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December 30, 2008

Ten Clean Energy Stocks for 2009

UPDATE: Here's how this portfolio performed in 2009.

Here is a mini-portfolio of ten Renewable Energy and Energy Efficiency Stocks I expect to do well in 2009.  Last year, I brought you ten speculative picks in Renewable Energy and Energy Efficiency, and I evaluated them against clean energy mutual funds and ETFs on Monday.  I chose to go with speculative picks, because I did not expect readers to be interested in the stodgier, value-oriented picks I usually prefer.

Given the lessons of the credit crisis, if you still prefer speculative picks, you're an inveterate gambler.  If I get enough requests in the comments here, I'll also come up with a list of speculative picks for 2009 as well.  These stocks, however, are intended for a more conservative investor who wants to do something about global warming and possibly profit from the growing investment in alternative energy.  

This model portfolio is not intended as investment advice.

Company  Ticker Price 12/27/08 Articles/Notes
The Algonquin Power Income Trust AGQNF.PK $1.82 Algonquin Power*; Clean Energy Income Trusts
Cree, Inc. CREE $15.06 Efficient Lighting, 10 for 2008
First Trust Global Wind Energy ETF FAN $11.84 Wind ETF FAN, Wind ETFs Compared
General Electric GE $15.97 Solid, Clean Companies Ready for Stimulus
Johnson Controls JCI $16.94 Solid, Clean Companies Ready for Stimulus, Johnson Controls
New Flyer Industries NFYIF.PK $6.60 New Flyer, Dividend-paying Energy Efficiency Companies
Ormat ORA $29.79 Geothermal Power
Trinity Industries TRN $15.00 Solid, Clean Companies Ready for Stimulus; Trinity Industries
Warterfurnace Renewable Energy WFIFF.PK $17.148 Geothermal Heat Pumps, Dividend-paying Energy Efficiency Companies
UltraShort S&P500 Proshares ETF SDS $76.11 I feel there is more downside risk than upside potential for the market as a whole in 2009.  This ETF is included to offset some of that risk.  

*forthcoming article.  Link will be broken until article is published.

For readers who feel that conglomerates like Johnson Controls, Trinity, and General Electric don't belong in a "Clean Energy" portfolio, the inclusion of SDS can also be seen as a way to offset the performance of the non-clean energy parts of these companies. If this portfolio were included in a larger portfolio containing large cap stocks, another way to acheive a similar effect would be to reduce the allocation to large cap stocks by as much money as is allocated to two stocks in this portfolio instead of including SDS.

I plan to publish updates on how this equal-weighted portfolio is performing in comparison to the S&P 500 and The Van Eck Global Alternative Energy Fund (GEX), an ETF which I consider to be the best alternative energy fund for investors looking for a single alternative energy investment.

Tom Konrad, Ph.D.

DISCLOSURE: The author owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, WFIFF, and SDS.

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.

December 28, 2008

Clean Energy Mutual Funds and ETFs: Does Active Management Pay?

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

In my articles about Clean Energy Mutual Funds and Exchange Traded Funds (ETFs), I usually say:

Given the complex nature of the technologies, and the sparse coverage of many of the companies by industry analysts, there is still considerable room for active management in [Alternative Energy].  Many investors buy Renewable Energy stocks for emotional reasons, so an understanding of practical behavioral finance may lead to excellent buying opportunities in quality companies.

My recent update on the not-so-bad-as-might-have-been-expected performance of my ten speculative picks for 2008 might be an example of this.  Or it might have been luck.  But I'm not the only one trying to beat the market in alternative energy, actively managed mutual funds are also trying.  This is the only rational justification for paying their high fees.  If, after fees, an actively managed mutual fund has a higher return than a passively managed index fund or ETF, then it is worth paying the fee.  If the gains from active management are not enough to pay for the fees, then they are not worth paying.

Fund Name & Ticker Active? Global? 2008 return* 2007 return
Calvert Global Alternative Energy Fund (CGAEX) Yes Yes -59% N/A
Firsthand Alternative Energy (ALTEX) Yes Yes -51% N/A
Guinness Atkinson Alternative Energy Fund (GAAEX) Yes Yes -68% 41%
First Trust NASDAQ Clean Edge US Liquid (QCLN) No No -67% N/A
New Alternatives FD Inc (NALFX)** Yes Yes -46% 32%
PowerShares Clean Energy (PBW) No No -70% 58%
PowerShares Global Clean Energy Portfolio (PBD) No Yes -63% N/A
Van Eck Global Alternative Energy Fund (GEX) No Yes -64% N/A
Winslow Green Growth Fund (WGGFX) Yes Yes -63% +23%

* through Dec 27, 2008.  ** The New Alternatives Fund charges a front-end load, as well as an annual management fee, so actual investor returns will be lower than those shown.

