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The S&P 500 gained 1.2% on Monday, while the Dow was up more than 500 points, a nice change from the past three months of losses. As I write this in Tuesday morning trading, the indexes are treading water on the final day of October.
Since the S&P 500 hit its 52-week high of 35,679.13 in early August, it’s lost nearly 8% of its value. That’s three straight months of losses.
These are not the signs of a bull market.
And yet, Hannon Armstrong Sustainable Infrastructure (HASI) flashed a buy signal yesterday. According to Barchart.com data, the buy signal had an entry price of $16.94 based on the 20-day moving average crossover.
It suggests that over the past five years, when HASI stock has flashed a buy signal based on the 20-day moving average -- a sample size of 70 trades with an average duration of 14 days -- it’s produced an 84.45% gain compared to HASI stock generating a five-year loss of 18.4%.
I’m no technical analyst, so I’m not going to predict what it will do in the short term; however, I do believe that the risk/reward proposition for HASI stock at the moment is tilted in your favor.
Here’s why.
It’s Bounced Off Its 52-Week Low
As I said, I’m no technical analyst, but it’s hard not to notice that since HASI hit a 52-week low of $13.22 on October 6, its shares are up 31%, with 10 up days compared to seven down.
It’s on a wee bit of a roll.
The question is whether it can maintain its October momentum. The 20-day moving average buy signal thinks it can. Consider this: despite the 31% gain over the past three weeks, HASI is still at levels last seen in March 2020 and February 2016 before that.
Will it go on a 300% tear like it did between March 2020 and January 2021? No, but that doesn’t mean it can’t deliver another 30% gain over the final two months of 2023.
What About Its Fundamentals?
Hannon Armstrong reports its Q3 2023 results on Thursday. The 11 analysts that cover its stock project earnings per share of 53 cents, four cents higher than a year ago. For all of 2023, the EPS estimate is $2.17, translating into a high 12.4% earnings yield.
By virtually every metric, HASI is ridiculously undervalued.
Through the first six months, its revenue was $143.4 million, 18.2% higher than in the same period a year ago. Its income before equity investments was $13.3 million, 146.3% higher than a year ago. Its net income per share was $0.39, 30.0% higher than a year ago.
The business is performing well. However, discontinuing its REIT status in 2024 is holding back the share price. That should fade.
Management and the board first announced in March that they were doing a thorough analysis of Hannon’s tax and corporate structure. They concluded that the growth opportunities in renewables and fuels and other non-qualifying investments would best be undertaken outside the REIT structure.
“I will again clarify that our change in corporate structure will have no impact on our investment strategy or dividend policy. Quite simply, the company will continue to operate in an identical fashion in virtually all aspects of our business. We also expect the shareholder rotation will be minimal as our shares are held by very few REIT funds,” stated CFO Marc Pangburn in Hannon’s Q2 2023 conference call.
The CFO said that net operating losses (NOLs) should keep its taxes relatively minimal over the next five years. At the same time, it plans to maintain a healthy dividend payout.
With an investment pipeline of more than $5 billion, it has an opportunity to accelerate the company’s growth. In the meantime, investors are getting a chance to get in on the ground floor of this expansion at a fraction of what you’ll have to pay in five years.
To me, it’s easy to see why nine of the 11 analysts covering HASI rate it Buy or Overweight, with a $29.50 target price, 71% higher than where it’s currently trading.
The Bottom Line
Approximately 50% of Hannon Armstrong’s $5 billion pipeline is currently allocated to its BTM (Behind-the-Meter) business, followed by GC (Grid-Connected) at 35% and 15% for FTN (Fuels, Transport and Nature).
As of June 30, its top clients had $50 billion in capital needs for projects through 2025. There is no shortage of work to be done to solve the world’s climate issues.
The REIT points out on page eight of its Q2 2023 presentation that its portfolio yield was 7.7%, 290 basis points higher than its cost of debt. Even with its refinancing in 2025 and 2026 increasing its cost of debt to 5.6%, it will still maintain a spread of more than 200 basis points.
While everyone is freaking out about higher interest rates, Hannon appears to be handling the situation exceptionally well. Unless inflation reignites in the next 12 months, I don’t see its debt becoming an issue for the company.
If you’re into options, I like the June 21/2024 $22.50 call. It’s got a $ 1.50 ask price for a 6.7% down payment on the strike. With 234 days to expiration, HASI only has to increase $4.45 (26%) for you to double your money on the call. To exercise your right to buy 100 shares, it’s got to move 4o% higher.
Given the momentum over the past three weeks, it’s more than doable. Worst-case scenario, you’re out $150, less than a fancy dinner out.
Hop aboard.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
