February 16, 2022

The $1.2 trillion infrastructure bill money should start flowing this year. This issue we feature two businesses that should benefit from the influx of capital into public spending on top of their already positive growth.

Action in Greentech has us cautiously optimistic that the sector is reversing the bearishness that has gripped tech stocks and renewables for the past few months. In this issue, too, is our ESG Three stocks to consider, a glance at what out Greentech Timer tells us and a full update on our Real Money and Excelsior portfolios.

Stantec (STN)

Overview
Engineering and infrastructure expertise fits in the core of environmental work. It’s still large public and corporate works that can make big impacts on the environment – most energy comes from hydropower in both the U.S. and Canada, for instance, and providing clean water is almost always a cooperative or publicly funded effort. As November’s infrastructure bill begins to disburse money and general activity improves from the adjustment to treating COVID-19 as endemic, expertise in planning and executing large projects will be increasingly in demand.

Business Model
Stantec (STN) is a professional services, engineering and consulting business based out of Edmonton. In the 12 months ending its third quarter, September 30, Stantec generated $3.58 billion in sales (as always, we use USD) the vast majority from environmentally related business: 28% in infrastructure, such as mass transit, 22% from water projects, 19% from buildings, often sustainably and energy-efficient focused, 15% from environmental remediation, such as cleaning and revitalizing waterways, and the balance from energy and resources, usually renewable projects (roughly 25-30% of the energy business comes from oil and gas and mining, however.) Three-quarters of business comes from the U.S. and Canada, and a recent acquisition of another professional services business, Cardno, provides the company critical mass in Australia and gives it a greater Asia-Pacific presence. The company also does business in western Europe and South America.

Recent news provides some concrete examples of what Stantec does:

• It was just awarded a $45 million “indefinite delivery/indefinite quality” (IDIQ, i.e. general tasks/on call) contract for the U.S. Bureau of Reclamation – the largest entity delivering water in the country. Stantec will provide support for water infrastructure, the bureau’s 53 hydroelectric facilities and various pipelines. IDIQs are more than $1 billion in open contracts for Stantec, but they aren’t included in backlog orders because they’re for work yet to be firmly assigned.
• In addition to Cardno, which brings $350 million in revenue with its $500 million purchase price, Stantec has purchased three smaller U.S. environmental services businesses in recent months, as part of an effort to beef up environmental compliance consulting and wind and solar projects.
• Stantec has a good niche in medical facilities, and is designing the mechanicals, electrical and fire systems, elevators and escalators, lighting and acoustics in the new Footscray Hospital, the single largest medical project undertaken in the state of Victoria, Australia.

A mid-cap stock with a value of $5.8 billion, Stantec is a more defensive-minded holding, with management emphasizing its desire to provide stable growth and taking steps consistent with defensive stocks – stock buybacks and paying dividends ($0.52 the past 12 months)

Stantec is also a safely ESG stock – a definition that tends to focus more on social and corporate governance issues – due to its 38% female corporate board, and its efforts on gender pay equality, community engagement and inclusion and diversity.

Business Outlook
The company tallies about $4.4 billion in order backlog – level with about a year ago – and projects 1% to 4% organic growth for 2022 over 2021. Cardno and other acquisitions will improve the top line to about $3.4 billion for the current year, up from what should come in at $2.9 billion for 2021 (earnings are reported next week). Earnings per share are seen as $2.31 for 2022, so shares are about 23 times price-to-2022-earnings at recent prices, about in line with the S&P 500’s ratio.

A variable here is the infrastructure bill. The U.S. is Stantec’s most important market, at 50% of sales, and the infrastructure bill will direct some $506 billion to areas Stantec can compete for. To date, no allowance has been made for the bill in projections. Interestingly, infrastructure is the one facet of Stantec’s U.S. business that didn’t grow in 2022. There is some expectation among the Street that Stantec will start to post gains in infrastructure as the laggard sector.

