With the market bucking like a rodeo bull, investors should hang on and sit tight, JinMing Liu advises, especially with the high-beta cleantech and renewable energy industries he covers. In this interview with The Energy Report, the senior vice president and director of research at Ardour Capital Investments explains how the recent market correction affects both the cleantech and waste-management companies in his portfolio. His advice throughout: Be patient.
The Energy Report: JinMing, the first half of October was a bloodbath on Wall Street, and resulted in the stock market's worst performance of 2014. How did the selloff affect the companies you cover?
JinMing Liu: Renewable energy, or cleantech stocks, have very high beta, so what happened in the past weeks had an even bigger impact on them. On the general market level, this correction could be very healthy. We need to wait to see how the cleantech and renewable markets develop, because they could go quickly either way. I suggest investors be patient.
TER: So investors should sit tight to let the market settle down some?
JL: They should have patience, because cleantech stocks, in general, have a higher risk profile. Cleantech and renewable energy companies are a newer industry, and the risks associated with them are higher than with more mature, bigger companies.
TER: Is that true of the waste-handling stocks as well?
JL: That is a different space. The waste-handling industry has different subsectors. Municipal solid waste is relatively mature. There are also industrial waste and food-processing waste subsectors, which have different risk profiles.
In the municipal solid waste market, companies like Covanta Holding Corp. have relatively mature operating models and, generally, very high cash flow. On the other side, industrial waste handling and food-processing waste handling have two different sets of factors affecting them. For food-processing waste, the final products are sensitive to commodity prices, which can affect the stocks of companies like Darling Ingredients Inc., which I cover.
Because of what happened recently with the uncertainty surrounding the Renewable Fuel Standard compliance requirement and sanctions against Russia, expectations for the global consumption of agricultural products have been adjusted. As a result, prices for Darling's products are under pressure. That led to some pressure on the stock.
The industrial waste segment is very fragmented. Many smaller companies are trying to get in, but the competition is relatively high.
We are also looking at technological improvements in the waste industry. Some technologies are relatively mature, such as landfill operations, traditional waste-to-energy solutions, burning trash to generate electricity, or the rendering process for agricultural waste. These are mature technologies.
Companies either bury, burn or cook food waste to make the final products. But given the increases in different commodity prices, including crude oil, and in landfill prices because of finite space available for landfills, different types of technologies are called for.
For example, some companies are trying to use municipal solid waste to produce biofuels. Another crossover company, called Strategic Environmental & Energy Resources Inc., is using a combination of pyrolysis and plasma technology to reduce the volume of the waste from different industries, including oil refineries and medical waste. These are the areas in which we expect to see potential significant progress in the near future.
The U.S. generates a lot of waste each year. The waste disposal industry is worth about $50–60 billion per year in the U.S. The traditional waste-handling companies like Covanta have relatively stable business models. Their growth will come from incremental market growth. We may see better opportunities in the future in technologies that help us improve waste-handling and processing.