulation-distribution line of our benchmark index, the Wilderhill Clean Energy ETF (PBW). The accompanying chart shows the index with its accumulation and distribution line below. Accumulation-distribution is a measure of price and volume action of recent sessions that indicates opportunistic buying or selling. Comparing it to the price chart above it, there’s a bullish divergence in that the accumulation-distribution line didn’t make a fresh low even as the index did. The same is seen in a chart of the S&P 500, which hints that market sentiment is improving. I’m also encouraged generally by the S&P’s trailing price-to-earnings ratio easing to about 21, which is slightly below its average since 1980 of 21.92.

But before we get ahead of ourselves, there are suggestions the move downward isn’t done. For one, the price charts themselves tell a different story. There is a downtrend line that implies resistance for Greentech near recent prices is the orange arrow in the chart– as well as the 200-day line, the purple line, just above that. Plus, volume on last week’s gains was good, but not great. Lastly, usually the S&P has to fall deeper into value territory to launch a new bull leg.

Greentech Timer
Greentech has switched from bearish to mixed. It’s above its 20-day moving average, which is turning to move higher, and is right around its 40-day moving average. If it can firm above the 40-day line, it could be a sign to begin moving back into positions with more force.

The major subsectors – solar, wind and water – are all in a similar position as the larger Timer, with encouraging near-term action but resistance above in the form of the 200-day moving average, which typically will generate good pushback. Utilities and nuclear are bullish. EVs continue to look like the laggards, but also have some near-term positive trading.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward-trending 200-day moving average too, but not essential).

Featured Stock: Vertex Energy Inc. (VTNR)

Overview
The U.S. used 57.43 billion gallons of diesel in 2020, the latest year for which the federal government has compiled figures. As you know, diesel is used mainly by heavy equipment – tractor trailers, farm equipment, construction vehicles. For air quality and global warming reasons, the federal government wants to see the amount of diesel used from its traditional source – crude oil – reduced. That is done primarily by blending in biodiesel – derived from plant matter, mainly – and renewable diesel, a slightly different type of diesel that can be used as a standalone fuel, but is also mainly blended with traditional diesel. Production of both is still just getting off the ground. The country has the refinery capacity to make 2.41 billion gallons of biodiesel a year, while renewable diesel production is 600 million gallons. The government wants more bio- and advanced fuels and mandates some 22 billion gallons be produced this year (biodiesel and renewable diesel aren’t the only fuels that meet that requirement). It supports this production through tradeable tax credits known as RINs, which producers of these fuels get and can sell to others.

Business Model
One way to produce renewable diesel is to re-refine waste crude products. U.S. motorists produce about 1.3 billion gallons of dirty motor oil each year. Vertex Energy (VTNR) started about 20 years ago to collect and sell used motor oil (UMO) and used oil, known as black oil, to refiners. A few years later, it developed its own method of refining UMO and, through a couple of mergers, became an outfit that collects and transports UMO. In 2014, it started re-refining its own used oils on a relatively small scale. Those refining assets are small plants which use UMO as their feedstock. One, in Marrero, Louisiana, produces 1.66 million barrels annually of vacuum gas oil (VGO), which is then sold to companies who either refine it further into gasoline or blend it as a home fuel oil. Another plant, in Columbus, Ohio, produces 476,000 barrels each year of Base Oil II/II+, a type used in auto engine oil formulations.

That has been a fine business. In its best 12-month period, around 2014, Vertex has generated as much as $259 million from its activities. It recently made an acquisition that could see the business generate more EBITDA in 2023 than total revenue from that best year.

Business Outlook
The story with Vertex is a business in transformation. This year they closed on a 75,000 barrel per day (bpd) refinery in Mobile, Alabama. The company spent $75 million buying it from Shell, a good price coming ahead of the spike in energy prices, and is using as much as $100 million cash-on-hand to revamp the facility to produce renewable diesel. Unlike its other plants, the feedstock for Mobile will be soybean oil, not used motor oil. The facility will be converted by the end of this year. Once done, it will produce about 3.6 million barrels – about 153 million gallons – of renewable diesel a year, increasing to 5.1 million (214 million gallons) with planned capacity additions.