For next week’s 2021 fourth-quarter report, as usual, outlook will probably matter more than the past results. Consensus is for EPS of 45 cents on revenue of $728 million. Management has tended to beat on earnings and miss on sales the past few years. In particular, if U.S. infrastructure business continues to underperform, investors will want to see that some of the lack of growth is a result of business pushed into the current year.

Issues to Consider:

• Stantec is valued roughly in line with peers.
• Business is still looking to bounce back from the pandemic slowdown.
• Debt-to-equity is about 48%.
• Stantec shares tend to underperform in March.
• EPS has beaten consensus strongly in three of the past four quarters; sales have missed in four of the past five periods.
• The next dividend will likely be payable in April on a late-March ex-dividend date.

Technical Analysis
The technicals of STN make it stand out, with shares building a base while performing superior to the broad market, on a relative basis. This suggests we could see a firm breakout higher with a lengthy run at some point soon.

STN gapped higher in October on news Stantec was acquiring most of Cardno (the U.S. and Asia-Pacific operations) and held a recent retracement back to the top of the gap, around 51. Shares felt pushback from resistance at the 40-day moving average, at 54, last week. Support should be very good at the 200-day moving average, which coincides with another price chart support zone. The all-time high close of just over 57 is key resistance, having held two tests in recent months.

Stantec also trades on the Toronto Stock Exchange under the same symbol, STN.

What to Do Now
Shares face some immediate resistance and, with earnings out on February 24, we’re likely going to wait to see the outlook and results. WATCH

Stantec Inc (STN)
Revenue (trailing twelve months): $2.58 billion
Earnings per share (trailing twelve months): $1.44
Dividends per share (TTM): $0.52
All-time high (intraday): 58.33
Market cap: $5.9 billion
Recommendation: Watch
Intended Portfolio: Real Money

Aecom (ACM)

Overview
ESG-positive outcomes are increasingly a focus of public policy, where infrastructure projects are designed to reduce carbon emissions and facilitate de-carbonization across society. Many of these projects are already inherently environmentally focused from delivering clean water to laying the groundwork for increased renewable energy. Much of the emphasis also comes from undertaking energy efficiency in projects that don’t necessarily have to have them, such as designing green buildings.

Business Model
Aecom (ACM) is the world’s largest ESG-focused infrastructure company, working throughout a project’s lifecycle. Aecom designs and manages construction of stadiums (such as the first LEED Platinum stadium, Atlanta’s Mercedes Benz Stadium,) bridges (a 15-mile sea crossing in Malaysia), railways (converting an Italian railway from diesel to hydrogen,) and even cities (it’s managing the $15 billion revitalization of the historic Saudi city of Al Ula). The company also offers a host of environmental and planning services, from remediating PFAS – the “forever chemicals” – to assisting the Federal Emergency Management Agency with planning to develop “resiliency” around coastal and interior flooding coming about from the effects of climate change.

The Dallas-headquartered company is ranked as the top, or among the top, firms for chemical remediation, green design, desalination plants, solar plants, and water and hazardous management and transport, among other awards.

The business generates revenue of more than $13.3 billion a year, though more than half – $7.2 billion – is pass-through revenue. Net service revenue (NSR, the dollars it keeps) is $6.2 billion a year. Transportation and facility businesses – think bridges, tunnels, buildings and airport terminals – are the two largest segments, each just about splitting evenly 70% of sales. Environment and water account for 28% of revenue while the renewable energy is 3%. Most (54%) of sales come from the U.S., with state and local governments generating two-thirds of domestic revenue. Aecom makes money, with net, after tax, income more than $173 million or $1.16 a share last year.

The company just initiated a dividend, cutting its first quarterly checks of 15 cents a share in January and committing to increasing dividends paid by 10% or more annually.

Business Outlook
Aecom expects 2022 to generate $3.30 – give or take a dime – in EPS and earnings before interest, taxes, depreciation and amortization of around $900 million. Growth is mid-single digits generally in its business, which management is supplementing by committing to returning capital to shareholders with the dividend and in the form of stock buybacks, having closed out a $1.2 billion program recently.

