« December 2007 | Main | February 2008 »

January 31, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: Intro, and Honorable Mentions

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!):

Company Ticker Forward P/E Div Yield Article
General Electric  GE 13.14 3.6% How Clean does a Clean Energy Company Need to Be?
Siemens  SI 12.25 1.4% Barriers to Transmission
The ABB Group ABB 16.46 0.8% Barriers to Transmission

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.

January 29, 2008

A PHEV-EV Demand Curve, REEV-isited

On January 13th, I posted some speculations about how many people really want an Electric Vehicle that can go 400 miles without having to recharge.  It was only a little over a week ago, but in the few days since then we've learned that what I used to call a "Plug-in (Series) Hybrid Electric Vehicle" (PHEV) is now called a "Range Exteneded Electric Vehicle" (REEV.)  How quickly times change.

I also posted a poll to test my speculations at the end of the article.  I asked about the Aptera, which will be offered in both EV and "REEV" versions: Would be willing to pay the extra $3,000 it is likely to cost for the REEV, and would they have another vehicle as well?  The results are in, and they contain a number of surprises, but also some confirmation.

Ignoring respondents who weren't sure, wouldn't buy either version, or didn't know what I was talking about), here is a summary of the results:

I'd buy an...

How many vehicles would you own?

1 2 or more Any number of vehicles
EV 29% 41% 38%
REEV 71% 59% 62%

Either Version

23% 77% 100%

In the original article, I hypothesized that:

  1. People in multiple car households would be more likely to buy the EV than people in single car households, since they would have the option of using the other car for long trips.  This guess was confirmed by the poll.
  2. Over 60% of multiple car households would opt for the EV version.  Here, I have underestimated the the attraction of long range even in multiple car households.
  3. Most single car households would opt for the REEV version, since they were less likely to have other options for long trips.  Nevertheless, I significantly underestimated the attraction of EVs to single car households.
  4. Combining the above, I hypothesized that at least 30% of all Apteras sold would be the EV version.  In this case, my errors seem to have cancelled out, with 38% of respondents preferring the EV.

What can we conclude?

  1. I enjoy theorizing on very little evidence.
  2. While having another vehicle is a significant factor in the decision between an EV and an REEV, this is not the sole dominant factor in the decision.
  3. There is a significant market for highway capable, pure electric vehicles with limited range.

All of which leaves me with more questions than answers:

Comments are open.

January 27, 2008

The Presidential Candidates on Clean Energy

Politicians will always have an influence on the stock market, through regulation, tax policy, incentives and more.  This truism is only more certain in energy policy, where electricity markets and transport are highly regulated, and the next administration is widely expected to enact some sort of carbon regulation, if not a tax.  

Last night, I heard the head of the Colorado Governor's Energy Office speak on what the state administration is doing on energy policy.  Our current governor, Bill Ritter, ran on a three part platform: working to fix Colorado's healthcare, transportation, and energy policies.  Last year, the administration mostly focused on energy, and although healthcare and transportation will get more attention this year, there are already several energy bills on the legislative slate.  This is because "Nobody is certain what to do about transportation or health care, but we do know what to do about Energy."   This scenario may also be familiar to residents of California.

Since we do know what to do about energy, do the remaining US presidential candidates?  From the news coverage, I have to admit I'm far from certain.  My impression has been that most of the Democrats and John McCain among the Republicans have been talking a good game, but repeated mentions of potentially problematic technologies and policies such as "Clean Coal," Biofuels, Carbon Cap'N Trade, Nuclear power, and even Coal to Liquids, leave me wondering if even the best of intentions might lead to bungled energy policy.

If I Were President...

There is no doubt that energy policy is complex.  Nevertheless, energy policy much more tractable than solving our nation's healthcare crisis, the looming unfunded costs of entitlements such as Medicare and Social Security, or even what to do about the mess in Iraq.  In short, I feel I know why Al Gore isn't running for President again.  

It is true that many of the candidates have health care plans as well as energy plans. but until some other unsuccessful presidential candidate reinvents himself (or herself) by trudging around the nation with a slideshow about healthcare, I doubt our next President will be able to do more than apply a band-aid to any of these problems.  (I sincerely hope to be wrong on this.)

In contrast, Energy policy, while complex, provides clear opportunities for improvement.  

  1. Improved energy efficiency provides winners all around
  2. Strengthening our national grid is essential to large-scale renewable energy development.  
  3. If a Carbon cap is chosen over a carbon tax, it needs to be carefully designed to avoid rewarding polluters without significantly reducing pollution.  
  4. The entire life-cycle of transport fuels needs to be considered to ensure they don't do more harm than good.  
  5. All externalities of transport solutions need to be considered to avoid unintended consequences, such as higher fuel economy encouraging driving and hence contributing to congestion and accidents.  We need better transportation systems and smart growth more than we need better cars.  
  6. "Clean Coal" and ...
  7. Nuclear are likely to be much more expensive when true costs are taken into account than cleaner options with less active lobbyists. 

Admittedly, several of my above points are controversial, but they're less controversial than turning off life support on a brain-dead Florida woman.  And they're orders of magnitude more important. 

Grading the Candidates

I'm doing this exercise partly for my own benefit; I don't know how the candidates are stack up against each other, and I still have a caucus to participate in.  What follows are my grades of the remaining candidates on each of the seven above criteria.  Keep in mind that I give candidates low grades on "Clean Coal" and Nuclear if they support subsidies for these technologies.   I assume that the candidates who are not currently talking about energy policy will not attempt to do anything about energy policy.  


All of the democrats have put real effort into their proposed energy policies, but only Obama considers it one of his highest priorities.  Links are to sources other than the candidates policy statements.

  Hillary Clinton John Edwards Barak Obama
Energy Efficiency B A B
Transmission/Grid C C B
Carbon Regulation B B B
Transport fuels C F B
Smart Growth C D B
"Clean Coal" D F C
Nuclear C B C


Rudy Giuliani and Mike Huckabee seem to consider energy independence (a chimera) more important than reducing carbon emissions.  Ron Paul shifts the subject to property rights, while Mitt Romney waffles about whether climate change is caused by human action.  Given this backdrop, I cannot take any of their energy policies seriously.

While John McCain also emphasizes energy security, he puts priority on combating climate change.  If you are a Republican who cares about this issue, he is the only one likely to take any meaningful action.

Energy Efficiency C Smart Growth F
Transmission and Smart Grid B "Clean Coal" D
Carbon Regulation C Nuclear D
Transport Fuels C    


I'm surprised to find that Barak Obama is the best candidate for the Clean Energy voter.  I started this project remembering the furor he aroused with his support of Coal-to-Liquids technology, but his subsequent "clarification" that he was only interested in low-carbon coal to liquids seems to have taught him a lesson about transport fuels, and that early misstep may have led to a more comprehensive look at the tricky issues of transport fuels.  This may be why he now takes the lifecycle costs of transport fuels seriously, while they aren't really on other candidates' radar.

Obama is also the only candidate who explicitly calls energy one of his highest priorities.  I can't say I'm in love with any of the candidates (note the almost total lack of "A" grades.)   John Edwards earned the sole "A" because he panders towards interest groups.  On energy efficiency, he managed to hit one of my hot-button issues squarely, but then he went and blew it by pandering to the ethanol and "Clean Coal" lobbies.  

