Investors are getting  bearish these days, which comes as a surprise to me, since I'm used to being in the minority.  I was a bear when I first took the leap from mutual funds and started trading stocks in 1999, and am a bear still.  I wish I'd turned bullish for a couple of years at what I consider to be the large bear market recovery of 2003-2006, but I didn't.  However, since I was (and still am) bullish on commodities since around the same time frame, I can't complain about my returns over the period.

This spring, I was more bearish than usual, which is why I brought you my ideas for stocks to buy when you think we've hit bottom, and some very un-green stocks to consider shorting.  With it becoming clearer and clearer that GM, Ford, and Chrysler are in serious trouble from high oil prices, while the Airlines are going from bad to worse, I only wish I had been less cautious about advocating shorting these industries than I was, and also that I'd been willing to take bigger risks myself.

I've already covered by proposed short of First Solar (FLSR) in a previous performance update, but I'll also throw in the various stocks I've warned people to stay away from here.

Stocks We Love To Hate

My April 20 article on un-green stocks had the following suggestions for shorting, which I will benchmark against the 7.5% decline of the S&P 500 since then (as of the close on July 1.)

As you see from the chart above, the sector I said I was shorting myself was down about 30%, and the sectors I said people should consider shorting were down and average of 13.3%, slightly more than the 7.5% decline of the S&P, although there was a wide variation between the different companies chosen.   The three I suggested were bad ideas to short (China, Coal, and Oil) included the biggest gainer I talked about (Coal) and the other two roughly matched the index, so I'm pleased with the performance of these ideas as a whole, and not to mention my auto and airline shorts.

Pink Sheet Stocks to Avoid

I've also come out against a few pink sheet stocks which caught my attention (usually because a PR person sent me one-too-many press releases.)  I'll benchmark these against the iShares Russell Microcap Index ETF (IWC) from the dates of the original stories.  IWC is not a great benchmark, because even microcaps are considerably larger than these tiddlers, and there is no energy emphasis, but I know of no existing index of tiny, non-listed energy companies for comparison.  Click on the company names for the original articles.

All in all, it's been a good time to be short, and I'm certainly happy with my performance (although I've lost plenty of money by shorting in the past, most of it during the 2003-2006 recovery.)  As I learned in studying for the level III CFA exam, it is often easier to find good ideas for shorting than it is to find good long ideas.   There are fewer analysts looking for overvalued stocks than for undervalued ones, so there are more overvalued stocks to go around.  If only my broker would let me short those pink sheet companies!

The End, For Now

With this article, I have covered most of the stocks I've written about in 2008, and some from 2007.  (See also 10 Speculations for 2008 and 10 Stocks to Buy on the Cheap.)  I plan to revisit these in 6 months or so, but if you have suggestions for other "performance update" themes, please leave a comment.

DISCLOSURE: Tom Konrad has short positions in NWA, DAL, LUV, F, and GM.

DISCLAIMER: The information and trades provided here and in the commetns are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:40 PM | Permalink | Comments (4) | TrackBacks (0)

Unlike my Ten Speculations for 2008, my Solid Clean Energy Companies series will be much more difficult to benchmark.  The intent of the series was to list some "stocks to buy when you think we've hit bottom."  Since I obviously don't know when you think we've hit bottom (My opinion: not yet), I don't know what prices you'd have paid.

Instead, I'll look at what would have happened if you bought only those stocks which dropped 10% since I wrote about them, and you bought them at the close that day, in equal dollar amounts.  Here's what happened (click on the company name for the original article.)  Performance is as of the close on June 13, 2008 .

Overall, if you bought the 10 stocks which fell 10% since I wrote about them in equal amounts, you'd be looking at a 12% gain (not counting dividends) since then.  You would have bought six out of the ten between Thursday, March 6 and Monday Mar 10, so I'll use the close of business on Friday March 7 to benchmark this portfolio.  

Using the same benchmarks that I used for the 10 speculations update, I note the Nasdaq Clean Edge Liquid Series QCLN is up 20%, and the S&P 500 is up 5% since then.  These are generally large capitalization companies, many of which only have a small exposure to clean energy, so I feel the S&P is the better benchmark of the two.  (I would, wouldn't I?)

In any case, it's much too early to tell how these ideas will perform.  Most importantly, I don't think we've yet hit bottom on the market this year, so by the original criteria I gave, no one should have bought any of these yet.  If you have, it does not look like you are crying about it.  (Someone I know told me she had bought several because she had some money to invest, and has lost money so far.  I felt bad about that.  Timing can be everything.)

In terms of the particular companies, I don't have a lot to say because I don't watch large cap companies closely... this is the "fire and forget" part of my portfolio.  That's what's nice about owning these companies... I don't lose sleep over them.

DISCLOSURE: Tom Konrad and/or his clients have long positions in GE, SI, ABB, UTX, PHG, PWR, DE, SHCAY, TRN, AMAT, BGC, GBX, OC, HON, WMI, NGG, and JCI.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:21 PM | Permalink | Comments (0) | TrackBacks (0)

This is the first of a short series of articles I plan, reviewing how my stock recommendations have been doing this year.  I started the year bringing you 10 Alternative Energy Stocks I thought were worth speculating on for 2008, and I'll start this review with those articles, and also give you updates on what's been happening (or not) with the stocks.  Click on the company name a link to the original article where I wrote about the stock.

