Carbon Two Ways
Much has been made of two climate-activist backed outsiders being elected to the board of Exxon Mobil Corp (XOM) last week. We’re probably less optimistic than most that this will do much to change Exxon’s stripes since, as the descendant of industry creator Standard Oil, its identity is woven with burning carbon.
More important, in our view, to focus on is the fact that the three largest U.S. investment managers–BlackRock, Vanguard and State Street–and America’s three largest pension funds backed the new directors. Is the motivation from institutional investors climate concern or simply profit related? At this stage of the development of Greentech, it probably doesn’t matter–they’re both means to the same end. This chart below is hard to read in reduced form, but seeing the difference between the blue and red line is all you need to know. In the past 2,000 trading days (that is, since early 2013), the total return for clean energy equities–the blue line–is 270%. The total return for the red line, traditional oil and gas stocks: negative 60%.
In this issue of the Greentech Advisor, we add two carbon-related stocks, at either end of the value creation spectrum. Enjoy!
“When companies don’t listen, shareholders will take action”
-Andrew Behar, CEO of As You Sow, a corporate accountability non-profit, on climate activist electing two board members to Exxon Mobil
Featured Stock: Chara Solutions (CHRA)
Concrete is a necessity for a modern functioning society. It’s certainly part of economic growth, with more concrete produced per capita now than ever before. It’s also a major greenhouse gas emitter, accounting for 8% of global man-made carbon dioxide and using about 3% of global energy. One way to reduce that is to use materials in the making of concrete that inherently generate less CO2. Cement (which technically is an ingredient of concrete, not a synonym) is made by heating a limestone powder and clay base (with other inputs) to very high temperatures, which releases CO2 from the product itself in addition to requiring vast amount of power, often from coal-fired plants. Coal-fired plants also produce a lot of waste product called fly ash, which gets deposited in ash ponds or pits, often on site beside the power plant. There’s a lot of waste all around. Yet it turns out that fly ash contains a lot of material that can be used to swap into concrete. One to 1.5 pounds of fly ash replaces one pound of Portland cement in manufacturing. The benefit of doing that that is that it reduces the energy needed to produce cement, puts the waste ash to use and actually ends up making the concrete better performing, including being easier to handle in cold weather and stronger overall. Fly ash can also be used in related products such as tiles.
Chara Solutions (CHRA) is a Kentucky-based industrial services firm that is one of a handful of businesses that handle fly ash, using a purification system to make fly ash suitable for use in cement, a term called “benefication.” Chara should benefit from three factors: an increase in demand for ash as a cement mix-in, expanding state demands that coal ponds be cleaned up and expectations the Environmental Protection Agency will also push for power plants to clean up their ash ponds in accordance with a 2015 rule that hasn’t been enforced in recent years.
We calculate the country probably generates 74 million tons of fly ash annually and, even without enhanced government enforcement, use of ash is increasing, with the market taking 41 million tons of coal ash in 2018, the latest year with EPA data. There are hundreds of ash ponds from past production as well, meaning there is plenty for Chara to remediate for years to come.
One late 2020 contract is typical of what Chara does: the company won an RFP process from Dominion Energy (D) to remove fly ash from its Chesterfield Power Station in Virginia, where 14.9 million tons of fly ash sit in two open-air ponds. Dominion, by a state law passed in 2018, has to remediate its fly ash with a minimum percentage being reused and the balance being disposed of in a lined, covered landfill. Chara has 15 years to remove the fly ash, with 8.1 million tons being transported by train on a railspur it will construct. That ash will be shuttled across the eastern U.S. to cement makers who pay for the ash, and the rest buried according to state law. The contract is the main one that underpins deals totaling $715 million Chara won in 2020. Year-to-date in 2021, the company has won another $527 million in contracts. The company has outstanding bids on $3 billion worth of deals and management says it expects to be able to announce victories on some of those soon (it’s believed Chara wins about one in three deals it bids on) and it sees another $7 billion in projects being put out for bid soon that it expects to also compete on.
