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What I'm Selling (and will be Buying) in the Market Turmoil

The market is in turmoil, and it seems like everyone I talk to wants my take on what's happening this week.  So here's my take:

  • I really don't know if the various bailouts and decisions not to bail out made by Paulson et al will turn out to be good decisions or not.  I do know that the mess we're in is due to hard decisions which have been put off for years at the highest levels, and I do know that the American taxpayer is going to be feeling the pain for a generation, if not generations.  
  • Although I predicted that the credit crunch would lead to a bear market, (and was bearish long before that) the intensity of this last week still caught me by surprise. I had expected big problems to emerge sooner, and when they did not, I began to expect that the fall would be gradual, rather than quick. 
  • I do not believe we are at the bottom, so I'm taking the current recovery as an opportunity to unload some of the stocks I expect to be hurt the worst.
  • Long-term, the extra US-denominated debt will have to be either repaid, or inflated away.  Inflation seems most likely, which may be good news for technologies like wind and solar which produce energy at a fixed cost, and probably better for efficiency technologies which do more with less.

Stocks to Sell

What companies are likely to be worst hurt?  Any company which needs to raise new money in the next couple years.  Although I tend to favor established, profitable companies, I have recommended (and own) a smattering of startups with compelling technology, and I'm currently selling many of these.

Many of these companies are thinly traded, and I am still in the process of selling these positions (mostly at substantial losses).  Not wanting to depress their prices, I will not disclose the specific companies at this point.  I also am holding on to some which have fallen so far that the proceeds of the sale are insignificant, especially if they are in accounts such as IRAs where the tax loss would not be useful.

Ten Stocks to Buy

Last February, when it was still fairly early on in this bear market, I brought you a series on stocks to buy when you think we've hit bottom.  Although I do not yet think we've hit bottom, I know that timing the market is very tricky.  I also know we're considerably closer to bottom than we were in February.  Given these uncertainties, I take the approach of selling cash-covered puts on stocks I'm interested in at prices below where I expect them to fall.  This means that I collect the premium if the stock does not fall that far, or I buy the stock at what I considered a very good price if it does. 

I currently like companies involved in energy efficiency, wind, transmission, and government contractors involved in alternative energy, because I expect all of these to be more resilient during what I expect to be years of hard economic times.  Here are my current top ten, with links to the articles where I wrote about them.  Since most of these companies are both large and extremely liquid, I don't expect that listing them here will affect the stock prices materially.  The ranking is based on a combination of how much I like the company itself, and the current valuation, starting with my current top pick. 

  1. New Flyer Industries (NFYIF), $11.00
  2. Johnson Controls (NYSE:JCI), $33.65
  3. First Trust Global Wind Energy ETF (NYSE:FAN), $22.55
  4. Veolia (NYSE:VE), $45.15
  5. Philips (NYSE:PHG), $30.83
  6. Honeywell (NYSE:HON), $45.32
  7. General Cable (NYSE: BGC), $38.99
  8. Siemens (NYSE:SI), $102.42
  9. General Electric (NYSE:GE), $26.62
  10. AECOM Technology (NYSE:ACM), $27.28

DISCLOSURE: Tom Konrad owns or has written puts on NFYIF, JCI, FAN, VE, PHG, HON, BGC, SI, GE, and ACM.

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.



was posted on AltEnergyStocks.com.


       

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Comments

Tom:

The flip side of your inflation argument - debt being actually repaid rather than inflated away - could add a layer of difficulty for international alt energy investors.

Because many good alt energy plays are listed in the US - either firms or ETFs - exposure to the US is desirable. However, the fiscal pressure from this bailout plan could result in yet a lot more greenbacks floating around internationally. Certain international investors therefore have to be careful that capital gains don't get partly wiped away by a weaker US currency. Unfortunately, currency exposure can be difficult to hedge for retail investors.

Investors in countries such as Canada and Australia whose currencies are leveraged to the price of commodities could be facing this problem.

Charles,
I'm not sure I buy the argument that having a US listing exposes a company to US$ declines... what's more important is the currencies in which the companies revenues are denominated, since that is what profits are based on. Firms with revenues in dollars will be hurt by dollar woes, while firms with expenses in dollars will be helped by the same.

Tom:

It is not the company that is exposed to a currency decline, but the investor.

As you point out in your article, right now several alt energy companies listed in the US look cheap according to the levels of their valuation ratios, and an international investor might be tempted to purchase some of these stocks in his/her own currency. When the time comes to sell the stocks for whatever reason, a decline in the US$ vis-a-vis the home currency of the investor can neutralize some of the gains generated by having done a good stock pick.

For my part, I believe the inflationary environment for commodities - but especially oil and gas - will continue because it is based on a fundamental imbalance between supply and demand. For Canadian investors, whose currency has effectively become a petro-currency, the combination of high oil prices and fiscal problems in the US could spell adverse currency movements, and warrants some thought before jumping in and snapping up cheap US securities.

Charles, both of us can be right. I think you're talking about a shorter time-scale than I am.

In the short time scale (a few years or less) the currency in which a stock is denominated makes a big difference, but on longer time scales (5 years or more), real earnings and real cash flows to the investor dominate returns. It is in this longer term sense (which happens to be the perspective I take when investing) that the currency a company trades in is of lesser importance.

You call out energy efficiency vendors; what do you think of Lime Energy (NASDAQ:LIME)?

The company made a big acquisition this year, giving it a broader geographic and technology base. It was listed on NASDAQ (after a 7-for-1 reverse stock split). And it seems to have a unique spot in the market, serving all types of buildings (aside from single family homes) in offices across the country.

Note: I consult with them and own stock.

I have not looked into Lime recently. Last time I did was about a year ago, and I thought they were a little overpriced. Since the stock has fallen 50% since then, things might be better, but make sure that they have enough cash to cover a couple years' operating cash flow.

The only thing that is going to really stimulate our economy is to get the price of fuel down. Everything is affected by the high cost of fuel. We need to utilize natural sources such as wind energy, solar energy and increase our use of advanced technological knowledge to reduce our use of fossil fuels such as v2g , hybrid and electric plug in cars,generative braking, flex fuels, bio fuels etc. We have the knowledge and the technology. What we seem to be lacking is a government actively seeking solutions. Interesting book coming out soon called "The Manhattan Project of 2009" by Jeff Wilson. We need to be more proactive and demand our elected officials do more to reduce our dependence on foreign oil.

Can't disagree with that... although the Manhattan Project is the wrong metaphor... a Marshall Plan would be better.

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