Overall, a portfolio with equal dollar positions in these ten stocks is up 11.4% for the year, compared to the S&P 500 which is down 4.2% and the NASDAQ Clean Edge US Index, which is down approximately 14.3% (I took the number from CELS, the ETF which tracks the index, since I could not find up-to-date index values) since the start of the year.

#10  Cree, Inc. (NasdaqGS:CREE) Dec 27, 2007: $23.50; June 9, 2008: $25.85 (up 10%).

Cree shot up as high as $35 early in the year, on buy-out speculation.  There was also a quick bump when their transistors were used as part of a record breaking solar inverter. While a quick profit on a buy-out might be nice, the fundamentals and growing consumer interest in LEDs mean that I'm happy I didn't sell at the peak.  

#9:Lighting Science Group (LSGP.OB) Dec 27, 2007: $6.40 (split-adjusted), June 9, 2008: $5.90 (down 7.8%).

Another LED stock, Lighting Science saw a spectacular rise right after I recommended it, but was badly hurt by a patent infringement suit from Philips (NYSE: (PHG) in February.   I found this personally very annoying, since I'm long both companies.  I have no idea how the lawsuit will turn out, but I'm holding both stocks for now.

#8 Maxwell Technologies (NasdaqGM: MXWL) Dec 27, 2007: $8.10, June 9, 2008: $13.26 (up 64%)

Ultracapacitors have been much in the news this year as an enabling technology for hybrid vehicles.  Since that's one of the reasons I picked the company, I'm naturally very pleased.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) Dec 30, 2007: $0.68, June 9, 2008: $.65 (down 4.4%)

Electro-Energy has been up and down since I wrote about it, but still has not caught the attention of the investors piling in to battery stocks.  I'm waiting patiently.

#6 Capstone Microturbine (NasdaqGM:CPST) Dec 30, 2007: $1.62, June 9, 2008: $3.41 (up 110%)

Although I recommended this one, I've been totally shocked at how quickly it has run up.  Mostly, this seems to be due to a large, high-profile sale into the hybrid bus market.  I've taken the opportunity to take some profits (see my selling rule of thumb #2), but I'm still long.

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) Dec 30, 2007: $10.30, June 9, 2008: $8.66 (down 16%)

Although this one is down, I still like it for the same reasons.  The out of the money puts I wrote on it look likely to expire unexercised, and I just wrote some more today. 

#4 Composite Technology Corp. (OTC BB:CPTC) Dec 30, 2007: $1.37, June 9, 2008: $0.99 (down 28%)

Like Electro Energy, Composite Technology still has not caught the attention of investors.  I bought some more when I revisited the stock in March, and it's starting to look cheap again.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) Dec 31, 2007: $1.29, June 9, 2008: $1.25 (down 3.1%)

Another one requiring patience.  I expect the big gains for this stock to come before their Pumpernickel project [Correction: it's the Blue Mountain Project which is scheduled to come online first... Pumpernickel is less advanced] begins to produce electricity (assuming there aren't any unforeseen hitches), similar to what happened with US Geothermal (AMEX: HTM) last year.

#2 Finavera Renewables (TSX:FVR or FNVRF.PK)  Dec 31, 2007: $0.3371, June 9, 2008: $0.19 (down 43%)

I sold my position at a loss when I heard their wave energy license was subject to rehearing in late January.  Since then, Finavera was issued a preliminary 3 year permit, but I've continued to stay away.  My hopes for this one had been based on an expectation of investor euphoria for wave energy, not fundamentals, and given the down-trending markets, I don't expect that sort of irrational exuberance again in 2008.

#1 SHORT First Solar (Nasdaq:FSLR) Dec 31, 2007: $267, June 9, 2008: $245 (8.3% profit)

Since I wrote the article, a reader challenged my math on the impact of Te prices on their bottom line.  Although I've made a profit on this one, I question my original analysis, but have not re-run the numbers.  The slight decline can be completely attributed to the declining overall market, and FSLR has outperformed the clean energy sector as a whole.  I am still short a June $300 call, but do not plan to write another when it expires in a week and a half.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, MXWL, EEEI, CPST, FCEL, CPTC, NGLPF, PHG, HTM and a short position in FSLR.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 01:18 PM | Permalink | Comments (2) | TrackBacks (1)

With the recent market declines, the start of the year may not have been the best time to publish ten speculative stock recommendations.  Considering the S&P fell 6% in the month of January, I find it quite surprising that an equal-weighted portfolio of those picks is up over 6% for the same period (using the prices I quoted in the original articles.)  If the market as a whole continues down, I expect it to drag those speculative picks with it.  Small, profitless companies tend to be hurt more than others in market declines, and to benefit more from booms.  

Since I expect the Fed-induced reprieve to be fairly short lived, I thought I'd complement my original list of ten gambles with ten solid companies I'd be happy to buy more of if and when the bottom really falls out of the market. 

For those patient readers who sat through my thoughts on politics, electric vehicles, and cellulosic ethanol vs. biomass cofiring, next week I plan to deliver what you've probably been waiting for: some stocks to buy when you think we've hit bottom (or you can sell some cash-covered puts now.)

