Inflation fears have growth stocks like Greentech on the defensive. We already own some of the best-looking stocks in the sector right now despite the turmoil. This issue, we examine another potential addition to the portfolio that shows good relative performance.

We also review our current portfolios, with a new sell recommended. As always, we discuss our outlook for the sector and provide three additional stock ideas with our ESG Three.

Cabot SX Greentech Issue: June 15, 2022

Greentech Outlook

The past couple of weeks we’ve discussed how the market – and Greentech – were at a pivot point. For Greentech, the sector was mounting a challenge to a bearish trendline beginning in November. We noted in our last issue that the technicals gave some reasons for optimism, but that we shouldn’t get ahead of ourselves: the technicals were warning us there was resistance ahead. That came this week in the form of still-hot inflation that has the market concerned about a large interest rate hike that could come as soon as this week. Every rise in interest rates gets the market to re-evaluate to the downside the price they want to pay for growth, especially as other options, like bonds, begin providing yields that actually can produce decent income.

My reading of the long-term charts don’t differ from other analysts’ opinion of where the S&P is headed right now: support probably steps in about 7% lower from here – and it’s the same for Greentech. With both, that move could get extended to 12% lower, to about where the markets sat right ahead of the pandemic. Generally speaking, bear moves tend to push a lot of stocks into value territory before recovery. Right now, the S&P is at a 19 price-to-earnings ratio, lower than average, but still probably not enough to entice buyers back just yet. An analogy I’m not completely married to is the bust of the mortgage bubble, which is another period when easy money should have been dealt with earlier by the Fed. The S&P P/E fell to about 13 in autumn 2011.

Greentech Timer
The Greentech Timer stalled a week ago and then failed to hold onto support at the 40-day moving average on Friday. The gaps lower you see on the chart are bearish – every gap signifies resistance and – unlike commodities futures trading, which birthed the saying – there is no expectation that the market will want to “fill the gap” anytime soon. (As an aside, futures tend to fill gaps because the “pit” traders in futures markets want to force out sell- and buy-stops other traders may have set. It’s not action seen as frequently in equities).

So we’re bearish, and new positions should be taken very cautiously. Subsector-wise, every Greentech area is firmly bearish too, but solar, which has gotten a lift from the temporary reduction of tariffs on Chinese solar panels, in turn easing pricing pressure on installers. Still, solar had only briefly moved over the 200-day moving average last week and now has tumbled 13% to support at its 40-day line.

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: Montauk Renewables (MNTK)

Overview
Renewable natural gas (RNG) is generally the name for captured methane, a natural gas that is 28 to 36 times as potent a greenhouse gas as carbon dioxide. For power generation, it is no different from natural gas. Capturing RNG means displacing fossil fuels that would be extracted from the ground while also redirecting gas that otherwise would be released into the atmosphere – the end result is fewer greenhouse gases into the atmosphere. RNG is generated in two broad ways: one is anaerobic digestion, of food waste, wastewater solids, animal manure and landfills; the other is thermal gasification, which is the burning of biomass like leftover crops and woodmass from harvests and crops grown specifically for energy production. A March study by the investment bank Stifel estimates that there are enough dairy and pig farms to increase RNG production 80-fold, and enough landfills to increase production six-fold.

Business Model
We’ve featured renewable natural gas producers before – Aemetis (AMTX) in September and Archaea (LFG) in December. We exited Aemetis at a 1% profit and Archaea at a 9% profit after they hit our sell-stops. Montauk Renewable (MNTK) is another similar venture which currently generates RNG from landfills in Texas, Oklahoma, Ohio and Pennsylvania. It has capacity for 33,850 MMBtu/day from them. It also produces renewable electricity from plants in California, Oklahoma and Texas, a total of 30.2MW. While RNG is in some ways a low-cost business – the methane is going to be emitted into the atmosphere by cows and garbage anyway, so companies just need to capture it – it remains highly dependent on tax credits.

There are two sets of credits that drive the market: the federal Renewable Volume Obligation, which generates Renewable Identification Numbers (RINs) after biofuels are blended with conventional fuels. Those RINs can then be sold for others to use as offsets to their carbon spewing, generating money for the do-gooders like Montauk. RINs vary based on market conditions, mainly on the intricacies of federal tax and credit policy for fuels as well as mandates for blending. Those who use a lot of fuel, such as farmers, generally oppose blending, which they believe raises the prices of their diesel. The other credit that affects the market is the Low Carbon Fuel Standard (LCFS), a California law that has been adopted by Oregon too. This requires the reduction of carbon intensity of fuels by 20% by 2030, encouraging it with tax credits that are higher for RNG collected from livestock farms than from landfills.