A major part of Clinton's platform involves forcing oil companies to invest in renewable energy, an idea that does not fit into my rating schema.  I think this is a bad idea, because reluctant investors are unlikely to make intelligent investments.  Even without Clinton's paln, oil companies that understand peak oil will invest in alternatives, and oil companies that do not will decline along with their reserves.  

With my discomfort with Obama's initial endorsement of Coal-to-Liquids, and Edwards' habit of pandering to every interest group at the expense of his own coherence, I used to lean towards Hillary.  I'm now convinced that Barak has the best grasp of the issues involved. 

Republican Clean Energy voters have a much easier choice: only John McCain is willing to confront Climate Change.

The Week in Cleantech (Jan. 20 to Jan. 26) - Renewable Energy Is Coming Of Age

On Tuesday, Todd Woody at Green Wombat told us the the clock was ticking on the crucial solar investment tax credit. When the solar ITC was dropped, the potential impacts were unclear although many folks had a good idea of what might happen. It now seems as though this is indeed throwing a spoke in the wheel of more solar development in the US, although industry leaders apparently remain sanguine. Given the amount of debt financing solar developments typically get, throw on top of ITC concerns high levels of uncertainty in capital markets over the direction of the economy (for at least the first half of 2007), and you have a perfect storm in terms solar financing drying up. We've recently argued that 2007 could be a bear year for solar...to be continued!

On Wednesday, BCC Research argued that the global market for electric energy storage would be worth $3.8 billion by 2013. A gentle reminder that large-scale energy storage is one of the biggest challenges facing North American power grids at the moment, especially as more renewable energy is brought on stream. But besides renewable power, effective large-scale storage could go a long way in dealing with base/peak fluctuations cleanly and cheaply. Regular readers know that both Tom and I like large-scale storage a lot, and these numbers seem to confirm our hunch.

On Wednesday, Keith Johnson at the WSJ's Environmental Capital informed us that alternative energy was coming of age. The Iberdrola Renovables IPO did indeed mark a turning point in the world of public alternative energy firms - the emergence of pure play renewable energy behemoths.

On Thursday, Renewable Energy Access informed us that Acciona (ACXIF.PK), the Spanish wind power heavyweight, had received its first wind power contract in Canada. This news came a week after the company had announced the opening of its first wind turbine manufacturing facility in the US. On Wednesday, Repower System AG (RPWSF.PK) announced its intention to open a turbine facility in Canada. 2007 saw growing activity by large foreign wind players in the North American market, and it is fair to say that North American really has become the world's new 'wind frontier' (at least for the time being). What's the significance of this? Just as the European wind power boom is waning, many of those firms are now finding new growth pipelines that will carry them through the next few years until Asia really takes off. You can also expect a continuation of the intense consolidation activity that's been the norm over the past two years. Find small publicly-traded firms with wind development rights and you have good plays on this consolidation - for this, however, you will mostly have to look on the Canadian side of the border.

On Saturday, Alex Steffen at World Changing showed us what happens when Big Oil starts to scenarize about climate change. Given the degree to which companies such as Shell influence energy policies, this is interesting insight in how they see things develop over the next few years.

January 23, 2008

Cellulosic Electricity: Stock Analysts v. Venture Capitalists

Romm v. Kholsa

In a persuasive series of articles, entitled "Pragmatists vs. Environmentalists" (Parts I, II, and III) on Gristmill, Vinod Khosla provides the reasoning behind his "dissing" of plug-in hybrids, which drew the ire of Joeseph Romm.  Neither seems to think the argument is settled, and Joeseph Romm returns fire here.

As someone who knows as much about investing as Joe Romm and has written as much about Climate Change and Energy Policy as Vinod Khosla, I feel the need to jump into the debate and settle the matter.  (Will either of them will notice?)

To summarize, Khosla argues that cellulosic ethanol shows more promise for reducing carbon emissions than plug-in hybrids because he sees the barriers to plug-ins (the need to improve batteries and clean up the grid) as harder to surmount than the barriers to cellulosic ethanol (the improvement of conversion technology.)  In his words, 

I consider replacing coal-based electricity plants (50-year typical life) a much longer, tougher slog than replacing oil with biofuels (15-year car life).

Romm blasts back reiterating the multiple problems of corn ethanol in response to the first of Khosla's series, but has not yet responded to his point about cellulosic.  I thought I'd tackle the point about cellulosic myself.

There Isn't Enough Biomass

According to the National Renewable Energy Laboratory's From Biomass to Biofuels [.pdf] study, given all the available biomass in the United States, we will only be able to displace a little less than 2 billion barrels of oil equivalent a year.  But we currently use about 7 billion barrels of oil a year, so to displace all our oil usage, we would need nearly a 4x increase in fuel efficiency (not the 1.5x increase in internal combustion engines Khosla talks about.) 

 1.3 billion ton.bmp
Image source: NREL (From Biomass to Biofuels)

If the problem we're trying to solve is the need to displace petroleum as the transport fuel of choice (because of both climate change and peak oil), Khosla's "solution" can at best only tackle about 40% of the problem.

A Third Way: Cellulosic Electricity

Now let's return to Khosla's belief that it is simpler to replace the fuel (petroleum) in vehicles than the fuel (coal) in the grid, because of the longer lifetimes of coal plants than cars.  If you take a moment to review my article Ten Insights into Carbon Policy, you will note (insight #2), co-firing biomass in existing coal plants is more effective for reducing carbon emissions than turning it into liquid fuels.  You will also note (insight #9) that electric drivetrains are inherently more (5x) efficient than gasoline drivetrains.Image Source: European Biomass Industry Association

Khosla may be right that we are not going to shut down old coal plants quickly (although my own utility, Xcel Energy, is planning to do just that.)  But even given an existing fleet of coal plant some biomass can be cofired with coal in existing plants with relatively easy retrofits.  Cofiring biomass is part of the Arizona Renewable Energy Assessment, which Black and Veatch predict would cost about 6-7 cents per kWh, and the limited amount included in the assessment is mostly due to Arizona's limited biomass resource.

According to the NREL report referenced above, converting biomass into cellulosic ethanol can be done at about a 45% efficiency (i.e. 45% of the energy of the biomass makes it into the fuel.)  In contrast, biomass can be converted at 33-37% efficiency [pdf] when cofired.  Combining this with the 5x improvement of drivetrain efficiency that comes with electric propulsion, and the same amount of biomass converted to what I'll call "cellulosic electricity" will take a vehicle 3.8x as far as it would in the form of cellulosic ethanol.  In a more recent article on Biomass, Vinod Khosla states "we consider [Energy Return on Investment] a less important variable than carbon emissions per mile driven."  If carbon emissions per mile driven are the most important variable, a 3.8x increase in miles driven on the same energy source will lead to a less than 27% of the carbon emissions per mile driven.

While cellulosic electricity is still not sufficient to displace all of our current petroleum use, it comes much closer than cellulosic ethanol.   Biomass cofiring with coal also tends to reduce SOx and NOx emissions.