Honorable Mentions

 Just to keep the surprises coming (and to trim down my list to ten), I will exclude any companies I've already written about in 2008.  Here are those honorable mentions (statistics from Yahoo!):

I'll publish the start of the series Sunday night.  This search should find the articles as they appear.

DISCLOSURE: Tom Konrad and/or his clients have long positions in GE, SI, and ABB.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:42 PM | Permalink | Comments (0) | TrackBacks (0)

What Constitutes an Alternative Energy Company?

There's a debate going on in the clean energy investment community about which companies are "green" enough to merit our attention.  Before the filming of my WealthTrack appearance, I got into a discussion with Ardour Global Indexes' Joseph LaCorte.  The Global Alternative Energy ETF (NYSE: GEX) is based on the index he manages.  

The format of the show includes a top pick from each of the guests at the end of the show, and Mr. LaCorte was hoping that I'd pick GEX, since I had previously told him that it was my favorite alternative energy ETF.  However, my pick was General Electric (NYSE: GE), because they have a substantial presence in many alternative energy sectors and are attractively priced.  GE does not fit Ardour Indexes screen as an alternative energy company because only about 6% of their earnings (his number) come from alternative energy.  

Coven v. Coven

Another index manager, Raphael Coven, Managing Partner of the Cleantech Index, made roughly the same point on my Give the Gift of a Green Future article.  He said,

Are [GE and Sharp's] cleantech businesses (very good ones) are sufficiently large to significantly affect their earnings and hence stock prices? Certainly not in the case of GE and probably not in Sharp's case either.

Yet in an interview on EnergyTechStocks, he says that

He is “particularly bullish” on companies involved in making electric power grids more efficient, and thus he likes Siemens, ABB and General Electric, each of which he thinks could do very well fixing the woebegone grids in the U.S., China and elsewhere in the world.

I couldn't agree more..  Siemens (NYSE:SI) and The ABB Group (NYSE:ABB) are also among my top picks for the same reasons he outlines, although of them are particularly pure clean energy businesses.  Part of our difference of opinion may be that I see fixing and improving the grid as essential to the future of clean energy, while he may be thinking of it as an end in itself.

Indexes v. Portfolios

I don't think Raphael Coven has a multiple personality disorder.  Rather I believe he was speaking about different things at different times.  The two index managers and I agree that GE shouldn't be in a clean energy index.  There's too much to the company other than clean energy.  However, the question of whether GE should be in a green portfolio is an entirely different matter from its inclusion in an index.  From our conversation, I don't know if Mr. LaCorte agrees on this point, but Mr. Coven most likely does from his comments above.

Put another way, it would be irresponsible from the standpoint of portfolio management to put an entire portfolio into a narrow sector such as alternative energy.  For instance, a portfolio composed solely of GEX would be up about 30% since GEX started trading last May, but if it had started trading at the start of 2008 (or, more realistically, an investor decided to reallocate his entire portfolio to GEX as the market opened on January 2.  I say "he" because men are much more likely to choose aggressive portfolios than women.)

The hypothetical investor who bought GEX on Jan 2 would have already lost 12% of his money (or $12,000 out of a $100,000 investment) two weeks later, compared to only 3.6% if they'd put their money in the broad S&P.  Very few investors have the emotional conviction to ride out that kind of quick decline without acting (usually exactly when their holdings are at their lows.)  

Clean Energy Earnings: The Lessons of Green P/E

Companies like GE allow a diversified investor to buy into excellent clean energy businesses, such as GE Wind, roof-integrated solar tiles, and their LED lighting business at cost multiples far lower than the lofty multiples of pure-play counterparts, if those companies have earnings at all.  Per Yahoo!, GE's P/E is 16.9.  Using Joseph LaCorte's 6% number as the percent of GE's business that's in alternative energy, we find that you have to buy $282 of GE stock to get $1 of earnings for alternative energy.  I'll call this GE's "Green P/E."

A 282 Green P/E sounds high, until you start looking at the alternatives.  The world's top wind company, Vestas, has a P/E of 107, First Solar (NASD: FSLR) last year's solar high-flyer has a P/E of 161, and the top pure-play LED company, Cree (NASD:CREE) has a P/E of 36.  This gives us an average P/E of these three about 101.  

An investor who wanted to buy $1 of clean energy earnings from GE would have to invest $181 (= $282-$101) more than an investor buying an equal-weighted portfolio of the three companies listed above.  For that $181, he would get $15.68 of other (non-alternative energy) earnings, so he would have essentially invested in a well-run non-green business with a P/E of 11.5, something which is basically impossible to find in today's market.

Put another way, either GE's green businesses are currently under-priced relative to leading pure-play companies, or the rest of the company is selling for peanuts.  Either way, GE seems like a great relative value play.

That is why it's in almost every portfolio I manage.  

DISCLOSURE: Tom Konrad and/or his clients have long positions in GE, SHCAY, ABB, SI, CREE, and a short position in FSLR.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:18 PM | Permalink | Comments (2) | TrackBacks (0)

A Carbon Conundrum for Christmas

Do we have to choose between happy kids this Christmas, and a happy future for those kids?  Practically everything we buy has a negative environmental impact.  If green consumption is an oxymoron, so is green giving.  Are we left with only greener giving?  It often seems that the only way to be truly green is to be like the Grinch (before his heart-enlargement) and not give anyone anything.  And skip the tree while you're at it.