Renewable diesel receives a tax credit based on its carbon intensity, the credit higher for lower carbon intensity (about $1.80 a gallon for what Vertex produces). In 2023, when the facility will be solely making renewable diesel, along with the existing business, Vertex should generate revenue of $2.58 billion, compared to $184 million in 2021. EBITDA should be over $400 million in 2023, according to management. This year, with Vertex having taken possession and still making traditional crude products during its retooling, the business – along with the UMO arms – will produce $1.5 billion sales and EBITDA near $340 million.

Vertex had been planning to focus solely on renewable diesel refining and sell its UMO division to Clean Harbors (CLH) for about $140 million. However, regulator skepticism led to the companies deciding to cancel the deal recently, meaning Vertex continues to have the UMO division. It has been performing well this year and hasn’t been a drag on the business.

Issues to Consider:

• The company is producing traditional crude products right now as it works to convert its Mobile refinery.
• Lower tax credits for renewable diesel and under California’s low-carbon fuel standard would affect revenue. Renewable diesel is a heavily tax credited and regulatory-driven environment.
• Feedstock for Mobile will come from food crop oils. That exposes the business to crop inflation, although soybean purchases by China are seen much reduced through next year due to its pandemic lockdown, which will ease prices.
• Vertex will open a pre-treatment plant for its feedstock soybean oil, which will allow it to buy more common (cheaper) soy oil. Until that comes (expected by the end of 2023), the company will need to buy a more expensive version of soybean oil.
• Vertex may seek another buyer for its UMO business.
• Costs for the Mobile revamp could continue to rise. Management raised its cost estimate to $100 million from $85 million at the start of the year based on labor and supply inflation.

Technical Analysis
VTNR went public in 2004 and hit a high of 90 that year, before slumping through the rest of the decade to less than 1 per share with the financial and energy price bust of 2009. More recently, when the company announced plans to acquire the Mobile refinery in May of last year, shares rallied sharply, from 1.75 to a high of 12 before enthusiasm waned and shares drifted down to the mid-3s to start this year.

The closing of the Mobile deal and very good first-quarter results on energy prices have resulted in buyers coming into VTNR shares again. A push to a 15-year high of 15.10 came after earnings in mid-May. Shares have been consolidating since, letting an overbought condition ease somewhat. VTNR is showing excellent relative strength compared to the market. Since the company is in the oil and gas refining and marketing sector, they should also continue to benefit from the exceptional strength of investors putting money into the sector overall. Chart-wise, shares could be set to a near-term rise to 18, based on breaking through the neckline of a nearly year-long formation.

What to Do Now
It’s a bit of a deal with the Devil to buy Vertex now given its 2022 business will be heavily driven by traditional crude refining operations. However, all signs point to Vertex being on target to shift to renewable diesel for the start of 2023. We believe there’s relatively little risk to the renewable diesel credits and California’s carbon-support system, given government mandates and signs that both programs are providing net economic benefits. Right now, at 2022 projected adjusted net income of $255 million, Vertex is trading hands at a value-level 3.7 price-to-earnings ratio. Lastly, don’t confuse Vertex Energy and its ticker with Vertex Pharmaceuticals (VRTX). BUY

Vertex Energy (VTNR)
Revenue (trailing 12 months): $166.17 Million
Earnings per share (TTM): (0.47)
All-time high (intraday): 90.04
Market cap: $946 million
Recommendation: BUY
Intended Portfolio: Real Money

ESG Three

The ESG Three are three technically strong stocks to explore for further investing. We choose from among the 200 most-held stocks by ESG funds, and further screen out companies for clear environmental, social and/or governance issues such funds often overlook. As a general rule, we exclude fossil fuel producers from ESG consideration given their clear environmental impacts.

