PBW - QCLN & PBW: Renewable Energy Bust Takes No Prisoners

2023-04-18 13:42:03 ET

Summary

• QCLN and PBW are two popular funds for renewable energy exposure.
• We had a sell rating the last time we covered the funds, which was a year ago.
• We look at the setup today.

Renewable energy got an extra boost in 2022 as Russia invaded Ukraine. While the "tailwinds", pardon the pun, were already in place, there was a new urgency to develop these over the past 12 months. We last covered Invesco WilderHill Clean Energy Portfolio ETF ( PBW ) and the First Trust NASDAQ Clean Edge Green Energy Index ETF ( QCLN ) about a year back. We were certainly aware of what the macro picture was saying. Yet, we came away with a negative read on both of these.

In this environment, the owners of the electricity/power generating assets will be winners. Hence, we prefer, TransAlta Corporation ( TAC ) and AY kind of companies versus the builders of new assets. We are hence maintaining a Sell rating on both PBW and QCLN and look forward to revisiting this when all the proverbial wind has been knocked out of them.

Source: Renewable Energy Funds Have The Wind Knocked Out Of Them

The wind has certainly been knocked out of PBW, while QCLN has delivered a slightly better performance.

We examine the setup today.

The Funds

QCLN was started just before the global financial crisis and the inception price was $20.00 per share.

We show this to give readers a reminder that while renewable energy has increased by leaps and bounds since then, QCLN has been a poor performer.

In fact, from inception till March 2020, the fund returns were right around 0%. Outside the massive bubble influence post COVID-19, investors were wishing they had never heard of this fund. Taking a look at the current holdings we see that the fund is extremely top heavy with the top 10 forming more than 55% of the total.

Most of these are extremely familiar names unless you have been living under a wind turbine. Enphase Energy, Inc ( ENPH ), Tesla, Inc. ( TSLA ), Albemarle Corporation ( ALB ) and Brookfield Renewable Partners LP ( BEP ) are the "go to" names to invest in the future of non-fossil fuel energy. Some of these stock movements are what powered the entire bubble like returns in QCLN in 2020-2021.

PBW was founded even before QCLN. From that start date of March 2005, the total returns have been downright appalling.

Unlike QCLN, PBW goes into the more exotic area of the market. Most of these names will be new to anyone but the most serious renewable energy aficionado.

The fund is also far less concentrated compared to QCLN. Only one holding makes up more than 2%. One area where the two funds are almost identical is the expense ratio. QCLN is at 0.58% while PBW rings in at 0.62%.

The Fundamentals

QCLN provides the following information on its holdings.

What we can glean from that is that holdings range across all sizes. The price to book, price to cash flow and price to sales are pretty useless to ascertain whether you want to invest here. These metrics really vary across various industries. For example, 4.3X price to sales would be considered extremely expensive for the S&P 500 ( SPY ) as a whole. Here is that ratio till December 31, 2021.

But 4X sales would be relatively cheap for extremely high margin software stocks.

So, the overall composite number does not help decipher whether you are investing in cheap or expensive stocks.

Unlike QCLN, PBW's numbers also include a price to earnings or P/E, ratio.

It is indeed rare to see a negative price to earnings ratio for a fund. The main reason is that funds will eliminate negative earners in calculating the P/E ratio. But PBW happily shows this. In fact, when we first slapped a Sell rating on this in September 2001, we saw an almost identical picture.

This is great in a way as it does not allow investors to fool themselves into thinking they are "investing". This is a speculation exercise and one where things have not gone well.

Outlook

If you are here as one of those investors that lost a lot of money in this by jumping in at the top, the first question you must ask yourself is why that happened. It was not because there was no growth. In fact, since the inception of these funds, renewable energy has boomed far more than what most optimists projected back then. One example is cumulative solar installations which is about as parabolic a chart as you can find.

Yet PBW is nursing a 40% loss over the same time frame. QCLN has also underperformed that juggernaut of a trend.

The answer to that important question is that one shouldn't confuse revenues with profitability. As long as companies find patsies to fund unprofitable ventures in the name of growth, they will jump in with both feet. One great example of this is Plug Power Inc. ( PLUG ). Its revenues have grown rapidly, but profits are nowhere in sight. Somewhere along the line, investors woke up to this fact.

As bad as that chart looks, its longer-term chart is even more gut-wrenching.

We told you this about PLUG back in January 2022

The good news here is that PLUG is only trading at 100X 2026 earnings, so peak price buyers have a good chance of breaking even by the time the Andromeda galaxy collides with the Milky Way .

Source: When Do You Break Even On Plug Power?

In our view, most of these renewable growth stories will play out exactly like this. At some point investors will get excited about a specific story. The stock will go parabolic and then spend the next decade or three, fixing that euphoria. For the fund holdings we do follow, that "fixing" part already appears to be happening. Most of these got extremely expensive in the 2020-2021 boom and will end up getting extremely undervalued over the next few years.

Verdict

We like renewable energy as much as Captain Planet . We even like it as an investing theme. But buying a bunch of companies because they are involved with the sector, at extremely high valuations, is a recipe of punishment. Investors have been doled out this punishment save for an 18-month period post COVID-19. We don't think that has ended and will likely get worse during what we see as a coming recession. While trends for renewable energy expansion remain favorable, we are running into additional hurdles from high costs and rising interest expense. Unprofitable companies are going to struggle under that regime and we think both ETFs likely head 20-40% lower over the next 12 months. We rate both a Sell.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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