It's a hard decision, and while there are many Green Shopping Advisories telling us that we can buy and still feel we're doing something good for the planet, it usually ends up being "less bad" and the green claims are not always as strong as we would hope.

The Gift of a Bright Green Future

The sad truth is, as successful investors know,  we nearly always must choose between immediate gratification and long term gain.  The whole debate about Global Warming is basically a choice between long term well-being and instant gratification.  If you come down on the long term well-being side of the debate, prepare yourself for sighs and disappointed looks from the little ones, and give the gift of stock in a sustainable company that's working to make the place they live a better place to be.

Which stock to choose?  Here are a few criteria I think are important:

• Stability: We should probably stay away from companies aren't likely to be in business when the kids grow up.
• Greenness: As I noted last week, investing in green companies, like buying presents is often a compromise between greenness and practicality.  The profit motive can make a company less brown, but it is unlikely to make it very green (at least until we have stronger environmental regulation.)
• Educational: Most people give stocks to kids hoping to teach them about the market.  This will probably work better if the company they own also has a brand they'll see on a regular basis.

For the stocks I've picked below, I rate them on each of these factors on an A-F scale, to help you pick the one or ones you think will be best for your soon-to-be environmentally aware kid.

Top Five Stocks for a Green Christmas

#5. Cree, Inc. (Nasdaq: CREE),

Stability C, Greenness B, Educational C.

You may have never heard of Cree, but they are a world leader in making ultra-bright LED lights, as well as high current power controllers which can significantly increase the performance and efficiency of products that incorporate them.  I call LED's the Compact Fluorescent light bulb of the future (they're still too expensive for most residential uses,) but they are getting rapidly brighter and cheaper.  Although the company is profitable, they have been the subject of takeover rumors, and if they were bought for cash, it might be profitable for your little munchkin, but the lesson in green investing would probably be over.

On the other hand, if you also use energy efficient LED Christmas lights, you might just have the company's products on hand at the moment of gift-giving (if the LEDs involved happen to be made by another company, who is to know?)  Cree will also provide effects lighting for the Beijing Olympics.

#4. The ABB Group (NYSE: ABB)

Stability A, Greenness C, Educational C. 

ABB is a bit less fun than Cree, but they're in great shape in terms of long term profitability, and their expertise in efficient electricity transmission and distribution make them a good long term hold. While they don't have a lot of consumer awareness among us grownups, I bet your little one will have a lot of fun playing "Spot the ABB logo" in back alleys.  I bet you'll be surprised at how often you see it yourself (see my profile of ABB for details.)

#3. General Electric (NYSE: GE)

Stability A, Greenness D, Educational A.

It's hard to beat GE for consumer awareness, and the strong marketing push behind their EcoMagination initiative is sure to keep the company in the little one's mind, even if they missed an entire week of green programming on GE's NBC TV Network.  On the other hand, GE is so gigantic, they get less than 10% of their revenues from EcoMagination products (despite the apparent 90% of their marketing budget devoted to Green.)  Nevertheless, I believe that Jeffrey Immelt is serious about green, so green revenues are likely to grow quickly in the future.    

#2. Ormat (NYSE:ORA). 

Stability B, Greenness A, Educational F. 

I know, you've never heard of Ormat (unless you've been reading the recent spate of articles about Geothermal Power, including the one I wrote.)  Ormat is widely recognized as a leader in Geothermal, both in technology, and their ability to run plants well.  They are also just about as Pure-Green as any consistently profitable company I know of in the Renewable Energy space.  On the downside, you'll probably never see one of their power plants, although you can always take the kids on a trip to Yellowstone and talk about all the untapped geothermal potential there (long may it remain untapped.)

#1. Sharp (Pink Sheets ADR: SHCAY)

Stability A, Greenness C, Educational B. 

While you may not associate Sharp with Greenness, they are the world's largest manufacturer of photovoltaic panels.  The electronics they are more known for seem, from my unscientific sampling, to have a larger proportion of Energy Star qualified products than other manufacturers.  I give them the top slot here because photovoltaic solar panels are the first type of Renewable Energy most people think of, and while many of the pure-play PV manufacturers will survive, any particular one could go broke or be bought out in the near future.

Don't like these?  We at AltEnergyStocks.com would love to hear about your picks in the comments... We'll publish the top reader picks in a couple weeks... still in time for the Christmas Shopping shopping procrastinators.

DISCLOSURE: Tom Konrad and/or his clients have positions in all the stocks mentioned here: CREE, ABB, GE, ORA, SHCAY.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:20 PM | Permalink | Comments (7) | TrackBacks (0)

The market has fallen sharply, and Solar stocks have fallen even more following rumors that Congress will pass the Energy Bill without the Production Tax Credit or Investment Tax Credit.   Given this volatility and Renewable Energy's reputation for profitless startups, now might seem like an excellent time for a risk adverse investor to abandon the sector altogether.  

Not so.  Even if all tax credits and other incentives for Renewable Energy were to be removed, the underlying drivers of Alternative Energy remain firmly in place: Rising energy prices and decreasing reserves, the need to reduce our Greenhouse gas emissions to avoid the worst effects of Global Warming, and the likelihood of continued nationalizations, or the more subtle nationalization by taxation/royalty increases practiced in more developed countries.