Direct Combustion of Biomass

Biomass is a distributed resource, seldom available in large quantities in any one place.  This will be a problem for the cellulosic ethanol and cellulosic electricity industries.  Only a fraction of the available biomass will be close enough to existing coal plants that it will be practical to transport for cofiring.  Cellulosic visionaries see a system of distributed ethanol plants, yet that still leaves the problem of getting the fuel to market, since the current pipeline system for petroleum products has difficulty accommodating ethanol.  

On the other hand, while distributed direct- fired biomass generation of electricity is probably twice as expensive as cofiring with coal, distributed generation leads to opportunities for Combined Heat and Power (CHP), or cogeneration.   CHP can displace heating fuels such as natural gas, propane, or electricity, and often have combined efficiency from 50% to 80%.  In addition to the potential of displacing additional fossil heating fuel, cellulosic electricity is identical to the fossil fuel derived kind.  Therefore, unlike cellulosic ethanol, cellulosic electricity is completely compatible with the existing electric grid, leading to far fewer difficulties in transport.

A Cellulosic Sideshow

While I'm sure that economic techniques to convert various forms of biomass into ethanol and other liquid fuels will be developed, including by some of the companies in Khosla's portfolio, I think it is unlikely that a large fraction of what is likely to become an increasingly valuable and scarce resource, biomass, will be used for ethanol.  As a scarce resource with relatively inelastic supply, the price will rise to the point where only the most efficient uses will be profitable.  In most cases, cellulosic ethanol is unlikely to be one of the most efficient uses of biomass.

Khosla's dichotomy of replacing cars versus replacing coal plants is a false dichotomy.  While it is easy to retrofit gas cars to burn ethanol, it is also easy to retrofit coal plants to burn some biomass.  Given the dispersed and varied nature of the feedstock, both solutions are likely to coexist for a long time, but biomass cofiring has a little-heralded head start (unlike cellulosic ethanol, it is already progressing beyond the experimental stage), and cofiring's superior efficiency should allow it to keep, and widen its lead.

But Vinod Khosla will have little reason to weep.  His Concentrating Solar Power investments will also be fueling our cars, and his "clean coal" technology has the potential to produce carbon-negative cellulosic electricity.

January 20, 2008

No New Transmission Means Little Renewable Energy

I'm a fan of investing in electricity transmission, both because the grid in the US is in a sad state of repair, and because considerable expansions to the grid will be needed to take large scale renewable energy (especially concentrating solar and wind) from the lightly inhabited areas with renewable energy resources to population and demand centers.

Unfortunately, the need  for new transmission can put renewable energy advocates at odds with more traditional environmentalists, who are concerned about the local damage to views and habitat caused by new transmission lines.  Cases in point are opposition which looks like it will prevent a proposed new line in West Virginia, and opposition to the "Green Path" transmission line which was proposed to allow geothermal, solar, and wind development in the Salton Sea area of Southern California.

If new transmission is not built, we won't be able to wean ourselves from fossil fuels quickly, and the global effects of climate change will cause more disruption to ecosystems than any number of transmission towers would.

Investors Take Note

No matter where you stand in the debate, the issue is a serious one for Renewable Energy and Transmission investors.  If the lines don't get built, neither will the clean energy generation.  For transmission investors, opposition to new lines means that the US grid will have to make current rights of way work harder and transmit more electricity, since fewer new lines will be built than if there were no opposition to new transmission.

Transmission investors concerned about NIMBY opposition should tilt their portfolios more towards technologies that allow for line upgrades than towards builders of new lines.  This can be by either upgrading the existing lines with higher capacity technology, or by managing the grid better.  

I can think of three companies which might be insulated from a lack of new rights-of-way, because they have technology for upgrading the existing grid.  First, there is Composite Technology Corp., which was my #4 Speculative pick for 2008. In that article I describe Composite Technology's (OTC BB:CPTC) ACCC cable which can be used to replace conventional conductors to upgrade power lines without the need to make any alterations to the towers.  This can lead to as much as a doubling of the capacity of an existing transmission corridor at very low cost to the transmission owner.

For larger scale upgrades needed for very long distance transmission, as well as for new long distance transmission lines, the technology of choice is likely to be High Voltage DC Transmission (HVDC). The top suppliers of  HVDC technology are The ABB Group (NYSE:ABB), and Siemens (NYSE:SI). See this article about ABB's HVDC technology for more information.

I'm looking for more ideas in this area.  I love the desert, and don't want to see any more new transmission towers than absolutely necessary.  On the other hand, I don't want to see more and more of our land turned into desert because of Climate Change.

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

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.


January 19, 2008

The Week in Cleantech (Jan. 13 to Jan. 19) - CO2 'Wildcatting': The Next Big Alt Energy Play?

On Sunday, Cory Jenkins at Seeking Alpha told us about the next green energy phenomenon. The carbon offset space where credit origination is coupled with commoditization of what would otherwise be 'waste' (i.e. methane from livestock can be used to produce power instead of vented into the atmosphere) is a space I am very excited about. Some of you may have read the article in the December edition of Bloomberg Magazine on privately-owned Blue Source, and, if you haven't, I'd definitely recommend it. I think the business model makes an increasing amount of sense the more whatever you initially capture (e.g. methane) can be sold directly for revenue. Bank most of the credits, wait for regulation to happen, and you may find yourself sitting on an asset worth a lot of money. Again, unlike the more complex tech plays in the cleantech space, I like this because I can actually understand what's going on and can see a very healthy market develop for such services.

On Monday, Jim Gillies at The Motley Fool told us about the worst stock for 2008 (drum roll): First Solar (NASDAQ:FSLR). One quote from this article pretty much sums up how I feel: "Never confuse a business with its stock." Ratios alone will tell you that this story is over-hyped, and Porter's Five Forces tell you that unless certain specific conditions are met at all times (and they are not in this case), it won't be too long before something gives and your margins get squeezed. To be continued...

On Wednesday, Xavier Navarro at AutoBlog Green informed us that the EU was ready to ban certain biofuels. The EU is citing false concerns to shield its grossly inefficient farmers from global competition. What's new? What's new is that we are now exiting a world where prices for agricultural commodities had been in steady decline in real terms for 30 years, and entering the brave new world of agflation. More than ever, the distorting effects of Western agricultural protectionism will be felt not only abroad but also at home. Concerns surrounding agricultural inflation driven by increasing demand for proteins by China and India's exploding middle classes remains, in my view, one of the biggest risks facing the non-cellulosic ethanol sector. The Food Vs Fuel debate will become, in the years ahead, more real than ever.

On Wednesday, Tyler Hamilton at Clean Break discussed the ugly side of next-gen energy storage. This story should serve as a cautionary tale to investors who get excited after one contract is signed or one milestone reached by a company working on the technology du jours. Many companies in the cleantech space are attempting to develop applications that will never make it past the lab's doors. In times of credit tightness and equity market softness (i.e. now), the technology risks discussed by Tyler are compounded by financial risks, as many of these firms get wiped out after they burn through their cash and are unable raise additional financing. Right now is a good time, if you are holding stocks like this, to take a real close look at various measures of working capital. A balance sheet implosion would prove just as disastrous for an investor as a battery explosion.