Based on the bidding for the Dominion contract, as disclosed in a consultant’s report prepared for Dominion, Chara competes with Waste Management (WM) which cobbled a bid together with two other private entities, as well as Boral Resources, a publicly traded Australia-listed firm, Encap-It, a private Virginia firm, and Entact, a private Texas firm with about half the level of Chara’s sales. Covanta (CVA), Clean Harbors (CLH) and other large environmental remediators also have businesses in fly ash.
Management says this fiscal year will generate $260 million to $300 million, with a net loss as deep as $5 million and as little as zero, along with earnings before interest, taxes, depreciation and amortization (ebitda) of $35 million to $40 million. One thing to note in comparisons to past years is that Chara sold its nuclear and fossil fuel plant maintenance division, named Allied, earlier this year, which removes about half of past revenue from many topline numbers circulating. Accounting for that, continuing business revenue was $232 million for last year and $245 million for 2019, reflecting some pandemic-related slowdowns in 2020. Chara has sizable business in the southeast, which means hurricanes and other weather can affect operations and revenue seasonally too. Sifting through all the numbers reveals that Chara is trading for less than one times annual sales given its market cap of $188 million. The business does have notable debt, of $292 million, although offsetting cash and equivalents brings that down to about $150 million, meaning Chara is still undervalued at less than one times enterprise value (debt plus market cap). The average price-to-sales ratio of six peer companies including WM and CVA is 2.4, implying (in an admittedly back-of-the-envelope way) that CHRA could reasonably rise to $18.
Can it get there? One of the issues holding back CHRA of late is that its price (it has spent most of the past 18 months under $5) and its float of shares (30 million) are too small to make it a realistic investment for large investment funds. The private equity firm BCP Energy, which brought Chara public in 2018, owns the majority of shares (which is another no-no for many investment funds as well as for indexers). It has filed to sell an as-yet-undisclosed number of shares as part of its on-demand registration rights. It’s counterintuitive to basic notions of supply and demand that more shares can help share prices, but–unless BCP is selling its whole stake–additional shares are seen by Wall Street as conducive to creating better liquidity in CHRA and therefore bringing in more long-term buyers.
Shares have shown excellent performance this year, handily beating the S&P and Greentech stocks overall. Since the pandemic panic of March last year, buyers have consistently come in to provide support when the 50-day moving average (now at 5.50) has been tested. Charts imply CHRA should be have a path to the 8.50 area, and with those as near-term targets and support at that 5.50 level, that gives us a risk-reward ratio of about 3-to-1 to the upside.
What to Do Now
CHRA is a micro-cap, meaning it brings with it additional risks, particularly more volatile price swings. We can buy here around current market prices of the 6.25 area, with any dips being buying opportunities. Volatility measures suggest the 5 level could be the sell-stop, but it would be wiser to look for support to hold around 5.25, and that is where we are setting our sell-stop. The area between 7 and 8 could bring in choppy trading, as a zone where CHRA spent much of 2018. The all-time high of 12 is the June 2018 IPO price.