Defensive Alternative Energy Sectors

Without direct government support, the sectors likely to suffer the least are the ones which are already economic.  Top of the list is Energy Efficiency, which might actually gain from a cut in subsidies for renewable energy, as green House Gas production efforts shift away from Renewable.  Among renewable energy technologies, Geothermal, small Hydro, and Wind are already cost competitive with fossil competitors in the best locations.  Biomass and Biodiesel are also cost competitive when using waste as feedstock.

Most of the best companies in Energy Efficiency (especially when it comes to energy Efficient Buildings) tend to be systems integrators, large companies with strong energy efficiency arms.  These companies have an added advantage for a risk- adverse investor: built-in diversification.  This brings me back to a way even the most cautious stock market investor can participate in the Alternative energy Boom: By buying the companies in my Blue Chip Alternative Energy Portfolio: large, profitable companies that stand to gain from increasing energy prices and carbon regulation.

Charles and I have added a few to my original list since the original article.  Here is the updated list, along with links to articles describing why we like each of the stocks:

Investing, Like Life, is a Compromise

This portfolio is being heavily weighted towards engineering, industrial, and utility companies.  However, most of these companies have truly international operations, insulating them from a likely US recession and declining dollar.  They're also uniformly profitable, often with low price to earnings ratios, and relatively high dividend yields. 

Nor ate these as green as a company like Interface (IFSIA).  A diversified investor must make compromises.  Those compromises can be made at the portfolio level by mixing some dirty stocks in with the clean ones, or they can be made within the companies themselves.

Our choice is not between a diversified portfolio of green companies and a diversified portfolio of green-ish companies representing compromises of our green ideals.  In reality, our choice is between a risky portfolio of highly volatile green stocks, and a much better diversified portfolio of companies working to help the environment in many way, but nevertheless embodying real-world compromises of green ideals.

The Priuses of the Stockmarket

These Blue Chip stocks are the Hybrid cars of the stockmarket.  While they are a lot cleaner than a normal car, they still burn gasoline.  Eventually we may all be able to drive Electric Cars charged with Wind or Solar.  Until that day comes, we'd be a lot better off if most people drove hybrids or diesels.  Just as the cost of ownership and the environmental impact is lower with a high-mileage car, the environmental impact of these companies is lower than most, and I expect those benefits to translate into better returns for investors in the long run.

If we're lucky, we can use our profits to all buy Tesla Roadsters and charge them with Solar.

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: GE, SHCAY, JCI, WMI, AA, CAT, DD, FPL, ADM, DE, SI, OC, ABB, MGA, BGC, PWR, ITC, DOW, HON, TRN.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:55 PM | Permalink | Comments (5) | TrackBacks (0)

Most alternative energy investors are aware of North American wind power's very bright growth prospects. In past articles, we discussed encouraging projections for the US and Canadian (PDF document) wind markets between now and 2015. While onshore European capacity is fast being exhausted, North America is only beginning its foray into wind and some major capex can be expected in this space over the coming years.

Besides solid expected growth, another phenomenon is currently impacting the wind industry; consolidation. This is a global movement that is affecting all of the power gen sector, and that has no-doubt been aided by easy credit in the past few years. Examples of recent deals in the North American wind industry include EDP's July, 2007 acquisition of Horizon Wind for $2.7 billion, and Suez' July, 2007 acquisition of Ventus Energy (PDF document) for C$124 million.

Playing Growth & Consolidation

Two of the most interesting ways to play growth and consolidation in the North American wind sector lay on the Canadian side of the border. They are two Independent Power Producers (IPPs) with attractive pipelines of projects, good forward-looking revenue visibility because of their exposures to Power Purchase Agreements (PPAs) with credit-worthy customers, and attractive take-over targets due to their size and the location of their generation assets. These two companies are: Boralex [TSX:BLX or BRLXF.PK] and Canadian Hydro Developers [TSX:KHD or CHDVF.PK].

Boralex

Boralex currently runs a generation portfolio totaling around 350 MW, with 103 MW of wind. Over the next five years, however, Boralex is expected to add another 690 MW of wind to its portfolio. Besides having access to PPAs, Boralex is also active in the US Renewable Energy Credits (RECs) market - in 2005 and 2006, respectively, one of the company's facilities in the US recorded C$8.1 million and C$6.2 million in RECs revenue alone. With 2007E EV/EBITDA of around 12x and 2007E PE of around 21x, Boralex is trading roughly in line with its comps. The company is geographically well-diversified, with operations in Quebec (one of Canada's hottest wind markets), Ontario, the Northeastern US and France.

Canadian Hydro Developers

At upwards of 60x 2007E PE and around 24x 2007E EV/EBITDA, KHD does not come cheap, either as a stand-alone stock or relative to industry peers. However, the company has a very attractive pipeline of wind projects across Canada, and valuations are expected to converge with industry averages over the next three years. Canadian Hydro currently has around 265 MW of generating assets with around 154 MW of wind. The company has a further 384 MW of wind currently under construction and a total project pipeline of about 1,400 MW - one of the most interesting such pipelines of any mid-size North American IPP. While KHD is an expensive buy at the moment, a lot of that has to do with all of the growth the firm is projected to undergo between now and 2010, as well as with a high amount of revenue visibility associated with high exposure to PPAs.

