PBW - PBW: A Better Macro And Valuation But Momentum Remains Challenging (Rating Downgrade)

2023-12-15 02:34:11 ET

Summary

• Interest rates have plunged following the FOMC's December rate decision, which is expected to benefit green energy stocks.
• The Invesco WilderHill Clean Energy ETF has a better value today compared to earlier this year, but the technical picture remains suspect.
• PBW is a small ETF with high volatility and weak performance, but it offers diversification and a reasonable valuation for value investors.

Interest rates plunged following the FOMC's December rate decision. There was no change in the policy rate, but the long-awaited pivot from Chair Powell and the rest of the Fed sent the entire yield curve lower, with particular pressure on the short end of the curve. Taking a step back, the path from zero-percent interest rates to 5.33% on Fed Funds hurt so many industries dependent on low borrowing costs, including clean energy. The new outlook for upwards of six rate cuts in 2024 should greatly improve the prospects for green energy stocks.

I have a hold rating on the Invesco WilderHill Clean Energy ETF (PBW). I see it has a better value today compared to earlier this year, but the technical picture remains very suspect.

Clean Energy & Treasury Prices Moving Together

According to the issuer , PBW is based on the WilderHill Clean Energy Index. The fund will normally invest at least 90% of its total assets in common stocks that comprise the index. The fund invests in stocks of companies operating across energy, utilities, alternative energy resources, independent power and renewable electricity producers, and renewable electricity sectors. The fund and the index are rebalanced and reconstituted quarterly.

PBW is a somewhat small ETF with just $454 million in assets under management and it pays a high 5.4% dividend yield as of December 13, 2023. Share-price momentum has been very weak with PBW, and I will detail the downtrend later in the article. The fund is also to the expensive side with an annual expense ratio of 0.66% while PBW's risk ETF Grade is extremely poor given high volatility and weak performance over many timeframes. The bright spot for investors is that the fund is highly liquid given average daily trading volume of more than 260k shares, though its 30-day median bid/ask spread is concerningly wide at 15 basis points, per the issuer, so I caution investors to use limit orders when trading PBW.

Digging into the portfolio, you'll see why PBW is so risky. More than 80% of the allocation is considered small cap in size. There's just 7% exposure to more stable large-cap companies. The ETF also leans to the growth side of the style spectrum - many small-cap growth firms are dependent on low interest rates to better grow their profits, so the recent plunge in yields has been a boon to this group. Last March, the fund traded at more than 18 times earnings, but the price-to-earnings ratio has improved to be just above 15x. So, there is a reasonable valuation case to be made given its long-term earnings growth rate of more than 30%. In all, pure value investors should be attracted to PBW following the steep price decline in the last few years.

PBW: Portfolio & Factor Profiles

It's important to pay attention to the sector breakout. About 80% of PBW is invested in just three sectors, though the top 10 holdings represent just 19.5% of the portfolio, so there's diversification in that aspect.

PBW: Holdings & Dividend Information

Seasonally, PBW has not followed the script in 2023, unlike the broad stock market. According to Equity Clock , we normally see a rally from the middle part of the second quarter through year-end. Of course, that didn't play out, and the look-ahead would suggest volatility and sideways price action over the next few months.

PBW: Neutral Seasonal Trends through May

The Technical Take

Back in March , I outlined a bullish call on the fund but underscored the need for risk management given the possibility of a bearish breakdown. Indeed, shares fell below the key $40 level and went on to suffer significant losses in the next eight months. Today, the chart doesn't look a whole lot better. Resistance is now apparent in the $33 to $36 zone. Notice in the chart below that the mid-$30s was modest support in early May before a sharp second-half downturn led to an ultimate low in November under $25. Additionally, the 200-day moving average is negatively sloped, indicating that the bears are in control, and that trend indicator comes into play in the mid-$30s, too. Thus, there is a confluence of possible resistance about 20% above the current price.

The good news, and hope for the bulls, is that the RSI momentum oscillator at the top of the graph has improved in the last seven weeks. On the price side, the recovery rally looks more like a bear flag than a pronounced bullish reversal, so I am nervous about that. Finally, with a high amount of volume by price from the low $30s all the way up toward $60, the bulls will have their work cut out for them should PBW work its way higher.

Overall, there are just not enough signs of a bullish reversal to offer a very positive view of the overall technical situation.

PBW: Bearish Downtrend, Mid-$30s Resistance, Improved RSI Trend

The Bottom Line

I have a hold rating on PBW. I assert that the macro picture has greatly improved for clean energy, but technical risks are still very much apparent.

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