The company has worked through a restructuring to focus on delivering improving results and a cleaner business model. For instance, it exited 30 unprofitable or less-profitable countries and sold its civil construction and fossil fuels business lines. Coming with a company-wide spending overhaul, the moves cleaved $225 million in SG&A expenses annually.

Our outlook is for Aecom continuing to strengthen, considering the expected flow of infrastructure bill money to state and local governments, as well as the fact that states are enjoying full tax coffers. We don’t expect the infrastructure funds allocated in the November bill to start hitting Aecom’s top line until next year, but we should see an uptick in demand for advisory and planning services ahead of then. By 2024, management projects $4.75 EPS.

Aecom generally has hitched its business plan to fulfilling client ESG desires, positioning itself as a company in which decarbonization is integrated into all their planning – they call it ScopeX, reducing carbon through design. It is also focused on leveraging a few unique offerings to gain more business, such as its patent-pending way to remediate PFAS, called De-Flouro, predictive modelling for contaminants and a digital platform to streamline project public comment period collections and education.

Issues to Consider:

• Aecom is highly dependent on world government spending with 57% of global revenues from governments.
• Aecom historically uses mergers and acquisitions to grow. One, the 2014 acquisition of a firm named URS, has been widely panned, suggesting future acquisitions may not be well-received (however a 2015 buy gave it its well-regarded stadiums division).
• Los Angeles’ SoFi Stadium, the site of the latest Super Bowl, is a joint venture of Aecom and Turner Construction, and has gotten widely enthusiastic reviews, likely strengthening Aecom’s stadium niche.
• International work isn’t as profitable for Aecom as the U.S. is, yet likely offers more growth.

Technical Analysis
ACM recently tested support at 67, where both the 200-day average and support from prior chart resistance sit. Shares handled the test nicely and have fairly easily worked back through near-term resistance. The all-time high close of 77.90 will bring sellers to the upside, while 67 and then 59 will offer support.

What to Do Now
In addition to being somewhat similar companies, our featured stocks also have similar charts and set-ups. The difference with Aecom is that it doesn’t have pending earnings to swing sentiment and offers a slightly better technical appearance right now. Understanding the market environment is less than favorable for Greentech overall, we’re going to add shares to the Real Money portfolio here. We’ll institute an initial sell-stop “around 65,” about 10% lower and well within our portfolio risk tolerance overall. BUY

Aecom Technology Corp. (ACM)
Revenue (trailing twelve months): $13.29 billion
Earnings per share (trailing twelve months): $1.42
Dividends per share (TTM): $0.15
All-time high (intraday): 78.62
Market cap: $10.3 billion
Recommendation: Buy
Our Intended Portfolio: Real Money

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. We screen top performers further to eliminate widely held companies we believe have clear environmental, social and/or governance problems. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

Robert Half International (RHI)
What is it?
A temporary staffing and employee recruiting business.

Why is it ESG?
Corporate structure – board composition, oversight and anti-corruption practices – are considered superior to peers. It has 150,000 temporary workers at clients. ESG funds own $68 million of shares.

Why now?
The tight U.S. employee market means Robert Half should be widening its margin from higher fees from companies. Shares recently touched an all-time high of 124.53.

AbbVie Inc (ABBV)
What is it?
A pharmaceutical researcher and developer.

Why is it ESG?
Employee turnover is below peer average, suggesting strong employee engagement practices are working and more than offset concerns over board independence. ESG funds own $229 million of shares.

Why now?
AbbVie has been heavily reliant on one drug, Humira, for 43% of sales. Recently approved drugs and the recent acquisition of Allergan will diversify the business. Shares recently hit an all-time high.

Charles Schwab Corp. (SCHW)
What is it?
A brokerage firm and wealth manager.

Why is it ESG?
It beats peers in environmental measures and has weathered merging another large brokerage, TD Ameritrade, into its business, suggesting good employee engagement practices. ESG funds own $171 million of shares.