Two Of a Kind...

Both firms belong to a very rare breed - publicly-listed alternative energy generation pure-plays. While there are a number of similar companies listed on the Toronto Stock Exchange, most of them are income trusts with limited growth pipelines or small players with next to no track records. Both companies are increasingly on the radar of public market investors due their projected growth and to the fact that they are potential acquisition targets. Fundamentally-speaking, both look very attractive in the medium term (3 to 5 years) due to their extensive exposure to various schemes by Canadian provincial governments to boost wind generation capacity. These two companies really are, for all intents and purposes, two of a kind.

DISCLOSURE: The author is long Canadian Hydro Developers.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 11:17 PM | Permalink | Comments (0)

It's been six weeks since I last provided readers with an update on the Paper Portfolio.  According to the guidelines I laid out there, stocks are added to the portfolio when Chares or I mention them positively for the first time (leaving out ones for which Yahoo! finance does not have historical data, which are mostly pink sheet stocks.)  Here are the ones we've added since then.

According to the quick poll we took on August 16-18, our readers were about evenly divided between the optimists who felt that Alt-E stocks would rise as the market falters, and those who thought Alt-E would fare much worse.  A look at the stocks above shows that, so far, the pessimists have been right.  Personally, I wanted to have it both ways, and would have voted for the 3rd most popular choice "It depends on the Alternative Energy Sector."  

My picks for the most resilient sectors will be those that have the least hype about them, especially energy efficiency, as always.  So far, I've been wrong about that; the first four stocks above are all energy efficiency related, but they've fallen about 10% in the last 6 weeks, while the S&P has fallen only about 2% over that period.  That just makes me more interested in these stocks.  As you can see from my disclosure below, I've been waiting for a good correction before I buy... I think this one has farther to run.

Visit our Portfolio page to see how these stocks are currently doing.

DISCLOSURE: Tom Konrad  and/or his clients have positions in the following companies mentioned here: OC, UFS, PCH.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 09:33 PM | Permalink | Comments (0)

Putting Play Money Where our Mouth Is.

As regular readers know, both Charles and I invest in many of the same stocks we recommend. I take a broad portfolio approach, with small stakes in almost everything I think is interesting, and larger stakes in companies I'm more bullish about, while Charles has a highly focused portfolio consisting of a small number of companies he expects to perform well.  But our own returns will not be the same as our readers' returns, since we both typically own the stocks before we write about them.

Past performance is no guarantee of future results, but few people want to follow a strategy without some idea of its track record.   Our newly revised Portfolio page is designed to give our readers' some idea of our track record... as well as a one-stop shop for a list of companies that we're interested in for one reason or another.

We seldom give unequivocal "Buy" or "Sell" ratings, so a considerable amount of judgment is needed in deciding exactly what "following our advice" really means.  Returns will undoubtedly vary widely depending on the investor, so we wanted to come up with an objective criterion for deciding what constitutes a "recommendation" and what does not.  Here are the rules we're using.

1. The stock is mentioned in an article written by Charles or myself.
2. We said something positive about it (this could be as little as "here's a stock in an interesting sector"), and didn't say to avoid it.
3. Mutual funds and ETFs are excluded.
4. Stocks are removed from the portfolio if we said to avoid/sell them at a later date.  (So far, this has only happened with coal to liquids stocks, which Charles profiled in December, but I said to sell if you're worried about Peak Coal.)
5. We omitted stocks for which Yahoo! Finance does not have historical price data.  This was primarily an issue for stocks which trade on London's AIM, and a few pink-sheet stocks.

No intelligent investor would follow these rules (we hope you have done better by exercising more judgment), but in order to avoid hindsight bias, we designed rules which we hope will take the guesswork out of which stocks belong in the portfolio, and which do not.

We hope you will find our Portfolio Page educational, and we plan to keep it updated as we add new picks.  As always, we welcome discussion and feedback.

DISCLOSURE: Tom Konrad  and/or his clients have positions in many of the companies mentioned on the Portfolio page.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:40 PM | Permalink | Comments (0) | TrackBacks (0)

Investment opportunities connected to climate change and greenhouse gas (GHG) regulation are a popular topic of discussion on this blog. Most of the time, however, the companies we discuss are relatively small, often unknown to most investors and overall pretty speculative.

Yesterday, I came across an interesting article on Seeking Alpha entitled "Investing In a Greenhouse Gas-Regulated World" - the title says it all.

The article looks at the question of investing in a GHG-constrained world from a conventional portfolio management perspective, and therefore argues for a low weighting in pure-play cleantech or carbon finance stocks, and a greater focus on blue-chip companies with proactive approaches to issues related to climate change and GHG.

The author admits to having borrowed some of picks from an article by our very own Tom Konrad.

Posted by Charles Morand at 11:29 AM | Permalink | Comments (0)

Last week, we alerted you to a report from Germany's Energy Watch Group called “Coal: Resources and Future Production,�? which predicts peak coal by 2025.  Readers of AltEnergyStocks are doubtless familiar with peak oil, the inevitable fact that as we consume a finite resource (oil reserves) at some point the rate of that consumption must peak, and taper off.  Serious arguments about peak oil center around "when" oil production (and consumption) will peak, not "if."  