Montauk sold $32.2 million of RNG and tax credits in the first quarter, a modest 2% gain over the year prior. The weak rise was from management holding back most of its RINs in what it surmised as an abnormally weak RIN market, price wise (stemming from fears the federal government would reduce blending requirements, therefore reducing the need for biofuels). The price for a D3 RIN (D3 means the fuel is made from cellulosic materials) which Montauk sells fell as low as $2.85 in the first quarter. After improving to an average of $3.27 in the spring, management said they had entered into agreement to sell their remaining Q1 inventory of 4.4 million RINs this quarter. The first-quarter performance gave Montauk a loss of a penny per share, compared to a loss of 10 cents the year prior.

While that means Q1 results disappointed compared to expectations for sales and income, shares rallied from 10 to more than 16.50 after the first-quarter results because of management’s confident outlook for the rest of the year.

Business Outlook
For full-year 2022, Montauk says it will generate between $181 and $226 million in RNG sales, $17 million to $20 million on renewable electricity generation sales, with RIN’s sales to proceed as normal the rest of the year. The company should be able to generate about 38 cents a share in net income this year, compared to a 3-cent loss in 2021. Wall Street projects 53 cents a share in net income for 2023.

Given the premium put on the dairy farm LCFS credit, Montauk is expanding into dairy gas collection. The company currently collects from an 18,500-head dairy farm in Idaho which it sells into the California market. However, because of improvements Montauk was making to the site, California delayed giving the operation its Carbon Intensity score, which determines the LCFS credit. That’s expected to come this quarter and should start generating credit-sale revenue in 2023. The company is also operating an experimental swine farm RNG operation in North Carolina which it expects will eventually allow it to enter the market for collecting pig farm methane.

Issues to Consider:

• D3 RINs are highly exposed to political risk. During the prior administration, D3 RIN prices fell to as low as 59 cents each.
• Montauk would be in default on its revolving credit line if the D3 RIN falls below 80 cents.
• Competitors, such as Aemetis, have encountered delays in getting agriculture collection projects up to speed as quickly as projected. Montauk could encounter the same problems.
• Montauk debuted at 8.50 a share in January 2021. Institutional shareholder support remains light though it is improving. Lack of deep fund ownership means shares can be volatile.

Technical Analysis
MNTK slid to a low of 6.61 in the months after its IPO before rallying in the back half of 2021 into a trading range between 9 and 12.50. The Q1 earnings results prompted bulls to buy up shares, busting out of that range in May on decent volume to an all-time high of 16.56 on June 6. That overextended shares and, coupled with market turmoil, clipped MNTK back to the 12 area. That’s still on top of support of the 40-day average and the 200-day line (around 10.90 now).

What to Do Now
We give Montauk the nod at the moment over Aemetis and Archaea because it has the best chart and most favorable technicals. Even so, with the market bearish, we’re going to watch shares and see if we can enter at a better price that still suggests we have some gains ahead. WATCH

Montauk Renewables Inc. (MNTK)
Revenue (trailing 12 months): $149.86 million
Earnings per share (TTM): 0.06
All-time high (intraday): 16.65
Market cap: $1.8 billion
Recommendation: WATCH
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.

Ulta Beauty (ULTA)
What is it?
A brick-and-mortar retailer of beauty products

Why is it ESG?
Detailed anti-corruption policies with board oversight and a formal whistleblower program. The board is majority independent. ESG funds own $50 million of shares.

Why now?
The largest retailer in the fragmented health and beauty space, Ulta is seeing robust same-store sales growth this year. Shares are just off all-time highs and over multiple levels of support.

Bristol-Myers Squibb (BMY)
What is it?
A pharmaceutical company

Why is it ESG?
It provides royalty-free licenses for its HIV and Hepatitis C drugs for poor countries – less than 5% of pharmaceutical companies provide voluntary, royalty-free licenses like this. ESG funds own $335 million of shares.

Why now?
Investors have been lukewarm due to its major drug, Revlimid, seeing its exclusivity rights expire. However, management says it has four approved drugs that will each be multi-billion-dollar blockbusters by 2030.

Eli Lilly & Co. (LLY)
What is it?
A pharmaceutical company

Why is it ESG?
Robust employee engagement makes it stand out, with other ESG metrics seen as average to peers. ESG funds own $560 million of shares.

Why now?
Shares have backed off to support, about 10% from their recent all-time high, a potentially good entry point.