Iron Mountain (IRM)
What is it?
A storage and information management service

Why is it ESG?
A “one share, one vote” structure and fully independent key management committees should align the company with common shareholders’ interests. ESG funds own $50 million of shares.

Why now?
A move into adjacent markets, like art storage, consumer storage and data centers could open up more growth than Wall Street now expects from the primarily corporate-focused document business.

Progressive Corp. (PGR)
What is it?
An auto and property insurance company

Why is it ESG?
Good employee engagement practices and a majority independent board. ESG funds own $220 million of shares.

Why now?
A clean balance sheet and a well-managed business, Progressive shares have been mixed with investors of late because of higher auto parts costs combined with rising auto claims, from post-pandemic driving rising and supply chain crunches. It’s potentially a good price for a long-term grower.

The Travelers Companies Inc. (TRV)
What is it?
An insurance conglomerate

Why is it ESG?
Good data security and privacy practices and independent risk and pay committees. Management plans to weave in ESG policies into its investments, although ESG ratings firm MSCI is skeptical they have the ability to do so easily in 2022. ESG funds own $170 million of shares.

Why now?
More policies being written and lower catastrophe losses have the company ahead of 2022 projections so far. Efforts into data analytics are expected to yield better margins in consumer insurance products.

Current Portfolio

Real Money Portfolio

* Buy prices for Clean Earth and Growth for Good components are adjusted to reflect unit splits

Excelsior Portfolio

Sold positions

Real Money Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. When the sector is bullish, we keep our cash in the ETF based on our benchmark index – the Wilderhill Clean Energy ETF (PBW). When bearish, we keep our cash in U.S. Treasury bills. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows – but either way will work fine in the long-term.

Clean Earth Acquisitions Corp. Shares, Warrants and Rights (CLIN, CLINW, CLINR)
We originally acquired our holdings at 10.01. We’d lose money if we had to sell the SPAC now, given the weak SPAC market, but we’re up at least 2.4% given the per-share trust value of 10.10 we can claim and the value of the rights and warrants which give us exposure to the upside of the business Clean Earth finds to bring public. HOLD

Clearway Energy (CWEN/A)
Shares have bounced on TotalEnergies’ acquiring a stake in Clearway. At the end of today (June 1) we’ll also be in line to collect a dividend of $0.3536 per share. Shares are bullish but technicals suggest they may pause in the 34-35.50 area. Our sell-stop is ‘around 28.’ HOLD

Darling Ingredients (DAR)
Darling is in the upper portion of a trading range it has been in since March last year. Resistance, the top of that range at 85, will present a challenge for shares, but technicals suggest we should see a push to break it soon, with plenty of support down to 73. Our sell-stop is ‘below 62,’ though the more cautious investor could set a higher stop, at around 72, which is a price support from the 200-day moving average that will have been broken. HOLD

Daseke (DSKE)
We advised selling with last week’s update because shares had broken our stop-loss. The late-week rebound provided a better exit, at $7.315, the mid-point of the high and low of trading Thursday. There are still some lines of resistance not too far above prices here, and our concern with the breaking of support around our stop-loss at 7.18 is that it sets up shares to slice downward more sharply if the market turns again. SOLD

Good for Growth Shares, Warrants, Rights (GFGD, GFGDW, GFGDR)
We acquired our position originally at 9.97, putting us up about 1% given the guaranteed trust level of 10 plus the price of our warrants and rights, which gives us pure upside to the business the ESG SPAC finds to merge with. HOLD

Natural Grocers by Vitamin Cottage (NGVC)
Price internals suggest now is not the time to buy shares of the western organic grocery chain. How they act in the next number of sessions will give a hint if this recent slip from the high of 21.97 to the 17 region is a more significant move downward. WATCH

Excelsior Portfolio
Excelsior is our special opportunities portfolio, and is managed without consideration to the Real Money Portfolio. We may or may not recommend sell-stops in Excelsior.