On Wednesday, Rob Day at Cleantech Investing gave one of the reasons why residential energy techs don't get adopted. Add to that substantial behavioral barriers, and you start to get the picture. The residential market for green solutions offers the potential for high margins but the the hurdles as they currently stand make that space, in my view, unattractive from an investor's standpoint. Building-related cleantech firms have a much better shot with commercial customers, but here the margins are typically lower.

January 18, 2008

Short Demand for Cree High and Rising

I got a call from my broker this morning asking me if I'd be willing to loan out my shares of Cree, Inc. (NASD:CREE) to a short seller.  Since the only cost to me is that I will not be able to vote my shares, and I will earn 2.5% per annum on the value, I said "yes." 

Normally, brokerages get the shares they lend out to shorts from margin accounts with a margin balance.  Since I never carry a balance (although I do have a margin account in order to trade options) they must ask my permission and pay me interest in order to borrow my shares.  I'm planning on holding these shares for the long term, so I'm happy to earn an extra 2.5% on my money.  (I could still sell them, in which case the short seller would have to find shares to borrow from someone else, or cover his position.)

I also had the idea of creating some synthetic cash-covered short puts (a combination of the long position in the stock with short calls) to give me more shares to loan out, but the relative prices of calls and puts on Cree make this unattractive.  Most likely, other arbitrageurs who are able to earn higher interest on their loaned shares have already pursued this route to the point where it is no longer attractive to me (my return on capital would only be about 8%; I can do better with a plain-vanilla cash-covered puts.)

What to Make of the High Short Ratio?

Cree's short ratio (the ratio between the number of shares short to the company's float, or shares available for trade) is an extremely high 26.9%, and has risen over the last month.  This is why my broker was calling me to borrow shares.  But, other than my opportunity to make an incremental profit on my shares, what does this mean for the future of the stock?

On its face, a high short ratio means that a lot of investors are bearish about Cree's prospects.  This can be good or bad news, depending on how likely the shorts are to be right.  The contrarian position (and I usually lean towards the contrarian) is that most investors are usually wrong, meaning that a high short ratio is a bullish indicator.  We also know, since I'm getting calls from my broker, that few new investors will be able to short.  Finally, there is the potential of a short squeeze, which could be triggered by positive news such as another buyout rumor.  Short squeezes can lead to radical price increases over short periods.

I'm taking the call from my broker as another moderately bullish sign.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE.

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.

January 16, 2008

Cree, a Solar Play?

For investors excited about Cree's (NASD:CREE) Light-Emitting Diode (LED) business, here's one more piece of good news: The EE Times Reports that the Fraunhofer Institute for Solar Energy Systems (Freiburg, Germany) claims it has achieved a record efficiency for its inverter designed for PV generators, using Cree's SiC transistors.

I've previously noted that inverters are a good way to participate in the Solar and Wind power markets without needing to invest in the high priced (or foreign) companies which dominate those markets, and even without this news, Cree is a longtime favorite of this blog.  The stock shot up on the news today, but that's no reason not to get your feet wet with cash-covered puts.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE.

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.

January 15, 2008

How Green are Your Earnings?

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.

January 13, 2008

A PHEV - EV Demand Curve

The logic behind Plug-in hybrid vehicles (PHEVs) is that they combine the best characteristics of a Electric Vehicles (EVs), most importantly efficiency, which brings with it much lower operating costs and lower net emissions and no tailpipe emissions, with the benefits of a liquid fuel vehicle, mainly the range available with energy-dense liquid fuels.

But how important is range to car buyers?  PHEV advocates say that 80% of all daily car use is less than 50 miles, which is easily achievable with today's electric vehicle (EV) technology.  The freeway-capable EVs being developed today have a range between 100 and 200 miles, as you can see from the following comparison, which is edited down from a helpful comparison by Robert Green at DIY Electric Car (follow the link for an expanded table and sources.)

  Chevy Volt Mitsubishi MiEV MiEV Sport Tesla Roadster Opel Flextreme Aptera
Estimated Production Date 2010 2010 2010 2008 2010 2008
Estimated Price
26900 for EV, 29900 for Hybrid
Vehicle Class Compact Car Sub-Compact Car Sub-Compact
Compact Car Compact Car Micro Car
Full EV Range 40 miles 99 miles 124 miles 245 miles 34.17 miles 120 miles
Extended Range 640 miles n/a n/a n/a 444 miles 600 - 700 miles

As I argued in November, it makes sense for a two-car household to have one of their vehicles be a pure EV, since long range is only occasionally necessary, and shorter range is all that's needed for most trips.  This can be seen as the logical extension of John Addison's New Year's resolution to put the most miles on the car with the best fuel economy (I and other couples I know do this as well.)

Still, I wondered how much do people value range in a vehicle?  It finally occurred to me to ask.  

On January 1st, I posted a poll.  In the hope of getting less biased results, I didn't want people to know why I was asking.  My question was, "At what price would you stop filling up your gas tank all the way?"  When someone does not fill their tank all the way, they are implicitly saying that they have better uses for their money than extending the range of their car.  I asked about a car that had a 400 mile range, so I found out what the last miles were worth to people on a per-mile basis.

A Demand Curve for Range

Here is a graph of my results (blue line), which we can take to be an approximation of the demand curve for range.  I was surprised at how little gas prices had to rise before people stopped filling up all the way (ignore the green supply curves for now.)


A person who only fills up a 400 mile gas tank halfway is not saving much money, only delaying when the money is spent, as the tank must then be refilled sooner.  75% of my respondents said they would not fill up all the way if fuel cost $0.40 per mile.  If these people on average only fill up the tank 1/2 of the way at $.40/mile, they're essentially giving up the last 200 miles of range for $80 loans, which they must repay if they ever decide to fill it up all the way.  Only if they never fill it past half a tank would they get to keep that $80.

Even for someone who doesn't fill up his tank all the way, there is still the option of doing so, and options are valuable, so that same person who hardly ever filled up his tank past half way would be unwilling to give up the option of ever filling it up past half way.  But most people in a two-vehicle household do have the option of using the other car, so they would likely be willing to give up that option for much less than someone in a one car household.

The Bottom Line: What's Another 200 Miles Worth?

Admittedly, the above contains many untested assumptions.  That said, here's my stab at the extra value a person in a two (or more) car household would put on a vehicle with a 400 mile range over a 200 mile range.

Since buying a car with a 200 mile range means never being able to use that extra 200 miles, and having to use the other car in the household, I'll multiply the $80 calculated above by 10 to account for the value of the option of increased range.  This puts a value of only $800 on the last 200 miles of range.

Only Eight Hundred Bucks?

$800 seems awfully low to me, considering we are talking about the price of a car.  Yet a factor of 10 still seems generous for the option value, so I've also shown the calculation for 5x and 20x multipliers in the graph; this seems like a good range for two car households.  I would assume that single car households would pay more for the extra range of a PHEV, leading to higher PHEV adoption than in multiple car households.

The high expected adoption of EVs may be due to how I phrased my poll, since I now realize I should have asked "At what price would you start only filling up the tank halfway?" rather than "Would you stop filling it up all the way?"

