Companies that provide software and other technology services have been among the market’s best performers, buoyed by better-than-expected earnings reports and acquisitions. The Computer-Tech Services group was ranked 10th out of 197 industry groups as of Tuesday. It’s been in the top 10 for the past six weeks. Ten stocks in the 44-member group have Composite Ratings of 90 or higher, and a couple are expected to see earnings growth accelerate.
Summary CLNE’s margin has improved in the past year despite lower revenue as its margin/gallon is steady due to a diversified base of fleet operators and protection from the retail price. The price of natural gas/diesel gallon equivalent was $0.27 last month, which is way cheaper than diesel and gasoline, which is why CLNE’s volumes will continue increasing. CLNE’s natural gas volumes will increase as the addressable market grows from 74 million gallons last year to 1 billion gallons of diesel equivalent in 2018. CLNE could also benefit from an improvement in natural gas pricing as LNG exports from the U.S. begin next year, leading to lower oversupply and a move toward international pricing. The decline in natural prices has put the brakes on Clean Energy Fuels’ (NASDAQ: CLNE ) performance this year. After recording consistent top line growth until 2014, the company’s top line performance has slid this year. This is evident from the chart given below: Don’t miss the positives However, the above chart also shows that despite the drop in its top line, Clean Energy has managed to improve its margin profile since the downturn in natural gas pricing began. This is an impressive fact if we consider that low natural gas prices should have ideally pulled down Clean Energy Fuels’ margin profile, but the company has managed to keep its margin per gallon intact. For instance, last quarter, Clean Energy’s gross margin was $0.26 per gasoline gallon equivalent, down just $0.02 per gasoline gallon equivalent from last year. This is impressive if we consider that prices have dropped massively in the past year. The reason why Clean Energy’s margins have held steady in these difficult times is because the company has a diversified base of fleet operators that use its natural gas fuel volumes, and these are protected to some extent from the retail price due to the contracts in place. More importantly, it should also be noted that despite lower diesel prices, the use of natural gas fuel has not dropped as fleet operators have continued adding more NGVs to their fleets. This is clearly reflected by the fact that Clean Energy’s volumes delivered in the previous quarter grew 17% year-over-year. Now, on taking a closer look, it becomes clear that natural gas is still a cheaper fuel option than diesel despite the decline in diesel prices this year. Take a look at the following table for more clarity: Source: Westport Innovations Hence, the price of natural gas per diesel gallon equivalent stood at $0.27 last month, which is lower than the regular gasoline price of $2.059 per gallon and diesel price of $2.421 per gallon last month. So, it is not surprising to see that Clean Energy has seen an increase in its volumes delivered this year even though diesel prices have weakened, which lowers the incentive of switching to natural gas fuel for fleet operators. Why Clean Energy’s drop is an opportunity As discussed above, Clean Energy is seeing both volume and margin growth, while natural gas has an advantage over diesel in terms of both costs and emissions. As a result, the adoption of natural gas-powered trucks and buses should continue increasing going forward. For instance, in the past few years, the adoption of CNG trucks in the refuse transit market has increased, as shown below. More importantly, the adoption of heavy-duty LNG trucks as a percentage of overall sales will increase in the coming years, leading to an increase in gallons delivered from 74 million last year to 1 billion in 2018: (click to enlarge) Source: Clean Energy Fuels Hence, due to the advantages of natural gas, its adoption will increase going forward and help Clean Energy amplify its volumes delivered. However, as we saw earlier in the article, the steep drop in the price of natural gas has made it difficult for Clean Energy to grow revenue, but this might change next year onward as LNG shipments from the U.S. start gaining traction next year. By 2020, Australia and the U.S. are expected to make up for almost the entire 50% increase in global LNG trade, with the latter expecting to become an LNG exporter on the level of Qatar. Now, if we consider that the supply situation in the global LNG market is weak and the U.S. is aggressively building its LNG export infrastructure as shown in the chart below, the oversupply situation in the U.S. natural gas market will ease going forward as exports begin. Source: Cheniere Energy Also, due to these exports, the price of natural gas in the U.S. will move closer to international levels, which are higher, and eventually lead to better natural gas pricing in the U.S. as well. As a result, Clean Energy will see an increase in both revenue and margins going forward. Conclusion The performance of Clean Energy Fuels on the stock market has been no less than disappointing this year, but there are positives that we should not miss. The company’s volumes and margins are increasing, while a potential improvement in natural gas prices will be another tailwind. So, it seems like a prudent idea to buy shares of Clean Energy Fuels on the drop as it can deliver gains in the long run.
Riskier assets have been buckling clear across the asset board. Comfort seeking in treasury bonds over low-level investment grade bonds and higher-yielding junk bonds? A preference for recession-proof staples over the wider large-cap asset class? These are signs that momentum currently favors less risky alternatives. History has rarely been kind to those who ignore common sense warning signs. Is it the “smart money” or the “dumb money” that has been seeking safer portfolio pastures throughout 2015? Time itself will tell. That said, riskier assets have been buckling clear across the asset board. Consider the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ): iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) price ratio. A rising IEF:HYG price ratio signals an increasing desire for the perceived safety of U.S. treasuries over the higher yield-producing income of comparable corporates. The ratio has not been this high since mid-2014. Another relationship that typically offers insight into investor risk preferences is the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ):SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) price ratio. When there is skittishness about the economy, cigarette makers, soda pop providers and toothpaste purveyors tend to outperform the broader large-cap market of U.S. stocks. As it stands, momentum for XLP relative to SPY is near 52-week highs. Comfort seeking in treasury bonds over low-level investment grade bonds and higher-yielding junk bonds? A preference for recession-proof staples over the wider large-cap asset class? These are signs that momentum currently favors less risky alternatives. Indeed, there are plenty of additional examples where the less risky asset is outperforming the riskier selection. Compare the perceived safer world of large-company stocks versus the perceived riskiness of owning small-company stocks via the iShares Core S&P 500 ETF (NYSEARCA: IVV ):iShares Russell 2000 ETF (NYSEARCA: IWM ). Like most price ratio comparisons today, the lower risk option is experiencing far greater demand than the higher risk option. There are exceptions to the rule. For example, in foreign markets, large caps are underperforming small caps. This can be seen in the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ): Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA: VSS ) price ratio. One possible reason for the trend toward the perceived riskier asset? Large foreign corporations are exceptionally dependent on international trade; lackluster world demand has put enormous pressure on exporters. In contrast, smaller companies around the globe are more dependent on their local economies as opposed to global trade. Another possible explanation? International small-caps have been beaten down so far that some may perceive them as more attractive from a valuation standpoint. However, relative strength in small-cap international stocks relative to larger-company brethren is not an indication of greater demand for riskier international holdings. In fact, like the overwhelming majority of “risk-on” asset classes, small-cap international stocks via VSS have been faltering since May. In particular, VSS is more than 10% below its 52-week high and remains well below its long-term 200-day moving average. With the U.S. economy showing signs of deceleration and U.S. stocks exhibiting unrestrained overvaluation , few should be caught off guard by waning enthusiasm for risk taking. One fact that looms particularly large? Year-to-date, more stocks in the U.S. have been declining than advancing for the first time since 2009. In sum, history has rarely been kind to those who ignore common sense warning signs. If you have long-term winners in your portfolio, restore those assets or asset classifications back to your original allocation. The cash that you raise from “pruning” will help you buy desirable assets at bargain prices in the future. If you have been holding onto losing vehicles, consider taking a small loss on each. The dollars that you raise from “cutting bait” will help you buy the best fish in the sea when those fish are attractively priced. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.