After several years of horrible underperformance, the listed clean-technology sector is finally showing signs of life. It rose almost 7 per cent in February and substantially outperformed the S&P/ASX 200 and Small Ordinaries indices, according to the latest ACT Australian CleanTech index.
Over three months to February 2013, the index (up 11 per cent) is just a few percentage points behind the ASX 200 (13.3 per cent) and substantially ahead of the Small Ord’s 7.9 per cent gain.
Is the troubled clean-tech sector, which has so much promise but for years has struggled to attract investor interest, approaching a turning point?
Of course, a few months of outperformance is barely a trend. The ACT Australian CleanTech index is still down 15.5 per cent over 12 months, compared with a 20 per cent gain in the ASX 200. Three-year figures are even more horrendous: a 43 per cent fall in the CleanTech index, and an 11 per cent gain in the ASX 200.
Some care is needed with broad comparisons between the Australian clean-tech sector and market indices as the capitalisation-weighted ACT Australian CleanTech index is strongly influenced by its larger constituents, such as Sims Metal Management and Transpacific Industries Group.
Sims Metal rose 16 per cent in February and Transpacific gained 15 per cent. Other strong performers (up more than 15 per cent) included Quantum Energy, Phoslock Water Solutions, Novarise Renewable Resources, Earth Heat Resources, Coffey International, and Aeris Environmental.
The worst performers in February (down more than 20 per cent) included CBD Energy, AnaeCo, Medivac, Cardia Bioplastics, Redflow, Panax Geothermal, KUTh Energy and Greenearth Energy. The vast majority of clean-tech stocks are thinly traded micro-caps that suit speculators.
For all the negatives, contrarians might see the clean-tech sector’s severe long-term underperformance as a buy signal. As risk appetite rises, more funds will eventually flow to small and micro-cap stocks, or stocks such as clean-techs that trade at a shadow of peak valuations.
However, speculators will need a strong investment stomach to punt on small clean-tech stocks.
About $9 billion has now been wiped off the value of the sector from its 2007 peak. The 68 stocks in the ACT Australian CleanTech Index are now worth $7.2 billion – slightly less than Leighton Holdings’ market capitalisation.
The sharemarket rally has only lifted the clean-tech sector by a billion dollars from its $6.2 billion low in July 2012. Longer-suffering shareholders in clean-tech stocks would have hoped for much stronger gains, given the magnitude of falls during the past few years, and the potential of clean energy.
Also, the sharemarket rally has not yet found its way to smaller companies. The Small Ords Accumulation Index has a slightly negative return over 12 months and is barely positive over three years. The ASX 200 Accumulation index has a 6.7 per cent annualised return over three years.
The market rally this year has concentrated on large-cap stocks, especially those paying higher dividends. Investors are still showing little interest in most speculative stocks, such as minerals explorers, emerging life-science companies, or clean-techs with energy-saving products or services.
Sentiment towards clean-tech stocks is especially poor, despite an obvious long-term need for technologies that reduce energy use.
Backing blue-chip clean-techs and avoiding the speculative ones seems the best bet in this market. There is no obvious catalyst to re-rate smaller stocks, and uncertainty around the Federal election in September, and the carbon tax’s future, is another headwind.
Brokers are showing more interest in some beaten-up large clean-tech stocks. Two of five brokers that research Sims Metal have strong buy recommendations, two have a moderate buy call, and one has a hold, according to consensus broker estimates that Morningstar compiles. Sims looks like one of the better opportunities in the clean-tech sector.
The scrap metals recycler has underperformed the ASX 200 since 2010, largely because of problems in its US operations. Stronger global economic activity, higher scrap metal prices and better volumes will help Sims, although its recovery could take a few years to play out, and the stock can be volatile, given its inherent cyclicality and reliance on metals demand.
Four brokers that research Transpacific all have hold recommendations, Morningstar data shows.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.