In any case we'll soon be able to test the demand curve for range much more rigorously.  The vertical supply curves in the graph show the per-mile cost of the extra range of a PHEV Aptera over an EV Aptera ($6), divided by 5, 10, or 20 which I'm using as estimates for the multiplier on what the option of extra range is worth to a 2+ car household (for single car households, this line would probably be farther to the left than the 20x line.

As you can see from the graph, if the option of increased range for a single car household is 10x the cost of the extra fuel to fill up, only 22% of multiple car households would buy the PHEV over the EV.  Most likely at least half of Apteras will be bought by households with another car, and a few single-car households will also buy the EV version, so I estimate that no more than 70% of Apteras sold will be PHEVs (at least 30% EVs), if they stick to the announced pricing structure.

Time (and, I hope, Aptera) will tell.  You can say what you'd do below:


January 11, 2008

A Concrete Proposal

The Economist recently had a story on how the cement industry is beginning to confront the fact that the industry produces 5% of the world's emissions of greenhouse gasses.  Carbon dioxide is emitted not only by the fossil fuels used to create the heat used in the creation of cement, and by the chemical reaction in that process.

Unfortunately for us, cement is a remarkably useful building material, not least as a structural material which can also serve as thermal mass in passive solar buildings.  

All the large cement firms: Lafarge, Holcim, and Cemex (NYSE:CX) have joined a voluntary emission reduction initiative, the Cement Sustainability Initiative, pledging to reduce their emissions per ton of cement they produce.  This is more likely to be effective with industry PR than to actually produce reductions in industry greenhouse gas emissions, even if they meet their goals of per ton emissions reductions, since production continues to grow.  (All three are on track to reach their voluntary targets.)

One avenue of CO2 reductions they are pursuing is fuel substitution for their kilns, such as using agricultural waste or used tires.  This can lead to opposition due to the concern about more conventional emissions.


Cement plant prototype?

The Economist article was titled "Concrete Proposals Needed."  Here's my proposal: consider more radical fuel-switching, and build new plants in deserts with abundant direct-ray radiation.  Then the heat can be provided by the sun, in the form of concentrating solar.  I'd almost certainly buy a public cement firm adopting that strategy in a big way.  We may need a lot of cement for levees in the not-so-distant future.


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.

January 08, 2008

How to Buy Losers: Tricking Yourself with Cash-Covered Puts

It's that time of year again.  I've started studying for the third (and final) CFA® exam, and my readers are "treated" to my theories of the market and trading.  No stock picks today; put your thinking caps on! 

CAPM: Nice Theory, Too Bad About the Market

In Level II of the exam, we studied efficient-market theories, such as CAPM and APT.  I actually like an elegant theory (I spent nearly decade of my life studying mathematics), but as a market practitioner, I know the market doesn't work that way.  I learned this lesson the hard way.  

Early in my investing career, I would short overpriced stocks.  For instance, I twice shorted Amazon (NASD:AMZN) in 1999.  At the time, Amazon was bouncing up and down between $50 and $100 (split adjusted), and, looking back 8 years later, it was clearly overpriced even at $50.  After all, it's only at $88 today, meaning the annualized return from buying the stock in 1999 at $50 has been about 7%, while the expected return under CAPM for a stock with a Beta of 3.02 would be around 18% per annum.  (Assuming a 6% risk-free rate equal to the ten year Treasury note yield at the time, and a very low equity risk premium of 4%.)

Put another way, if Amazon had been fairly valued according to CAPM at $50 in 1999, it should have been around $190 in 2007, when in fact it mostly traded below $100.  It should never have fallen below $6 in 2001.

Looking back at my records, I actually made money on those two shorts (I made $4,661 on the first and lost $3,045 on the second), but it's the loss that stuck in my mind and prompted me to use this example.  After I closed out the first short near $50, the stock rebounded to $59 and I shorted again.  It kept on rising, and I got cold feet and took my loss at $65 (I also needed a tax loss, but that didn't make it hurt any less.)  

Although I didn't know it when I sold, if I'd tried to wait for the stock to start falling again, as it did in 2000, I would have had to ride through a paper loss of $24,000 before the stock fell to where I was in the black again.  Even people who have the margin balance to ride through a reversal like that find it very hard to do emotionally.

Lessons Learned

The lesson I took away from that (and a couple of other painful shorting episodes), is that CAPM alone is a lousy theoretical basis for investing or trading.  I still do occasionally short, as I am currently doing with First Solar (Nasdaq:FSLR), but I generally take smaller positions and do not rely solely on valuation.

My primary investment framework is Behavioral Finance, actually a grab-bag of theories which focus on investor psychology to explain market behavior that cannot be explained by traditional theories such as CAPM which assume market efficiency.  To my pleasure, Level III of the CFA® exam contains considerable material on Behavioral Finance, which I am reading now.

The Winner-Loser Effect

One of the most widely documented market behaviors which cannot be explained in an efficient market is the Winner-Loser effect.  Put simply, stocks which have performed badly over a period of a few years tend to outperform stocks which have performed well over the same period in subsequent periods.  I take this to mean that, all else being equal, I should prefer to buy stocks which have performed badly over the last couple years to stocks which have recently done well.

This is harder than it sounds.  I think the easiest way to demonstrate this is through introspection.  Compare this chart, eeei.png

from my original article about Electro Energy (NASD: EEEI) to this more recent chart of the same company:


Looking at the charts, which of these stocks would be easier to buy?  If you can honestly tell yourself that the first would be easier to buy, you're very unusual.  I personally would have a much easier time getting myself to buy the second chart, and was only buying the first chart and the dip that followed because I know that I have face my fear to make good trades.

People who bought EEEI at $0.50 when I first recommended it (and managed to hold not sell when the stock dropped as low as $0.30) are now sitting on a 70% gain in just a few months, and can look forward to participating in the same gains that someone who bought it in response to my Top Ten Picks for 2008 article.  (I'm almost certain that the reason the stock jumped 40% on December 31st was because of that article... there was no other news relating to the stock that day, and most of the move was due to a single large purchase a few minutes before the close.  If you were that buyer, I strongly suggest using limit orders when trading a thinly traded stock like EEEI.)

Cash-Covered Puts

With small cap stocks like Electro-Energy, the only way I have to make sure I buy them when they're down is keeping a tight rein on my emotions, but with larger capitalization stocks which have exchange-traded options available, I have a trick that makes it much easier.  Consider another pick from the same article, FuelCell Energy (NASD:FCEL.)  Part of the reason I chose to include it in the list is that its five year performance has been lackluster, especially when compared with other alternative energy stocks.  Unlike EEEI, I had not been following it closely and only had a small position before I wrote the article.  However, I convinced myself that the company has excellent prospects while doing my research, and so I wanted to buy more.  

Rather than putting in an order for the stock, I looked at the longest dated options available, in this case options expiring in July 2008

I sold (or "wrote") a number of July 2008 $5 FCEL Puts for $0.25 each when the stock's price fell on January 2nd.  For each contract, I was paid $25 by the purchaser, and I am obligated to buy 100 shares of FCEL at any time between now and July 19th for $500, or $5 each.  Keeping the necessary cash available until then, I not only earn interest on the $475 of my money, but also the $25 I've already been paid.  If FCEL does not fall below $5, that put will never be exercised, and my $475 has earned me about $36 in six months, or a 15% annualized return (actually a little less because I had to pay a commission, but it's still over 12%.)