In June we purchased five SPAC warrant positions as a basket trade: Navitas, Li-Cycle, ReNew, Ree and Volta. Of these, Li-Cycle, was closed at a 4% profit in December. Navitas has been closed out in February at a total of a 127% return.

ADS-Tec Energy (ADSEW)
SPAC-derived companies are inherently risky – they’re earlier-stage businesses than what typically comes public in recent years, and suffer from the rotation out and in of institutional investors with differing aims. Still, the super-fast EV charging company hit its financial projections and appears to be on track to hit them again for 2022. It has a novel approach that we believe gives it an edge (localized battery storage that means it doesn’t need upgraded power lines). At recent warrant prices as low as 45 cents, we’re shifting it back to ‘buy’ for those with a tolerance for risk and the patience to potentially wait four more years for a payoff. BUY

Altus Power (AMPS/WS)
Altus warrants posted a nice gain right after we purchased them, which is why we’re at ‘Hold’ rather than ‘Buy,’ given it affects the odds of the more profitable trade we’re pursuing in the long run. The solar power provider to commercial real estate properties says demand is the strongest it has ever seen. HOLD

Constellation Energy (CEG)
Shares rallied strongly to end last week, closing at an all-time high of 66.60 Friday. HOLD

ESS Technology (GWH.WS)
We’re biding our time to enter the iron-flow battery storge business at a low warrant price. ESS was the worst performer of Greentech stocks last week, suggesting two things: We’ll probably see better prices ahead and we may want to be cautious on what the market knows we don’t yet know. WATCH

FuelCell Energy (FCEL)
True to form, FuelCell rallied in line with Greentech to end last week. The move broke a sharp downtrend line for shares, a positive, with a longer-term downtrend line providing resistance at 5.25 that will probably be more significant. This is a long-term, half-sized position. Earnings are announced on June 9. HOLD

Origin Materials (ORGNW)
Origin continues to improve slowly but surely as it gets closer to the year-end launch date of its first carbon-negative plastics plant. Warrants hit a six-week high last week and shares look to be rising off a base on around 6-7. HOLD

Ree Automotive (REEAW)
The story is the same as it is most weeks for the EV chassis maker – warrants and shares are weak, but there is hope as long as the company can weather the bear market and continue making progress toward production beginning in 2023. HOLD

ReNew Energy Global (RNWWW)
Warrants are stronger on the week, with little news from the India renewable energy producer. Shares are offering some encouragement. HOLD

Volta Inc (VLTA.WS)
The EV charger maker is off its bottom. Warrants are still weak, if slightly firmer this week. HOLD

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday, June 15. A weekly update will come as usual next Wednesday, June 8, with any interim bulletins sent as needed. Get in touch with comments, suggestions and questions any time. Reach me at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on June 15, 2022.

About the Analyst

Brendan Coffey

Brendan Coffey, Chief Analyst of Cabot SX Greentech Advisor, has been immersed in investing for more than 25 years, including as an investment advisory editor, investor, markets reporter and writer about and for a wealth of Wall Street’s most influential minds. He’s discussed investing strategy with the likes of Carl Icahn, Mark Cuban and Leon Cooperman and collaborated with hedge fund managers and entrepreneurs on books and essays. He’s written about investments and markets for Forbes, Bloomberg, Fortune, The Wall Street Journal and numerous other outlets.

Brendan is a Certified Financial Technician (CFTe), representing extended study and achievement in technical analysis of securities. He combines technical and fundamental analysis in pursuit of a long-held passion for environmental and ESG stocks that began with the study of environmental law as an undergraduate at Boston College. Brendan’s also been a fellow at the Scripps Howard Institute on the Environment, served on a municipal energy planning board and, last decade, was editor of Cabot Green Investor and Cabot Global Energy Investor. In addition to ESG, he conducts proprietary research into billionaire-owned stocks, SPACs, sports-related equities and other sectors.