Trade Like It’s 2008

Tom Konrad CFA

Three stocks I sold recently, and why.

Three years later, I’m still kicking myself that the severity of the 2008 financial crisis and stock market collapse took me by surprise. 

Not that I wasn’t in good company.  If a majority of investors had been prepared for the crisis, it would never have happened in the first place: The overpriced CDOs and other securities which were a large part of the cause would never have become overpriced. 

But making excuses for past mistakes is not useful.  Learning from them is.  This time around, when the market began to again look overvalued in the latter half of 2009, I began hedging my portfolio, increasing that hedge as the overvaluation became more extreme over the last two years.  This has enabled me to opportunistically buy fundamentally sound, high yielding stocks among waste management companies, energy efficiency companies,  renewable energy power producers, and a solar balance of systems play over the last two months, because my hedges produced liquidity as the market fell.

I expect that the market has farther to fall, so my hedges are still in place, although I have not increased them to reflect my recent purchases. 

Despite the success of my hedging strategy (at least so far), last week I realized I was making one of the same mistakes I made in 2008: I had money tied up in companies that require functional financial markets to succeed. 

Any company which needs to raise money over the next year or two will almost certainly face significant share dilution in order to attract new capital.  Hence, I’ve taken the opportunity of this week’s mini-rally to sell the companies I was holding that will need to raise new capital in the near future.  Even though these companies are already trading significantly below the value of their assets, shareholders are not likely to be able to realize the value of those assets if the companies cannot raise new funds and outside buyers do not appear. 

These companies are Comverge (COMV), EnerNOC (ENOC), and Nevada Geothermal Power (NGLPF.OB, NGP.V), which I said I was holding in my quarterly review of my ten clean energy stocks for 2011.  The parallels between 2008 and 2011 which I noted in writing that article, as well as some similar parallels noted by the Economist got me thinking about other parallels between the two years. That thought, in turn, led me to decide to dump these three stocks despite their current cheap valuations.
There’s no law that says a cheap stock can’t get cheaper, and when funding dries up, cheap companies that have to rely on external funding almost invariably get cheaper.  That’s why I called 2009 the “Year of the Balance Sheet.”  I now expect 2011 will also be a year of the balance sheet, and probably 2012 as well.  Which is why I’ve decided to grit my teeth and take my rather significant losses in these three stocks. 

I initially included Comverge and EnerNOC in my ten picks for 2011 because I was looking for smart grid stocks for the portfolio, and I did not see many others which looked like good values.  These two companies had fallen in late 2010, so they seemed relatively attractive.  When they continued to fall in early 2011, I began to buy them myself.  Nevada Geothermal was included because I thought a small rally in geothermal stocks starting in late 2010 was the start of something bigger.  The opposite turned out to be true, partly because of a raft of bad news at geothermal companies, not least at Nevada Geothermal.

In short, I let my enthusiasm for particular industries lure me into investments in particular companies.  Letting our enthusiasm for an industry or technology cloud our judgment about individual companies is also a common mistake in investing, especially among those of us drawn to clean energy. 

Lesson learned, I hope that admitting that mistake to myself (and you) will keep me from letting my enthusiasm for clean energy from doing my stock picking for me again.

DISCLOSURE: None.

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