If the stock price has fallen to $4 (a situation I find emotionally hard to believe now, but one which I intellectually know is a real possibility) then the put will be exercised, and I will have bought FCEL for about $4.75 a share, even though it's trading around $10 now.  The irony is that, although I'd be jumping for joy at the prospect of buying FCEL for $4.75 a share today, experience tells me that if the option is exercised next July, I won't feel happy about it at the time.

Here's what might happen: some bad news will come out about the stock in the next four months, and the stock will fall to $4.  I'll then be sitting on a 16% loss on my $4.75 per share investment in a "loser" stock.  If all that happens, and someone asks me if I want to buy more at $4 (16% less than I feel would be the deal of the century if I could have it today), I'd almost certainly say no.  In other words, when I wrote those Puts on January second, I tricked my future self into buying a loser.

Losers, in the long term, tend to out-perform winners, and this is a loser I like for all the reasons I outlined, even if I may not be feeling so happy about it in July.  In order to get in that position, all I have to do is to not sell the stock for a loss.  Not selling a loser you already own is actually easier emotionally than selling and taking the loss.

That's what I mean by "tricking myself."

Getting Started Writing Cash-Covered Puts

If you'd like to try the above strategy yourself, I have some bad news.  While selling cash-covered puts and covered calls are actually lower risk strategies than buying and selling equivalent amounts of the underlying stocks, there are a lot of other things you can do with options that are much, much riskier.  For instance, you could sell the puts above, but decide you have better uses for the $500 cash than leaving it in a money-market fund... until the stock falls precipitously and you have to come up with the cash.

Regulators know about these risks, and they make investors jump though a lot of hoops to get option trading permission.  The procedure varies from broker to broker, but there is usually a net worth requirement (as if money made people smarter) and you also have to claim that you understand the risks involved.  Don't take short-cuts on this; just reading this article is not enough!  Get yourself a good book on options trading , or spend a few days learning about them online (you may have to do some searching... I had trouble finding a free option information resource that I would recommend.  But I can tell you what to avoid: anything that talks about getting rich quick.  I don't actually know that the linked book is bad, but why waste your time?)

Check with your broker to see if your net worth qualifies you to trade options.  Study up on them if you need to, and then fill out your broker's options trading permission.  

My own broker was a day trader in the late 90's.  Like most day traders, he lost his money and had to go back to a real job.  He says that the only traders he knew who made money were the ones who wrote puts on stocks they liked.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, and a short position in FSLR.

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.

January 07, 2008

Commodities Specialists Ask About Alternative Energy

Commodities investing site HardAssetsInvestor has published an interview with me from the start of December.  We covered a broad swathe of the clean (and not so clean) energy.  

If you're wondering why my top stock pick from the article was ABB, and not one from my recent 10 Speculations series, it's because all of those are too risky to be my top picks.  I like risk, but not with the largest part of my portfolio... stocks like ABB that let me sleep at night.

Major topics we touched on:

  • Ethanol (both corn and cellulosic)
  • Cost comparisons in electricity generation technologies, and in liquid fuels.
  • Electric Demand Side Management.
  • Electric Transmission
  • Plug-In Hybrid vehicles
  • The expected effects of CO2 pricing
  • "Clean Coal" and Nuclear power.

You can read the full interview here.

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

DISCLAIMER: The information and trades provided here and in the interview 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.

January 06, 2008

Questions from Readers

Many readers write me with questions relating to my articles.  At first, I would respond directly, but eventually the calls on my time became too great.  I instituted a policy: I would respond to comments on the blog, but would redirect people emailing me to put there comments there, allowing me to answer many readers' questions at the same time.

In that spirit, here are some recent questions from readers others may find useful as well.

Questions about My Reasoning:

  1. Why are so many greens against Fuel Cell Vehicles? (On 10 Most Blogged Cleantech Stories of 2007)
  2. Can you cite rigourous sources for your assertion that non financial benefits are much larger than the financial benefits of energy efficiency? (On The Value of Energy Efficiency)
  3. How can you call GE and Sharp "Green"? (On Give the Gift of A Green Future)

Questions about Which Stocks to Buy and How:

  1. How do I invest in CSP? (On Structured Leveraged Concentrating Solar Power)
  2. What is the investment timeframe for these stocks? (On Ten Alternative Energy Speculations for 2008)
  3. Can you rank these in terms of which are the best bets? (On Ten Alternative Energy Speculations for 2008)
  4. Are there any mutual funds which contain these stocks? (On Our Blue Chip Alternative Energy Stock List)

Other Questions about Stocks:

  1. How much of each of these are in your own portfolio? (On Our Blue Chip Alternative Energy Stock List)

Thanks to everyone who commented or asked a stimulating question.  Keep them coming!

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.

January 05, 2008

The Week in Cleantech (Dec. 30 to Jan. 5) - Will The Solar Bears Come Out In 2008?

Technology Review, my favorite science publication, gave us last week a wrap-up of the year in energy. It's a recap of the main energy-related stories the magazine published in 2007, and is well-worth a read if you want to start 2008 up-to-date on where the science is on most issues of relevance to alt energy investors.

On Monday, Jerome Ball at Alternative Energy Trading argued that the solar PV industry would veer into oversupply in 2008. This is one of the most cogent analysis of the solar PV market I have read in a while, and it takes a somewhat contrarian view - what's not to like! I'm entirely out of solar PV at the moment simply because last time I had cash on hand and was looking for PV stocks, I couldn't find what to me seemed like good value. On a related note, on the VC front, Rob Day's Cleantech Investing Readers’ Survey (Part II) revealed that many folks out there feel like solar may be exhibiting signs of bubblishness. Will solar PV be the great bear story of 2008?

On Wednesday, Dan Lewis at AEI told us which were the best and worst returning alternative energy stocks in 2007. Ignore the non-US securities and an unsurprising picture emerges: the vast majority of top performers are solar stocks (many of them Chinese listed in the US) and most of the dogs are ethanol stocks. Unsurprising as it is, this picture is still worth a thousand words. Tom argued some time ago that the correction in ethanol stocks may have been overdone, and Jerome Ball (see above) recently argued that the solar bull may be running out of steam. Might 2008 be a good time to start looking at some of the ethanol stocks again?

On Wednesday, Sebastian Blanco at AutoblogGreen told us that new CAFE requirements had helped turn Detroit's eye back to diesels. Interestingly, while arguments are raging within the cleantech community over whether biofuels or electric powertrains will emerge as the dominant choice for road transportation in North America, diesel may quietly be staging a comeback. While both biofuels and electric cars are years away at best from seriously threatening the dominance of gasoline here, diesel could emerge as a contender sooner rather than later, as evidenced by its prominence at this year's Detroit Auto Show. Purists will certainly say diesel isn't 'clean', but one would be hard-pressed to argue that ethanol is. Moreover, I've always favored evolutions over revolutions, especially when it comes to my portfolio. So, could 2008 be the year to start looking for auto part makers with exposure to diesel?