Chara Solutions Inc (CHRA)
Revenue (most recently reported trailing twelve months): $232.4 million
Earnings per share (TTM): ($2.32)
All-time high: 12
Market cap: $188 million
Recommendation: Buy at current price (around 6.25) with a sell-stop around 5.25
KraneShares Global Carbon ETF (KRBN)
Trading emissions credits for environmental goals took hold with the U.S. Clean Air Act of 1990, when a cap-and-trade plan was instituted. That plan demanded a cut of acid rain, but allowed companies to decide how to get there, enabling power plants that reduced faster to sell credits into the market. The end-result was uncertain at the time, but by all accounts, the system has been highly effective, with acid rain emissions 94% below 1990 levels today, and, from a cost perspective, efficient. That program inspired carbon trading markets, but efforts to launch those in the late 2000s struggled, with little traction from about 2008 to 2013. But in recent years, carbon cap-and-trade is coming into its own. The specifics vary depending on the scheme, but generally it caps the amount greenhouse gases that a large emitter – power plants primarily – can produce and mandates that they buy allowances through auctions or in the secondary market. The auction funds are then used to support renewable energy projects. The cost to emit greenhouse gas varies by jurisdiction – it’s about $65 a metric ton in the European Union, $18 a ton in California and Quebec (who have a joint market) and $7.60 a short ton ($8.38 when normalizing to metric) in the northeast U.S., where New England and the mid-Atlantic states have a regional system. All of those fall far short of true cost of carbon, which should include the environmental and health consequences which emitters don’t pay, but nonetheless, the effort is worthwhile: the point is to ratchet up the cost of burning fossil fuels steadily to encourage power companies to reduce emissions without pushing costs too quickly and causing economic hardship.
That brings us to a new addition to the SX Greentech Advisor Real Money Portfolio this issue: the KraneShares Global Carbon ETF (KRBN). The fund was launched in July 2020 to reflect the prices in carbon in the E.U., California-Quebec and the Regional Greenhouse Gas Initiative (RGGI), which includes the six New England States, New York, New Jersey, Delaware, Maryland and Virginia. The fund goes long futures in carbon, mostly focusing on the E.U.’s market, which is the most robust. Right now, the fund is 76% in E.U. carbon futures, 19% in California and the remainder in RGGI.
The E.U. system currently covers about 40% of its carbon emissions (including non-E.U. members Iceland, Liechtenstein, Norway and Northern Ireland, which participate in the program). Its goal is to get continental greenhouse gas emissions to 55% the level of 1990 by the end of this decade, although that 55% figure is a proposed increase from current targets that will need member approval. The E.U. is also mulling regulating carbon from transportation, such as trucking, to the cap-and-trade system.
The California system covers 80% of the state’s carbon emissions and aims to get emission to 40% of 1990 levels (Quebec joined in 2014 with the aim of providing its carbon emitters more liquidity for buying and selling credits).
The Northeast’s system reached its original goal, a 45% reduction from its base period of 2006-2008, in 2017 and has set a goal for a further reduction of 30% below 2020 levels by the end of the decade. Massachusetts has its own, second cap-and-trade mandate that isn’t part of RGGI and isn’t held by the ETF. Data for the absolute reductions for RGGI varies, since New Jersey dropped out of RGGI in 2012 at the order of then-governor Chris Christie and rejoined in 2020, along with new participant Virginia.
In each case, the systems annually reduce the number of carbon credits available but also have price stabilization mechanisms to try and tamp down prices rising too high. The RGGI, for instance, can supply an additional 10% of the annual allowance if the secondary market price rises too much from the auction prices – in each system’s case, the reasoning is to avoid price spikes that would threaten the viability of power plants to cost-effectively operate. The RGGI also has a large number of credits in the hands of market participants left over from the 2008-2013 period, when participation in the market was weak. RGGI’s first auction was in September 2008 (the number 1 on the X-axis, below) and number 24 was held June 2014.
Despite occasional efforts to raise supply to control prices, the long-run goal for each is to reduce the annual available credits, which should continue to push prices higher (and there are also mechanisms for establishing price floors). The thesis is that carbon prices need to increase significantly to get the world toward compliance with the Paris agreement to lower greenhouse gas emissions. If the average world price of a ton of carbon is accurate at $24, that needs to at least double, and possibly quadruple, to make those goals realistic. In the past year, the E.U. carbon price has more than doubled, from about 22 to 52 euro, as the chart shows.