Why now?
Schwab will benefit from higher interest rates, boosting margins with customers and improving income from assets held. Synergies from the TD Ameritrade acquisition are expected to improve results this year.

Greentech Timer & Current Portfolio

So far this week, Greentech looks on track to notch its third-straight positive week, showing welcome improvement after hitting a 15-month low in late January. Volume hasn’t been great, but has managed to overcome near-term resistance. There’s a good bit of technical pushback to be expected above here, with Greentech having space for another 10% gain before we’d expect sellers to start challenging us. On the monthly charts, so far February looks like it may be stanching the bleeding, so we’re cautiously optimistic. The sector is still bearish, but not hopelessly so.

Among the subsectors: nuclear looks the best, as bulls and bears fight around the 200-day moving average, with water and hydrogen-related shares showing improvement while still overall bearish. Solar and wind remain bearish.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving averages and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential). Right, now our Timer is bearish. It’s important to maintain sell-stops and enter trades cautiously.

Current Portfolio

Real Money Portfolio

Excelsior Portfolio

Sold positions

Real Money Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. When the sector is bullish, we keep our cash in the ETF based on our benchmark index – the Wilderhill Clean Energy ETF (PBW). When bearish, we keep our cash in U.S. Treasury Bills. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows – but either way will work fine in the long term.

Advanced Drainage Systems (WMS)
Shares are sitting right on long-term support and look to be in the middle of bearish and bullish trend lines with no news this week. Shares earn a dividend of 11 cents for shareholders of record as of March 1. We don’t have a firm sell-stop on right now. HOLD

Archaea Energy (LFG)
Archaea’s chief financial officer, Eric Javidi, and general counsel, Lindsay Ellis, are leaving the company as of March 1. A press release last week blandly said their work to transition the business to a public company was done. Clearly there’s another reason and that caused volatility in shares, as each have been with the company for less than a year. The release said the change had no relation to the company’s regulatory or accounting policies and practices and it probably isn’t insider trading, which has bedeviled some SPACs, because each joined after the merger agreement was signed. That probably leaves some sort of behavioral actions as the reason and therefore should have little impact. Dan Rice, the energy billionaire and trained attorney who created Archaea, is handling their functions as the search goes on for new executives. We also saw some good hedge fund buying disclosures immediately after the announcement – there are dangers in taking too much signaling from hedge funds, but we take this week’s regulatory reports as supportive. Shares are more bearish than bullish however, having fallen below support with the news. Our sell-stop is “under 14” and we may see bears push to test that support zone. We continue to maintain our recommendation on long-term strength of the business plan. BUY

Charah Solutions (CHRA)
Shares have been quiet this week and sit in a support zone as they look to be consolidating. We have no firm sell-stop right now, but suggest a wider-than-usual berth, to about 4.10. Moves as large as 70 cents would be normal by current volatility measures. BUY

Daseke (DSKE)
The trucking firm with a renewable energy transport specialty is consolidating gains in the low-11 region and continues to look bullish in the longer run. If you’re tolerant of big drawdowns, we’d put a sell-stop around 8.75, below major support and about a 25% drop from our buy price. BUY

Good for Growth SPAC Units (GFGDU)
The ESG-focused SPAC has no news this week. We’ll hear little to nothing until there’s a deal in the works. We bought the SPAC units at 9.97 from our last issue and, as we recommended in last week’s update, split them into their components. If you haven’t split them yet, call your broker and request the units be split, which can take from a couple of days to up to two weeks. Having the units split is key to flexibility in this trade to maximize returns. If we wait until a merger vote or liquidation, this trade is profitable, so we’re not concerned with shares currently trading at a discount to their trust value of $10. SPAC sentiment is weak these days, and in addition to share prices, levels for warrants and rights across the sector reflect that. Our warrants are trading around 30 cents and the rights, 16 of which equal a share in any merged entity, are at 17 cents. To maintain maximum flexibility and to execute our strategy with this SPAC unit, you need to request through your broker to split the units into their components. The buy prices listed for the components of the unit in the table above reflect our total buy price, apportioned to each component to reflect prices when the units were split. At current prices the units only, which are still liquid in trading, remain a Buy. We are setting our recommendation for the split securities – shares, warrants and rights – at Hold. HOLD

