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Clean Energy Fuels – Time To Go Long

Summary CLNE is set for another disappointing year as weak natural gas prices have curtailed the company’s growth despite an increase in its volumes, but investors should not lose hope. CLNE achieved positive EBITDA last quarter on the back of its cost-reduction efforts, which is commendable if we consider the challenging end-market situation. The registered number of medium and heavy duty vehicles running on natural gas in the U.S. is expected to increase from 0.25% in 2012 to approximately 3.8% in 2023. As CLNE’s end-market grows, it will see an increase in its addressable market that will lead to growth in gallons delivered and help it post better financial results going forward. Natural gas refueling company Clean Energy Fuels (NASDAQ: CLNE ) had started the year with a lot of hope and was trading at 52-week highs at the beginning of May. But, the second half of 2015 ensured that Clean Energy is set to post another disappointing year as it has lost half its value in the past six months. The weakness in the company’s stock price can be attributed a declining financial performance due to weak natural gas pricing. For instance, in the third quarter, Clean Energy’s revenue was down 11% from last year, while it also posted a loss due to a decline in the value of gallons delivered. But, in my opinion, investors should not ignore the improvements in Clean Energy’s performance as the company seems to be on track for long-term gains. In this article, I’m going to take a look at the various reasons why Clean Energy can come out of its slump. Cost reductions indicate that Clean Energy is moving in right direction Though Clean Energy posted a loss last quarter, the company was able to reduce the quantum of its loss. Clean Energy’s loss was down 21% sequentially and 15% year-over-year in the previous quarter. The decline in its loss can be attributed to Clean Energy’s cost reduction efforts and volume growth. For instance, the company has reduced its SG&A expenses by over 20% in the past five quarters and increased its volumes by more than 24%. These are commendable numbers, especially considering that weak oil prices have created an adverse impact on natural gas vehicle conversions. In fact, Clean Energy improved its volume by 17% to 80.6 million gasoline gallon equivalents in the third quarter. What’s more important is that Clean Energy, for the first time, reported positive EBITDA of $3.1 million last quarter despite the low pricing environment. This represents an improvement of $5.7 million over the second quarter of 2015 and an improvement of $8.7 million over the first quarter of 2015. In fact, for the first nine months of 2015, Clean Energy has improved its EBITDA by a whopping 62%. The following table clearly indicates the improvement in Clean Energy’s EBITDA performance. Source: Press Release Hence, as far as operational improvements are concerned, Clean Energy Fuels is moving in the right direction by reducing costs, which is why it has been able to improve its EBITDA remarkably. But, apart from cost reductions, there is another positive about Clean Energy Fuels, in the form of a booming end-market opportunity, which investors should not ignore Growing end-market opportunity strengthens the bull case Looking ahead, Clean Energy Fuels will benefit from a growing number of natural gas vehicles in the U.S. According to a report published by the Fuels Institute, natural gas vehicles are expected to grow substantially in the coming five years, particularly in the medium and heavy duty market. It is expected that the NGV share of registered M/HD vehicles will grow from 0.25% in 2012 to approximately 3.8% in 2023. The following chart shows the expected increase in natural gas vehicles on U.S. roads going forward in both base and aggressive cases: Source The report states that the majority of vehicles using CNG systems will be found in the class 8 category of heavy duty vehicles. This is because these vehicles will benefit from lower fuel costs, combined with significantly higher fuel consumption annually, which will provide returns on vehicle investment quickly. In fact, Clean Energy has already penned a number of agreements with fleet operators, which is an indicator of the fact that the company is already gaining traction for its business. For instance, last quarter, Clean Energy expanded its relationship with Raven Transport. Raven Transport deployed an additional 40 LNG trucks last quarter, and these trucks will refuel at Clean Energy’s stations on interstate corridors throughout the southeast. All in all, Raven now operates 223 LNG trucks in its fleet. Likewise, Clean Energy is also expected to benefit from its relationship with Saddle Creek Logistics, which recently announced that it will be adding 50 CNG trucks to its existing fleet of 200. These new contracts indicate that Clean Energy will see an increase in its natural gas volumes going forward, and as the overall market expands, the company will see better opportunities to expand its volumes. Conclusion Despite the downturn in the end market, Clean Energy has managed to improve its EBITDA performance this year. At the same time, its volumes have also increased, indicating that the demand for natural gas vehicles is still there despite low diesel prices. In the long run, as the number of NGVs on the roads increases, Clean Energy Fuels will see an increase in its addressable market and will be able to improve its financial performance. So, in my opinion, investors should go long Clean Energy Fuels and take advantage of the drop in its stock price for long-term gains.