There’s debate in Europe right now about instituting a 50-euro price floor for carbon as well as what is called a re-basing, which means the removal of a greater amount of carbon credits to accelerate carbon reductions. Much of the rally in the E.U. price has been in anticipation of tighter regulations as well as a rally after the drop in economic activity with the onset of the pandemic last year. That brings some risk to buying into the carbon ETF – a faction of the E.U. would like to push out financial market participants (like KRBN) as a method of pushing the price back down. Others would like the market to continue to operate and everyone notes the expectation is that carbon prices will need to appreciate dramatically by 2030 (to 90 or 100 euro) to reach greenhouse gas reductions. A proposed carbon adjustment tax at the border – to tag on a price for carbon to places where carbon taxes aren’t applied – may be the middle ground acceptable to both environmentalists and E.U. industry, who fear not being cost competitive with imports. In short, as with everything in investing, there is some uncertainty here.
The time may be right to buy the carbon ETF, however. For one, rising prices bring in financial market participants who provide a key role of taking risk and providing liquidity in every workable commodity trading market. Certainly, the KraneShares ETF is one. The fund recently gathered enough assets to get past $150 million AUM which is where ETFs are seen as viable. Viability reduces the risk that KraneShares will simply shut the fund down for lack of fee revenue. Also appealing in the current market environment is that KRBN is has low correlation to clean energy equities and U.S. equities. The chatter in the market is that it’s been largely institutional buyers who want exposure to the carbon market who have been buying into KRBN, which means we’re still earlier than later in riding the trend.
What to Do Now
Shares are consolidating right now, with some near-term mixed signals from the charts–KRBN settled May in the bottom half of the monthly range, which is a bearish signal, while they’ve gapped higher to open June, a bullish indicator. We’ll buy here, though easing toward 32 would be a better entry point without changing the technical outlook. Consolidating patterns like what KRBN is displaying can break either way, higher or lower, but we read the technicals as biased to going higher, with a run into the low 50s possible if we can break above the mid-36 area.
KraneShares Global Carbon ETF
Net asset value per share (end of May): $33.74
All-time high: 36.99
Assets under management: $379.74 million
Recommendation: Buy under 35.5 with a sell stop not above 32.95.
The ESG Three
The ESG Three are three technically strong stocks selected from the 200 most-held stocks in ESG funds. ESG funds do hold environmental stocks in their portfolios but, by and large, they tend to focus more on blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.
Pool Corp. (POOL)
What is it?
A distributor of swimming pool supplies to builders and owners on four continents.
Why is it ESG?
Its corporate governance, especially pay claw-backs and independent board membership, is considered superior to peers. ESG funds own $34 million in shares.
Why now?
Pandemic stay-at-home professionals are adding pools as part of the trend toward making homes outdoor retreats, while the increase in post-COVID travel means resorts and other pool operators want to revitalize their operations. Sales should rise about 25% this year and next on a strong backlog and four smart acquisitions last year. Shares have recently broken through a range to make new highs and chart-wise, they project to be able to add another 10% to 23%. The 410 area should be very strong support here, a break beneath would be distinctly bearish and the sell-stop should be set to react there. A test of the next support level, 390, would follow.
SVB Financial Corp (SIVB)
What is it?
Silicon Valley Bank, a commercial bank focusing on tech, venture capital, winery and life sciences corporate clients.
Why is it ESG?
It meets federal and California privacy rights standards and has better-than-average corporate governance structure. ESG funds owns $137 million in shares.
Why now?
The company has a growth rate in the mid-teens and a strong ability to generate fees based on its close, long-term relationships with its target sector businesses. Shares have built a base in May and appear near to making a move. It may be wise to wait for a close over 590 here to indicate upward momentum. Key support is around 550.
Howmet Aerospace Inc (HWM)
What is it?
A manufacturer of lightweight metal products for aerospace, like jet engine sheaths and structural parts.
Why is it ESG?
A strong anti-corruption policy for executives. ESG funds owns $29 million of shares.
Why now?