Current Portfolio

Real Money Portfolio

* Buy prices for Clean Earth and Growth for Good components are adjusted to reflect unit splits
* Returns don’t include dividends for TKTK

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)
As is normal with SPACs searching for a target, there is no news this week. As long as we don’t need to sell, this trade will stay profitable. HOLD

Clearway Energy (CWEN/A)
Clearway had a big down day last Thursday, with a lot of volume on no obvious news. Follow-through selling has been quite light since then, although it has pushed shares down to the 30 area. Our sell-stop is ‘around 28.’ HOLD

Darling Ingredients (DAR)
DAR settled below our heightened sell-stop on Monday of ‘below 73.’ As always, we recommend honoring the sell-stop strategy and selling here, especially since Tuesday’s trading didn’t push DAR back over its 200-day line. SELL

Good for Growth Shares, Warrants, Rights (GFGD, GFGDW, GFGDR)
No news on our SPAC, which isn’t unexpected. As long as we don’t need to sell, we’re nearly certain to end up profitable on this trade. HOLD

Natural Grocers by Vitamin Cottage (NGVC)
We’re eying the 200-day line, in the low 15 area, as a potential entry point for the organic grocer. However, inflation concerns may overcome the defensive nature of a grocery store stock. WATCH

Vertex Energy (VTNR)
The renewable diesel maker has softened with the market turmoil a bit, but remains one of the best-looking stocks in Greentech. Two brokerage analysts have raised their price targets for Vertex this past week, which should help sentiment. We’re maintaining our rating here, with shares above their moving averages. BUY

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 2021 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 was closed out in February at a total return of 127%.

ADS-Tec Energy (ADSEW)
Little news for the German maker of fast EV chargers. Warrants are weaker, but we remain confident ADSE-Tec is one of the better managed SPAC-derived companies out there right now. If you don’t own any warrants, buying here is likely a good long-term bet. HOLD

Altus Power (AMPS/WS)
The warrants on AMPS have weakened a little this past week, but we’re comfortably profitable. Our aim is to benefit from the price gains in the warrants as shares improve, given the values placed on them by a company option to convert warrants to shares when shares trade over 10. HOLD

Constellation Energy (CEG)
The nuclear energy generator has knifed through support with the market turmoil. Maintenance shutdowns ahead of the deep summer heat haven’t helped either. The selling is starting to look a bit overdone. HOLD

ESS Technology (GWH.WS)
We added the warrants as part of a long-term trade on the current deep discount of warrants and the conversion ratio if and when shares trade more than 10. We added the warrants at 53 cents Thursday, the mid-point between the high and low price that day. The warrants have weakened since, making the securities an even better play, presuming the energy storage maker sees its shares rebound to over 10 before October 2026, when the warrants expire. BUY

FuelCell Energy (FCEL)
FuelCell missed consensus in its earnings report last week, posting an 8-cents a share loss when a loss of 5 cents was expected, and tallying $16.4 million in sales, a rise of 17% but well below $34 million expected by the Street. There are some delays in a U.S. Navy project – one of two platforms at the Groton, Conn., submarine base still needed work – and a project to provide Toyota green hydrogen in California is also delayed. Posco Korea still needs to purchase the bulk of the $60 million in fuel cells it is obligated to this year as well, which will benefit coming quarters. HOLD

Origin Materials (ORGNW)
Warrants surrendered a high percentage of their value this week – nearly 30% – on no news. It’s likely more of the market’s current disdain for growth and SPAC-derived stocks. HOLD

Ree Automotive (REEAW)
Ree shares and warrants are weak in keeping with the current environment. Our horizon here is now out to 2023, when U.K. factory plans and some potential fruit from various Asian carmaker partnerships may be seen. HOLD

ReNew Energy Global (RNWWW)
ReNew reported fourth-quarter and fiscal-year results on Tuesday after the market close. The compnay’s loss narrowed to 12 cents per share, from about 13 cents a year earlier, on sales of $232 million, which was slightly below consesnsus of $232 million. HOLD

Volta Inc (VLTA.WS)
Volta management is in disarray, with a slew of moves this past week to try and refocus the EV charger business. The head of the SPAC that took Volta public, Vince Cubbage, is now interim CEO of Volta, shifting the former interim CEO to a new position as the company searches for a permanent CEO. For about 10 years Cubbage had been CEO of Arc Logistics, an oil storage MLP that was well regarded until it was purchased in 2017. He certainly has a financial interest in Volta doing well, from SPAC-period investments. Other moves were made, with executives “promoted” to vague new positions like Chief Strategy Officer and Chief Development Officer. Still needed: a new CFO and a new permanent in-house counsel. Volta shares now trade for less than we paid for warrants. We have until August 2026 for the turnaround to occur and our warrants to pay off. The current market conditions won’t help shares or warrants in the near term. HOLD.

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday, July 6. 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 July 6, 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.