Positioning From The United States Into The Eurozone

Summary The economy in the U.S. is deteriorating, while the Eurozone is prospering. The euro is about to take off due to fundamentals in current account and balance of trade. European stocks will be boosted due to good production and retail sales numbers. Investors are focused too much on the U.S., while they are totally ignoring what is happening in Europe. What they are missing is that Europe’s economy is actually improving. I will highlight some of the main key indicators of both economies and invite investors to jump into Europe and out of the U.S. First off, the trade balance, one of the most important indicators of export and import, has favoured Europe as the euro declined 20% against the U.S. dollar last year. Europe still has a positive balance of trade, while the U.S. has seen widening deficits. (click to enlarge) (click to enlarge) This translates into a current account deficit in the U.S., while Europe has a current account surplus. A positive current account is typically good for a currency so we should see the euro prosper against the U.S. dollar. The only reason why the U.S. dollar is so strong is because it is still the reserve currency. (click to enlarge) (click to enlarge) Second, the unemployment rate in Europe is really improving now, unlike the manipulated numbers in the U.S. The reason why the U.S. had such a major decline in unemployment rate is because a lot of people dropped out of the labor force (which we don’t see in Europe as more people actually have a job) and because the U.S. has seen a lot of part-time employment, especially in the low-paying service sector industry. (click to enlarge) (click to enlarge) Third, as I already suggested, the U.S. manufacturing industry is collapsing with a manufacturing PMI dropping to 52 in November 2015. All the jobs are going into the service sector. In Europe on the other hand, the manufacturing PMI is on the rise to 54. These trends tell me that GDP growth in the U.S. will decline, while GDP growth in Europe will improve. That also means that government debt to GDP will go up more in the U.S. (103%) than in Europe (92%). (click to enlarge) (click to enlarge) The trend in industrial production numbers confirms my previous statements. Year over year industrial production growth in the U.S. is flatlined at the moment, while Europe is improving. (click to enlarge) (click to enlarge) As the industry collapses in the U.S., factories need less capacity and this results in a declining capacity utilization rate to a low of 77%. In Europe on the other hand, we see a continuing improvement with capacity utilization well over 80%. (click to enlarge) (click to enlarge) Fourth, the consumer is also more confident in Europe as compared to the U.S. When we look at retail sales there is a huge discrepancy between the U.S. and Europe. In the U.S. we see a steady decline, while in Europe the retail sales are booming. Of course, a lot of these numbers depend on inflation and due to a strong decline in the euro, inflation in the Eurozone has been somewhat higher than in the U.S., boosting retail sales numbers. Nevertheless, it looks like the European consumer has more money in its pocket to spend than its U.S. counterpart. And keep in mind that the European savings rate is double (13%) that of the U.S. (6%). (click to enlarge) (click to enlarge) Conclusion: It looks obvious to me that Europe is the better deal here and investors should start looking to invest in Europe instead of the U.S. I believe the euro will be heading north soon due to improving current account surplus and industrial production. European stock markets will fare better due to higher GDP growth, manufacturing PMI, consumer sentiment and retail sales. An improving employment picture in Europe will boost the overall economy. Investors can choose out of a series of European ETFs, but the ones I recommend are the 4 largest: the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ), the Vanguard FTSE Europe ETF (NYSEARCA: VGK ), the iShares MSCI EMU ETF (NYSEARCA: EZU ), the SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ). These ETFs are the closest in replicating the price and yield of equities in the Eurozone. Of these ETFs the highest return on equity is found in the Europe Hedged Equity Fund. The reason for this is because this ETF yields higher returns when the euro falls against the U.S. dollar, which is what we saw happening in 2014-2015. Now that the euro is going back up, the returns in this ETF will be lower. This ETF invests mainly in stocks from Germany (26%), France (24%), the Netherlands (17%), Spain (26%) and Belgium (8%). The second highest return is found in iShares MSCI EMU ETF which invests mainly in stocks from France (32%), Germany (30%), Spain (11%) and the Netherlands (9%). To a lesser extent this ETF has exposure to Belgian and Italian equities. The FTSE Europe ETF has the third highest return with interests mainly in the U.K. (29%), Switzerland (14%), Germany (14%) and France (14%). Although these are European countries, this ETF invests in global companies like Nestle ( OTCPK:NSRGY ), Roche ( OTCQX:RHHBY ), Novartis (NYSE: NVS ) and HSBC (NYSE: HSBC ). So we can’t really say that this is a pure European ETF. For more European exposure you should look at EZU and HEDJ. The last ETF is the SPDR Euro STOXX 50 ETF which has the lowest return. One of the reasons of this low return is because it has a pretty high exposure to France (37.44%) and we have seen France underperform this year, not only due to its high unemployment rate, but also due to the Paris terror attacks. Other holdings are mainly invested in Germany (30%).