The same it true for other finite natural resources, such as natural gas, uranium, and even coal.  The difference with coal is the received wisdom: that the US has two centuries of remaining coal reserves, with the (often unspoken) implication that there is no need to worry about it in our lifetimes.  Other reports have drawn attention to peaking coal supplies before this, and I have no doubt that more will follow.  

How to beat the market

As an advisor seeking superior returns for my clients, I take reports like this seriously.  Dismissing them out of hand because it disagrees with the consensus view is not only close-minded, but a massive missed opportunity.  That's because, in order to achieve superior returns, I must accomplish four things:

1. Have hypotheses that differ from the consensus view.
2. Act (i.e. make investment decisions based) on those hypotheses.
3. Be correct as often as not.
4. Have a mechanism for testing the hypotheses, to enable a change of tactic when a hypothesis is proven wrong.

The first two are easy... but without  numbers 3 and 4, I'd be just another whack-job in the blogosphere losing my own and my client's money.  Here's how my hypothesis looks for peak coal:

1. A hypothesis.  The consensus is too complacent about the supply of coal.  Note that I don't need to pin down a precise date for the peak in coal production (worldwide or in the US), I simply have to identify something I believe the majority of investors have gotten wrong and the direction of the error.  My hypotheses are normally of this form: how the consensus view is incorrect.

2. See "How to prepare your portfolio for Peak Coal" below.

3. You don't have to be right all the time.  One of the great benefits of diversification is that it allows an investor to make mistakes.  None of us is right all the time.  For example, I've been bearish on the market as a whole since 1998... which means I was wrong in 1998 and 1999, right in 2000, 2001, and 2002, and wrong since then.  However, despite the fact that I was wrong about the market for six out of the last nine years, over that time period, I put a large chunk of the money which I otherwise might have allocated to US stocks into foreign currency denominated bonds mostly through close-end funds such as the Aberdeen Global Income Fund (AMEX: FCO), because I expected a general decline in the dollar. Note that is is a vast oversimplification of one choice taken within my managed portfolios over the period, and should be considered educational, not taken as an example of past returns.  Looking at this chart comparing SPY and FCO (I'm using SPY as a simple proxy for the US stock market as a whole) for the last nine years,  you will note that SPY outperformed FCO over the period by about 25%.  However, over that time SPY has had an average yield of around 1.5%, while the yield on FCO has averaged around 7%, over 9 years, that difference amounts to a 35-50% advantage for FCO (depending on the investor's tax rate), for an advantage in total returns for FCO of between 10% and 25%, or 1 to 2% compounded annually.  

Also note that risk (measured in terms of volatility) for FCO has been much lower than that of the market over that time period.  So while I was wrong about the market 2/3 of the time over that period, I was correct about the general decline in the dollar a bit more than half of the time, and the extra income I earned with my risk adverse strategy of investing in bonds rather than stocks left me with a slight advantage over the period.   Through these slight advantages, amounting to only 1-2% per year, a successful investor can dramatically increase his returns over the long term.  Once again, these returns are only an example, showing the long term advantage of acting on the hypothesis that both the US market and the dollar would under perform over the last 9 years.  I still believe both these to be true, and as a result, I and my clients continue to be over-allocated to foreign bonds, and under-allocated to US Stocks (with the exception of alternative energy.)  Nevertheless, past returns are no guarantee of future results, which is why it's important to...

4. Quickly recongnize when you're wrong. Thinking again about my hypothesis the market is overly complacent about coal supplies, how can I know when it is incorrect, either because I was wrong to begin with, or because conditions have changed?  That could happen because coal will continue to be as easy to mine as most investors think, or because they become as worried about coal supplies as the situation warrants.  China, where the most rapid coal depletion is taking place, may indeed recognize the severity of coming shortages, but my hypothesis is primarily about investor in US markets.  Until recently, the Chinese have mostly confined themselves to buying huge chucks of our Treasury and other agency debt, but we see them rushing to secure long term coal contracts in Africa and elsewhere.  Since China is a net coal importer, it is much harder for them to be as complacent about coal reserves as we are in the US.  At the moment, I don't see any worrying at all about coal reserves in the popular press, and reporters typically accept the "200 years of coal" line without question.  When that changes, it will be time to re-evaluate.  As to my simply being wrong in my pessimism, even the normally Pollyanna-ish EIA estimates, coal production in the US will peak in 2060, which implies a peak in world production much sooner, because the US has the lion's share of remaining reserves.  I don't believe that a world peak in coal production even as late as 2050 has yet been acknowledged.  When it is, it will again be time to reevaluate this hypothesis.

What to expect from Peak Coal. 

While I usually only make investments that I expect to pay off in 5-10 years time, and even the earliest predicted peak for world coal production is still 18 years off, the precise date of the peak is not at all important for the purposes of investing.  What is important is when we will see unexpected price rises as demand adjusts to constrained supply.  As an example, the first effects of peak oil are not happening today; instead they happened in the early 70's, when United States production peaked, and Texas could no longer act as the swing producer of oil, leading to a shift of production in the Middle East.  Because of the new investment required, that shift took a number of years, during which time oil stayed at historically high levels, until new production caught up with demand.

