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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.

Understanding Covered Call CEFs

Barron’s recently had a favorable write up on closed end funds that one way or another use a covered call strategy as a means of providing income. The article proposes that volatile markets like now are a good environment for this niche and that the call premium can help mitigate the impact of large declines. I think both points are flat out wrong. The history here is that they do well in rising markets. By Roger Nusbaum, AdvisorShares ETF Strategist Barron’s recently had a favorable write up on closed end funds that one way or another use a covered call strategy as a means of providing income. Where the article focused on CEFs, the yields can be quite high because of the leverage that CEFs often use as well as returning capital, when necessary to maintain a payout. It is also worth noting that there are traditional funds that sell calls and ETFs that sell calls and puts too for that matter. I wrote about these quite a few times in the early days of Random Roger. The history of them shows long stretches where they do very well then long periods where they get pounded and then repeats. Based on chart below they got crushed in 2008 and the dividends were cut on many of them and neither the prices or payouts have recovered since. The article tries to make the case that volatile markets like now are a good environment for this niche and that the call premium can help mitigate the impact of large declines. I think both points are flat out wrong. The history here is that they do well in rising markets. The chart from Google Finance captures a whole bunch of them over a ten-year period. I removed the symbols for compliance reasons but finding funds in this space should be easy to do. If you play around with the time periods you will see they did very well in 2006 and far into 2007, 2009 well into 2010 and then a three year run from 2012-2014. As mentioned the got crushed during the bear market, did badly in 2011 and are having mixed results in 2015. (click to enlarge) I would have no expectation that these funds can buffer a stock market decline. These are income vehicles but they track the equity market higher to an extent (they correlate but don’t keep up) and I would bet they get hit hard in the next bear market but probably not as hard as 2008. Part of the equation in 2008 was a shutting down of bond markets which impacted CEFs in terms of accessing leverage. I don’t expect that to repeat but I would want sell in the face of a bear market as a 30% decline seems plausible for these funds in a down 40% world. Obviously there would be income vehicles to keep in a bear market but I don’t think these are one of them. Where they do well, then do poorly, they will do well again, maybe after the next bear market maybe sooner but anyone interested in this space probably needs to be willing to be tactical and be willing to sell after a period of their doing well. Interest rates have a very good chance of remaining inadequate for many years even if the Fed does hike rates this month. Attempting to be tactical is not right for everyone but I do think that the way investors get their yield will probably include market segments that require a more active and tactical approach.

Actionable Insights: What The FANG?

Do you know what FANG stands for? If you don’t, you should – it makes an impact on your investments in ways you might not realize. FANG stocks mask the fact that the overall tech sector is under pressure compared to other indexes. 12/10/2015 You might have started hearing the word “FANG” thrown around in recent months and have questions on what it means. Like many terms before it, such as BRIC (Brazil, Russia, India, China), FANG is a recently-coined term associated with Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), and Google (NASDAQ: GOOG ). The performance of these stocks has been nothing short of impressive this year (avg. +87% return year-to-date), but what’s more important is the FANG’s impact on other investments, such as the NASDAQ ETF (NASDAQ: QQQ ). Though investors think they might be diversifying by owning ETFs, the FANG stocks make up about 20% of the ETF’s composition. When we include Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ), that number increases to 41%. So when you think about diversification, remember that over 40% of your investment is allocated to just six companies. This has been a pretty great issue to have this year, but it’s important to realize this before choosing your investments. More importantly, this heavy allocation into six companies skews what on face value looks like relatively great performance out of the NASDAQ this year: As you can see, the NASDAQ (less the top six stocks) has significantly underperformed the other major indexes. When you consider this index is weighted more towards growth/technology companies, and that mutual funds are beginning to write down private venture investments , its paints a much bleaker picture on tech’s ability to maintain its high multiples going forward. Additionally, as ETFs become an increasing larger portion of the market, the FANG stock may begin to move based on overall market buying/selling of indexes. Just something to keep an eye on….and now you know FANG. The Actionable Insight Take : With poor performance out of recent IPOs like Square (NYSE: SQ ), the write-downs of private investments in “unicorn” stocks, and general weak performance out of the NASDAQ this year, we are growing increasingly concerned about valuation in the tech sector. If the market were to start rotating into lower-risk stocks, many of the currently unprofitable “unicorns” would probably have a high likelihood of a sell-off. On the FANG front, we tend to prefer Google for its mix of growth and value, its profitability and strong balance sheet, and its opportunities to grow new, valuable businesses in the future (Google fiber, autonomous cars, expansion of YouTube, etc.). We commend Netflix for its transition into media production to offset the risk of rising content costs, but we fear the risk of miss-hits in production (something all producers eventually face). We think NFLX could take pricing here and there is ample room to grow internationally, but at its current price we think some of that is already priced in. Next week, I’ll be skiing in Utah, so stay on the lookout for my special skiing edition of Actionable Insights Last, as a shameless plug, it was announced this morning that my recent write-up on Ross Stores (NASDAQ: ROST ) came in 4th place in Seeking Alpha’s retail ideas contest . You can find the write-up here . Actionable Insights is a daily newsletter written by Shaun Currie, CFA, which aims to provide investors with quick, educational updates on market news with insights on possible investment opportunities. Periodically, Actionable Insights will also contribute longer investment ideas that the author produces for clients and the general public. Follow me to get notified when updates and articles are posted.