My Investment Plan For 2016

Summary I’m overweight on domestic equity (non-REITs) and want to scale it down over the next year. Raising my international allocations looks attractive with policies that favor GDP growth in Europe. I have 22% in equity REITs and intend to bring that allocation higher. The most attractive equity REIT sector for me right now is the triple net lease REIT. My personal tax planning and preference for low expense ratios will push me to continue sending cash to domestic non-REIT equity. I may sell some of my domestic ETFs to offset that allocation. With 2015 nearing a close, I’m looking over my holdings and asking myself what I want my portfolio to look like for the next year. Followers will now I’m primarily a buy and hold investor. I will occasionally sell of shares to make an adjustment to the weights in my portfolio or to harvest a tax loss after a terrible investing decision, but for the most part my investing philosophy is to focus on buying quality and diversification at a reasonable price and then planning to hold that position for decades. I’ll make an exception when it comes to mREITs because there are market failures that indicate very clear opportunities to exit or opportunities to make a short term buy. My Portfolio Investors can see my precise allocations as of late November. For this piece I want to reference my allocation by sectors because that is a major area I expect to modify over the next year: (click to enlarge) Domestic or International? My allocations to the domestic market excluding REITs are over 50% of my portfolio value. That is too high for my taste going into 2016. With the Federal Reserve planning to raise interest rates and with the dollar having strengthened materially against the Euro, I’m expecting the growth rate of GDP in the United States to suffer and growth rates throughout Europe to pick up. Based on expectations of higher growth rates for the general economy there, I want to increase my positions in companies that perform most of their operations outside the United States. To be fair, my domestic equity allocation includes a substantial exposure to large cap multi-national companies that earn substantial revenues abroad. However, I would still like to increase the my exposure to that area. I’ll be looking at a combination of the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) and the Schwab International Equity ETF (NYSEARCA: SCHF ) to get that job done. Why those funds? Because my investments accounts are with Schwab so I get the benefit of free trading on those ETFs. That serves as the tie breaker. Without free trading on those ETFs I would find Vanguard’s funds for that allocation to be very comparable. Those two funds currently combine to be just 1.44% of my portfolio. I’d really like to increase that over the next year. The small-cap companies are particularly interesting to me because I expect them to have more localized exposure to their markets and to see a larger boost in sales. If we were to look at the financial statements of those companies in USD (United States Dollars) the stronger dollar would make their earnings and dividends look weaker. On the other hand, strength in exports should mean more economic activity including more people being hired which should cut down on unemployment. The values should look weaker in the short term, but I would expect better growth over the next several years. Therefore, I think there may be enough short term weakness to get my positions established without having to sell off any current investments to fund it. I’d rather fund the acquisitions by earning more money and sending it to my brokerage account. Equity REITs I work hard to get my assets into tax advantaged accounts. By making that a major part of my investing philosophy, I’m able to hold higher exposure to REITs without concerns about tax implications. While the Federal Reserve is aiming to increase short term rates, I don’t think they’ll be successful in raising rates as quickly as they would like to raise them. If the rates remain low the equity REITs should provide solid value to the portfolio from a combination of dividends and growth in dividends. Share prices may not move perfectly with the dividend growth, but with a holding period measured in decades, I’m just going to treat any low prices as sale prices. While I do a substantial portion of my investing with ETFs, I may be adding a couple individual names here. I started doing some research on Realty Income Corporation (NYSE: O ) a while ago and found the structure of their business was excellent. After that I took a quick look at National Retail Properties (NYSE: NNN ) and found their operations were also exceptional. I see the triple net lease REIT space as being very attractive because of the structural benefits it offers. The way leases are handled in the triple net lease system results in a better alignment of interests because it makes the tenant responsible for most costs. This is a win/win situation for the REIT and the tenant because it allows the property to be held in a more efficient format. However the REIT and the tenant split up the savings created by financing the property through the triple net lease REIT, it is still possible for both sides to profit from the deal. Looking at the combination of dividend yield and growth and AFFO (adjusted funds from operations) yield and growth makes me feel pretty comfortable with either of those REITs. I recently transferred more cash into my brokerage account and I’m looking to open a position in a triple net lease REIT. I’ll probably end up with shares in both of these triple net lease REITs, though I’ll be looking at a couple other options in the sector as well. The timing on my entry will largely be a function of price. Overweight on mREITs I’m already quite overweight on mREITs. I might still make a few short term plays in the sector and I’ve got my holdings set to reinvest dividends, but I don’t expect to be adding more long term positions in the space. I think 10% allocation is fairly heavy so 20% is definitely more than enough. Adding More Domestic Than I Want Remember how I said it was a big priority for me to focus on tax advantaged accounts? My wife’s retirement plan through her employer has very limited choices. After researching the funds available I found precisely one fund that I liked as a long term investment due to intelligent diversification and low costs. Unfortunately, the fund is purely domestic large capitalization. Since I aim to shove as much money as possible into tax advantaged accounts each year, I pick the lowest fee allocation with an intelligent exposure and then build around that using my other accounts. Fortunately, using a solo 401k I have a great deal of flexibility in my holdings. The most likely candidates for sales would be shares in the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) or the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) since these holdings are in accounts where I have full control. Conclusion Over the next year I want to increase my allocations to equity REITs and international ETFs. I’ll try to do it by adding new cash to the portfolio to keep buying, but I may need to liquidate some of my domestic allocations within my accounts to accommodate for buying more through my wife’s retirement accounts. I see the Federal Reserve policies offering Europe a path to higher GDP growth and lower unemployment, but I don’t see enough large rate increases in the near future to push me away from wanting to buy the triple net lease REIT sector.