Could something similar happen with coal?  If any country is likely to be a driving force for world demand, sending prices up for everyone, that country is likely to be China, which is by far the largest producer of coal, but has only half the reserves of the US (according to the EWG report.)  How many times have we heard that the US is the "Saudi Arabia of Coal"?  If it is, the China is the "United States of Coal."  I think a price spike in coal available for worldwide trade is the most likely investable event for peak coal in the near future.

Here are some effects I would expect from such a price spike.

1. Coal prices in current coal importers would skyrocket.
2. Coal prices in areas with easy access to ports would also rise dramatically.
3. Transportation links such as rail from coal producing regions to ports, ports, and bulk shipping would also benefit.
4. The price of electricity in regions relying on coal fired power (other than mine-mouth plants) would increase several cents per kWh.

How to prepare your portfolio for Peak Coal.

1. Companies owning or discovering new coal reserves in coal importing regions will benefit dramatically.  (I'm far from an expert on coal companies, so I have no specific recommendations here.  I also avoid investment in coal because of the effects of mountaintop removal and global warming.)
2. Coal mining companies with easy access to ports will also benefit dramatically. 
3. Rail lines with connections to large port facilities would benefit, as well as the port operators.  (Again, I'm no expert.)
4. Construction companies able to quickly build rail lines and expand port facilities will also benefit. (I don't know much, do I?)
5. Shipping companies who own large ore/coal carriers will benefit.  Shipyards which produce these ships likewise. 
6. Companies that use coal for purposes other than electricity generation will be hurt.  Avoid coal-to-liquids companies such as Sasol [NYSE:SSL], Rentech [NYSE:RTK] and Syntroleum [NASDAQ:SYNM].  I wouldn't advise shorting these, unless you are a lot better than I am at anticipating price changes in energy markets: they'll all profit from Peak Oil, perhaps long before they are clobbered by Peak Coal.
7. Alternatives to coal based electricity will also benefit.  Because coal plants supply base-load power, the first beneficiaries will be Nuclear power and Geothermal, both of which are also inherently base-load power sources.  The easiest way to invest in Nuclear today is by buying uranium miners an processors.  I'm personally not a big fan of this approach, but you'll find a lot of other people's uranium picks over at Seeking Alpha.  Warning: there is a lot of talk about Peak Uranium as well.  Since I have decided to stay away from Nuclear because of the proliferation and hazardous waste effects, I have not made an attempt to figure out how serious this will be for miners.  This brings up another general point about investing: you don't have to have a hypothesis about everything... nor should you.  It is much better to have a few good ideas than a stack of half-thought out ideas.
8. Geothermal is an under-appreciated renewable form of electricity generation.  Ormat Technologies (NYSE:ORA) is the premier geothermal company, and should be the centerpiece of a geothermal portfolio.
9. Concentrating Solar Power CSP can be combined with thermal storage to produce base load power (or even peaking power.)  North American companies are only now starting to discover CSP, wit the exception of FPL (NYSE:FPL), which owns most of the original CSP plants built in the United States in the 1970s and '80s.  European Conergy AG (an engineering firm) and Iberdrola SA (a utility) are actively pursuing CSP.   I'm also watching an Australian company called Enviromission (EVOMY.PK), which is developing Solar Chimney projects, which can easily be a source of base load power, and are remarkably low-tech (which leads to very low running costs.)
10. Biomass, such as wood waste and trash incineration  is a good source of small amounts of base load power.  Boralex (TSX: BLX)) and The Boralex Power Income Fund (TSX: BPT.UN) have experience with biomass.  Another option I like are forestry and paper companies, especially ones committed to sustainability such as Catalyst (TSX: CTL) and Domtar (NYSE:UFS.)  Waste Management, Inc. (NYSE: WMI) has a variety of power generation projects fueled by the trash it collects.
11. Power storage technologies such as Compressed Air Energy Storage and Flow Batteries which can allow intermittent sources of energy such as wind to meet base load power needs. One flow battery company I like is VRB Power (Toronto Venture: VRB.)
12. Hydropower based utilities, such as Idacorp (NYSE:IDA) will increase their cost advantage over coal, and their dispatchable nature will become even more valuable as a balance for intermittent wind.  Some may also have valuable opportunities to take advantage of pumped hydro power storage.

Given the uncertainties about the timing and effects of the early stages of peak coal, I find it fortunate that a lot of the things I'm doing to prepare my managed portfolios for carbon regulation are the precise things I should be doing to prepare for rising coal prices.  I have little doubt that serious regulation of CO₂ emissions is on its way, and quite likely sooner and much more comprehensively than most investors are prepared for.  But that's a hypothesis for another day.

Links:

Energy Watch Group report

Discussion at The Oil Drum

EIA Coal data

Discussion of the EIA's most recent Energy Outlook at The Cost of Energy

DISCLOSURE: Tom Konrad and/or his clients have positions in FCO, ORA, FPL, Iberdrola, BPT.UN, CTL, UFS, WMI, VRB, and IDA.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:20 PM | Permalink | Comments (0) | TrackBacks (0)

In my article about electrical transmission, I mentioned that I liked Composite Technology Corp. (CPTC.OB).