Heritage-Crystal Clean (HCCI)
Shares are bearish and look uninspired. The waste oil remediation firm announces earnings at month’s end, which could be the catalyst we need to buy. Consensus is for earnings of 58 cents a share. WATCH

KraneShares China Green Energy (KGRN)
The China-listed stock fund is in a range, and is working against near-term resistance. A test to the downside, toward 36, could come again, while a move to 43 would break some selling sentiment. BUY

Lithium Americas (LAC)
Shares have rebounded from a mild test of support at 23 two weeks ago and are now generally bullish. A third Native American tribe has joined the lawsuit to try and block the Thacker Pass mine, saying the region is sacred, but the tribes have been on the losing side of decisions by judges, saying evidence of a massacre at the site is too speculative to halt the project. We’re instituting a sell-stop at “near 22,” which is below major support levels. BUY

Excelsior Portfolio
Excelsior is our special opportunities portfolio, and is managed without consideration to the Real Money Portfolio. We may or may not recommend sell-stops in Excelsior.

In June we purchased five SPAC warrant positions as a basket trade: Navitas, Li-Cycle, ReNew, Ree and Volta. Of these, Li-Cycle, was closed at a 4% profit in December. Navitas has been closed out with a 127% total return this past week.

ADS-Tec Energy (ADSEW)
The German-based and Ireland-domiciled maker of superfast EV chargers is looking for a location to build a U.S. factory in what would be a positive development for expanding its presence stateside. Warrants continue to be weak at under a dollar of late, but stable. HOLD

FuelCell Energy (FCEL)
The fuel cell maker is pushing over resistance this week on improved sentiment with little news. More important, resistance is around 7 and 8. HOLD

Navitas Semiconductor (NVTSW)
The Navitas warrants are being redeemed. If you have not sold, you must sell soon, otherwise your position will be liquidated for 10 cents a warrant on March 7. Early last week the company issued a mandatory redemption of the warrant and we recommended selling the quarter of the original position we still held in last week’s update. Timing-wise, redemption crimped returns, because Navitas warrants haven’t rebounded to previous very strong levels. The warrants did improve after the redemption order and the portfolio booked the sale Thursday at 3.26, the mid-point of the high and low for the day. That’s good for a 27.1% gain on that portion of the holding. We previously sold three-quarters of our position in mid-November at 6.68, booking 160% profit on that portion. Overall, we made 127% on the trade. SELL

Origin Materials (ORGNW)
Origin, which will make carbon-negative plastics, has management making the rounds of investor conferences to drum up support. Warrants are slightly firmer this week at 1.10. HOLD

Ree Automotive (REEAW)
Ree, too, is making the rounds of conferences. The EV chassis maker is currently running trials of a delivery fleet platform. Warrants are weak, but stable. HOLD

ReNew Energy Global (RNWWW)
The Canada Pension Plan, one of ReNew’s major shareholders, inked an agreement with Goldman Sachs, which has been seeking to reduce its stake in ReNew. The CPP will buy 18 million shares from Goldman at $6.50 each. It’s a good outcome and has buoyed shares this week into the 7 range. HOLD

Volta Inc (VLTA.WS)
Volta intends to install 1,000 EV chargers at 500 Walgreens locations across the country. Volta’s business plan in part is to use display advertising to drive sales at nearby retailers, under the assumption food and beverage spending at gas stations are up for grabs with EV drivers. No financial details are disclosed yet. The company should report the next quarter’s earnings in early to mid-March. Warrants have perked up about 35 cents this week, to 1.70 recently. HOLD.

Thank you for being a subscriber. Our next regularly scheduled update is next Wednesday, February 23. Please send along your comments and questions anytime to me at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on March 2, 2022.