On Thursday, the Biopact Team told us that investments in renewables broke the $100 billion barrier in 2007. It's a nicely-done overview of a recent study (PDF document) by New Energy Finance on alternative energy investment flows in 2007. On the public market side, the Iberdrola Renovables IPO was unmistakably the deal of the year. The interesting thing about this whole cleantech story is that it's been occurring in concurrence with a very strong bull market in North American equities, often blurring the line between good investment and good market. If 2008 turns out to be the difficult year that many expect it will be for equity markets, we could see the first real round of shake-outs in the short history of cleantech as an asset class, where many of the weaker players either fold because they can't raise money or get gobbled up. As pointed out by Rob Day in his Cleantech Investing Readers’ Survey (Part I), successful VC exits in the cleantech space have been few and far between thus far, and a bad year in equity markets could compound this problem.

January 01, 2008

Ten Alternative Energy Speculations for 2008: Geothermal, Wind and Wave, and Thin Film Hype

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction to that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks are part of that same article linked to above; the moderately risky picks are here.  This article contains the most speculative three picks.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) US$1.29 or CAD$1.26

Geothermal first started catching investors' attention about six months ago.  I went into detail as to the reasons for its appeal, and the factors bringing it to investors' attention in this profile of Geothermal power in October.  

Since then, we have been given an added reason to appreciate Geothermal in the United States.  While the recent energy bill did not contain a national RPS, nor tax credits for renewables, it did give the geothermal community much of what they were asking for since it contained the "Advanced Geothermal Energy Research and Development Act of 2007." 

There are three ways to invest in geothermal power: through the technology, through existing plant operators, and through resource explorers and developers.  The provisions relating to Enhanced Geothermal Power and Co-production in oil fields should help technology and service providers such as Ormat (NYSE:ORA) and United Technologies (NYSE: UTX) over the long term, since they will help open up new opportunities for Geothermal.  Over the short term, which is what this article is about, I expect the "Industry-coupled drilling" provision will be most important, and help explorers and developers of conventional geothermal resources.

According to the Geothermal Energy Association, the Industry-coupled drilling provision "pairs the federal government with geothermal developers to reduce drilling risks and improve drilling precision."  Geothermal exploration and development is a very risky process, so government risk-sharing should greatly increase the value of Geothermal prospects by lowering the effective discount rate at which they are valued.  Coming as it does early in the development process, a reduction in risk could easily be worth more to a company which owns the rights to develop an undeveloped geothermal resource than the later boost to income that would come from a Production Tax Credit, even though the industry-coupled drilling provision is likely to cost the government far less than a Geothermal Production Tax Credit.

US-based geothermal developers are most likely to benefit from this provision.  These include US Geothermal (OTCBB: UGTH, GTH.TO), Sierra Geothermal (OTC: SRAGF, SRA.V),  Raser Technologies, (NYSEArca:RZ), and Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V)).  US Geothermal and Raser Tech are up over 3x from their 52 week lows, while Sierra and Nevada Geothermal are each up about 2x, although the Nevada Geothermal share price was stagnant for the previous two years, while Sierra Geothermal has been following a steady uptrend.

Comparing these last two with the least recent appreciation, Sierra Geothermal has many more early stage projects, while Nevada Geothermal has just four high quality projects nearer to production.  In fact, Nevada Geothermal owns Sierra Geothermal's most advanced project (Pumpernickel), and Sierra's exploration and development efforts will earn them at most a 50% share of the project.   This is only Nevada Geothermal's second most advanced project, after their wholly owned Blue Mountain project which is on track to begin producing electricity in 2009, and for which they have already completed a Power Purchase Agreement and an interconnection agreement with local utilities. Nevada Geothermal is currently funding development of its projects with loans from the likes of Geothermal specialist Glitner Bank and Morgan Stanley, while Sierra Geothermal is financing its exploration needs with dilutive private placements.

Because of the relatively small recent run-up for Nevada Geothermal, its strong financial position, and ownership of a late-stage project (as well as sufficient promising projects to keep them busy with development for many years to come), I see the most potential for robust returns in Nevada Geothermal among geothermal developers.   

#2 Finavera Renewables (TSX:FVR or FNVRF.PK) CAD$0.335 or US$0.3371

I chose to include Finavera in my Top Ten Speculations for 2008 for my own reasons, but AltEnergyStocks.com Editor Charles Morand has been following the company longer and more closely than I have myself, so I asked him to profile it.  You can read what he has to say about Finavera Renewables here or simply scroll down to the next post.

#1 First Solar (Nasdaq:FSLR) $267

When I disclosed that I was short First Solar in the first installment of this series, I received an incredulous comment soon after the article was syndicated on Seeking Alpha: "OUCH!! You have a short position in FSLR? I hope it doesn't come back and bite you!"  I'm sure the commenter is not alone in his conviction that First Solar's rise will continue.  The fact that First Solar has risen so far so fast only because people like the commenter have been purchasing the shares like hotcakes all year.

Shorting is inherently more dangerous than being long, because in a long position you can not lose more than you initial investment.  Shorting a momentum stock, even when it is overvalued, can be especially risky, because momentum tends to be a self-fulfilling prophecy, with more investors becoming interested and driving the price up as they try to buy the stock.  For all those reasons, shorting First Solar deserves to be the #1 riskiest of my 10 speculations for 2008. 

Why did I decide to short at all?  What makes me think that 2008 will be the year that First Solar's bubble pops?

First Solar's valuation seems out of line because of an inherent limitation on their profitability.  Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust.  In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.  In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies.  PrimeStar Solar, a private company is using a recent infusion of capital from General Electric (NYSE:GE) to quickly begin production of their own CdTe modules.  They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; I expect they will begin production in 2008.  

With this much demand on short-term Tellurium supplies, we can expect continued price increases.  First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.  With the failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it it has in recent years.  If anything, this should cause prices per watt to fall somewhat in 2008.

Ethanol producers were caught in a commodity squeeze this year by using 25% of the United States corn supply.  In contrast to First Solar, ethanol production has only been growing 20-25% a year, much slower than the demand for Tellurium from CdTe cells, and corn production was artificially sustained at an uneconomically high level before the advent of corn ethanol by farm subsidies.  Hence, I would expect a commodity squeeze for CdTe producers at a lower percentage of supply.  My 16% projection for 2008 does not seem out of line to trigger a commodity squeeze, which could cause First Solar to miss (or at least cease to beat) earnings estimates in the coming year.  Missing or just failing to exceed earnings estimates almost always leads to quick price drops for high multiple companies.  According to Yahoo!, First Solar's trailing P/E is about 195.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million [NOTE 3/8/08: I received a comment that I had lost a decimal in this calculation, with actual Te cost being only $8.7 million... don't take this as gospel, make sure to double-check if this makes a difference in your investment decision.], compared to First Call average estimated Revenues of $800M, and $146M estimated earnings.  I don't know what Tellurium prices were used in those estimated earnings, although I expect it was over $100/lb.  Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008, and, as the oil price has shown us, even moderate increases in demand for a commodity with inelastic supply can create massive price rises.  What will new demand for Te rising from 4% of supply to 16% of supply in two years do to the price?