The company is seeing its margins improve even as top-line sales missed expectations last quarter. The recovery of equipment maker customers, like GE Aviation, Boeing and Pratt & Whitney, should power revenue this year. Chart-wise, shares busted through a significant resistance level at 29-31. The 37 area should bring in some selling pressure but the bulls seem to have momentum to push through it. Support is at 31.
Our Greentech Timer
We’re cautiously optimistic that mid-May was a nadir of the medium-term bear move in Greentech. The broad market’s tech sector, which Greentech often mimics, is still lagging overall market performance but is showing good signs of improving momentum and shifting toward leading the market–but it’s not there quite yet. The various clean energy indexes all show that the sector is testing resistance at the 40-day moving averages to start the week, having pushed through the 20-day moving average last week. We want to see the sector hold its ground and relatively quickly establish itself with a close over the 40-day. Most importantly, we’re about a 5% upward move away from getting back over the 200-day moving average, our most important indicator of long-term sentiment. There are still headwinds in Greentech, but if we can push back over that level, we should start to see it easier to retake ground.
So, for now, we remain cautious, focused more on the stronger sectors within Greentech, like businesses with bullish commodity exposure and waste and disposal services, which have remained in decent form. Solar, wind, EVs and energy storage, on the other hand, keep telling us “look but don’t touch” for the moment.
Our Greentech Timer is fully bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential). As we can see from the chart, they’re both downward trending. In a situation, possible in coming sessions, where the index closes above the 200-day moving average, we’re skewed bullish despite the downward trending short averages.
Current 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. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell-stops are essential to long-term success to our approach. With the Greentech Timer bearish, we’re holding uninvested proceeds as cash or in four-week T-bills (take your pick - neither generates any income right now). When bullish, we’ll invested unallocated cash into cleantech sector ETFs. From time to time, we can also invest additional funds into our special opportunities portfolio, called Excelsior. That should be considered a separate portfolio from our Real Money Portfolio.
Freeport-McMoRan (FCX)
FCX held the gains it made early last week and gapped higher to start June. A move over 46 would be especially bullish. Right now, charts suggest we have some room to add to gains. We’ll raise our sell-stop from around 36 to around 38.50 and are looking to raise our stop to break-even as soon as possible without risking getting stopped out on normal volatility. BUY
Steel Dynamics (STLD)
The environmentally superior steel-maker is in the black as well for us and is looking to be extending higher again after a pause. Technicals suggest we could be in for a push toward 73 here. Volatility suggests we keep our sell stop around 57, which is now where the 40-day average sits too. The more cautious trader could raise the stop to the low-59 area, which would be a breach of recent, if not terribly important, support. Shares will pay a 26-cent dividend to shareholders of record as of June 30. BUY
Trex (TREX)
TREX is underperforming but technically remains fine, appearing to be working a trading range between 88 and 109. We loosened the sell-stop here to around 87 last week, which is below where a confluence of support now sits. That’s really the maximum we want to suffer a loss of based on the portfolio’s buy price. If you’re buying in now at these lower prices, that support at 88 is also a good spot to place a stop below and has the benefit of a lesser draw-down. It’s quite possible we may see a test of that support in the sessions ahead. BUY
| Stock | Buy Date | Buy Price | Price on 6/1/21 | Sell-Stop | Gain/Loss | Rating |
| Freeport-McMoRan (FCX) | 5/19/21 | 40.86 | 43.72 | near 38.50 | 7% | Buy |
| Steel Dynamics (STLD) | 5/19/21 | 61.13 | 63.34 | near 57 | 4% | Buy |
| Trex (TREX) | 5/5/21 | 107.44 | 96.81 | near 87 | -10% | Buy |
Email me at brendan@cabot.net any time with questions or comments at any time. Thank you for being a subscriber to the SX Greentech Advisor.
The next Sector Xpress Greentech Advisor issue will be published on June 16, 2021.
Cabot Wealth Network
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Chief Investment Strategist: Timothy Lutts
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