UPDATE 1/2/08: Ken Zweibel, President of PrimeStar Solar and former head of NREL's thin film partnership program, got back to me today on a research question for this article, now that the holidays are over.   He couldn't tell me much for strategic reasons, but did say that he isn't skeptical of First Solar's valuation, and "There is more Te from nontraditional sources than people are aware of."  I believe he is referring to Te from oceanic ridges, which I don't believe can be extracted in significant quantity within the next couple years, although a Tellurium price rise like the one I anticipate would lead to mining of oceanic ridges in the medium to long term.  Nevertheless, Ken is responsible for much of what we know about CdTe technology, so his comments should not be taken lightly, and there may be other nontraditional sources which can ramp up production more quickly. 

The other reason to believe that First Solar's meteoric rise might halt in 2008 has to do with investor sentiment.  An unscientific survey of sentiment among Seeking Alpha bloggers (myself excluded) has turned negative (as far as I can tell, only Andrew Ling is still writing positively about the stock), and the Tellurium problem is getting wide attention.  How long will it take the mainstream press to latch on to the Tellurium story?  It's impossible to say, and another run like last quarter could easily squeeze out the shorts.  

Taking this all into account, my short position is only about 0.1% of my portfolio, more of an intellectual experiment than a real bet.  As Keynes said, "The market can remain irrational longer than you can remain solvent."   I wouldn't advise anyone to take a short position in FSLR so large that they could not sleep through another doubling of the stock price. 

If any play is for gamblers, this is it.  But cards are stacking up against First Solar.

Links: Picks #10,9,8; Picks #7,6,5,4. Pick #2 Finavera Renewables

DISCLOSURE: Tom Konrad and/or his clients have long positions in UGTH, SRA, RZ,  NGP,  ORA, UTX, FNV, GE, 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.

#2 Finavera Renewables (TSX:FVR or FNVRF.PK)

When I first got wind (no pun intended) of Finavera Renewables (TSX:FVR or FNVRF.PK), I did not make too much of it because my view was that commercial exploitation of wave power - which is the banner under which Finavera has decided to promote itself to the investor community - was a few years away at best. Then, upon hearing that the company had managed to get a prototype in the water (PDF document), I decided to do a bit more digging.

After all, if the technology worked, the economics of the business model would closely resemble those of my uncontested favorite at the moment: wind power. Wave power also had the advantage of being more predictable than wind. With a proven technology, the firm could get itself into power purchase agreements, lever up to take advantage of the relatively lower cost of debt, and go on finding new sites to exploit while its existing operations generated steady cash flows. At some point in the perhaps not-so-distant future, the company could become an acquisition target, and yet more upside could accrue to equity holders. What's not to like for an investor who is in early?

Almost immediately I came across something that truly poked my interest: rights to develop wind assets in Germany, Ireland and the Canadian provinces of Alberta and British Columbia. Granted, there was no big secret here. This information was there all along for anyone who bothered to look. Finavera posted on its website research notes by two Canadian boutique brokerages that cover the stock: Haywood Securities and Dundee Securities (both PDF documents). Both notes confirmed my intuition at the time (this was in late October '07), namely that the bulk of near-term value rested with the wind projects, not wave energy. Although valuations differed, both reports had a much higher target than the C$0.40 the stock was trading at, and my own experience with renewables-focused Canadian independent power producers (IPPs) told me that they were likely right. I pulled the trigger and went long at C$0.40.

Shortly after, things turned ugly. First, Finavera's device sunk to the bottom of the ocean before tests were completed, compounding fears by environmentalists and fishermen that this idea may spell nothing but disaster for marine life. Second, when Q3 results (PDF document) came out, it became clear that things were a lot worse (PDF document) than just a sunken piece of steel and a few worried anglers: the company had a working capital deficit of C$4.1 million, it had to write down C$6 million in goodwill related to the very technology that had just sunk and on which it was banking its future, and it was abandoning its German wind farm plans, which would have generated much-needed cash in the near term. What's more, rough conditions in capital markets caused by the credit crunch prevented Finavera from moving forward with a critical round of financing.

The stock got killed, flirting with the C$0.10 mark. Ouch...but I hung on. Within a week, Finavera announced that it had secured about C$2 million in financing (down from C$23 million it was initially hoping to raise) and had restructured its board. New board members had weaker cleantech credentials but stronger acumen in financial and business matters. Not exactly great news but I decided to hang on until late December, when I was scheduled to get back from a trip to India - this would give me time to think things through, and it's not like I'd bet the house on this one anyways.

It was while sitting at a small internet cafe after visiting a tea plantation in Kerala that I got the good news: Finavera was at the center of the biggest ocean power news story I could recall. Shortly after, more good news came out related to the firm's wave power activities. Maybe there was value in wave after all. And this brings us to...

The reason why we selected Finavera as our #2 speculative pick for 2008. I still feel that viewed through the lens of a conventional valuation approach, wind is where most of the value lays. There is no doubt, however, that the succession of positive wave-related news has created something of a buzz, as evidenced by the stock rebounding to close at C$0.335 ($0.3371 in the US) on Monday on heavy volumes. Tom and I both agree that the PG&E deal could continue to generate significant investor interest in both wave energy and in Finavera in particular, and that the stock could see some strong upside as a result. I increased my position on Monday and my adjusted cost base now stands at $0.37. More good news on the wave front could spell good things for this stock in 2008.

There are, of course, a number of important caveats:

(A) Unless anything has changed, the company must still fill a working capital gap of around $C2 million. With 174 million shares outstanding, which is very large relative to sector comps (i.e. small earning-less IPPs), the risk of dilution looms large. On the positive side, the recent recovery in share price is good news from the point of view of seeking financing.

(B) Without the German wind farms, no company operation will generate revenue or earnings until 2009 at the earliest, which is assuming that Finavera can secure all the funding it needs to set up its Alberta wind farms. But liquidity is not the only thing in short supply at the moment; the market for wind turbines is currently incredibly tight and small wind farm operators are reportedly having a heck of a time getting their hands on turbines and turbine parts. Personally, I would feel reassured if I saw company management focus on executing on wind first, and worrying about wave once cash is coming through.

(C) Finavera wrote down all of the goodwill associated with its 2006 purchase of AquaEnergy (PDF document), which is how it initially got its wave technology. In fact, according to the company's Q3 2007 filings (PDF document), goodwill associated with the IP for the wave technology (called AquaBuOY) accounted for 97% of the value of all assets acquired in that transaction. While this write-down is more of an accounting formality than an indication that the technology is completely useless, as some may have thought, this still means that there were serious flaws and that Finavera's engineers must go back to the drawing board. In other words, this is not wind and the technology is far from ready for commercialization. Power purchase agreement or not, if Finavera wants to be a force to be reckoned with in ocean power it will have to have something to show for on the technology side before too long. Not to mention that if it doesn't soon the market will probably forget all about what just happened with PG&E and move on.

DISCLOSURE: Charles Morand has a long position in TSX:FVR.

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.

How much would you pay to fill up?

I'm collecting some info to test an idea I have about human behavior... this is fodder for a future article. Thanks. Happy New Year!

« December 2007 | Main | February 2008 »

Search This Site

Share Us


Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner

Subscribe by RSS Feed


Certifications and Site Mentions

New York Times

Wall Street Journal

USA Today


The Scientist

USA Today

Seeking Alpha Certified

Seeking Alpha Certified

Twitter Updates