Drawing Comparisons 

Because the First Trust NASDAQ Clean Edge and Powershares Clean Energy ETFs (shown in white above) only contain US-traded stocks, I have eliminated them from the comparison.  The differences in performance are more likely to be dominated by the different investment universes than the difference between active and passive management.  Most well-established alternative energy players are foreign, so domestic-only funds are likely to contain a higher proportion of  more volatile stocks.  This means that domestic funds will tend to outperform in good years, and under-perform in bad.  This prediction is borne out by the performance figures above: QCLN and PBW underperformed nearly all the global funds in 2008, and PBW outperformed the three global funds which were around for all of 2007.

Among the global funds, the actively managed funds (shown in green) had performances ranging from -68% to -46% in 2007, with an mean of -57.4% and a standard deviation of 8.9%.  The passively managed funds (blue) had performances of -63% and -64%, both of which were within a single standard deviation of the mean performance of the actively managed funds.  Statistically, this means we can't draw any conclusion about the effect of active management on the returns of these funds.  

If the returns for my ten speculative picks (-55% for 2008) are included in the active management, the active management mean increases to -57.0%, and the standard deviation drops to 8.0%, but the comparison remains inconclusive. (Statistics geek note: Technically, I should be using a two-sample t-test to compare the two populations, but that test will always be inconclusive if the informal z-test I went through above is inconclusive.)

Finally, if we include the two passively managed domestic ETFs, the mean of the passive sample becomes -66%, and the standard deviation 3.1%.  This also fails the two-sample t-test for statistical significance at the 95% confidence level.  Although it comes close to statistical significance, the inclusion of domestic-only funds in the passive sample would have made even a statistically significant result suspect.

Conclusions

With this data, there's no statistical reason to believe that the actively managed funds are any better (or worse) than the passive funds.  Since the management fees of the actively managed funds above are typically two to three times as high as the passively managed funds, the evidence still points to the passively managed funds as the best pick.

However, if you are willing to take the time to manage your own money actively, and do not consider the time it takes as a cost, the returns above show that it's not difficult to beat most of the available funds just by reading this blog.  (As with actively managed funds, we don't know if my results were due to luck or skill.)

On New Year's Eve, I will publish an article with ten clean energy picks for 2009 (the link will be broken until then.) 

Next year, we'll have at least twice as much data.

Tom Konrad, Ph.D.

DISCLOSURE: GAAEX is an advertiser on the author's website, AltEnergyStocks.com.

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.

December 26, 2008

Update: Ten Speculations for 2008

A year ago, I brought you  10 Alternative Energy Stocks I thought were worth speculating on for 2008. I revisited these in June, when a balanced portfolio of the 10 was "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%."  

Speculative picks tend to do better than the market as a whole in bull markets, and worse in bear markets, so given the steep drop in markets since then, I would normally expect these more speculative picks to fare worse.  This is borne out in the fact that the more speculative of the pick, the worse the stock performed.  (I put these picks in rough order of riskiness, with the riskier ones given lower numbers.  The exception to this rule was #9, Lighting Science, which probably would have been #3 except that I wanted to talk about it and the other LED stock Cree in the same article.) 

For the morbidly curious, an equal-weighted portfolio of these 10 was down 55% as of the close on December 24th.  For comparison, the S&P 500 was down 42% over the same period, while the NASDAQ Clean Edge Index was down 67%.  

More interesting to readers is probably my current opinion about these companies.  After the Lehman bankruptcy, I sold part or all of nearly all these, but still hold some, often in conjunction with covered calls.  Below, I give quick updates on the companies I'm still following.

#10  Cree, Inc. (CREE) Dec 27, 2007: $23.50;  Dec 24, 2008: $15.01; -36%

Cree is a leader in light-emitting diodes (LEDs), a technology which is just now coming of age.  With no debt, a strong current ratio, and selling only slightly above book value, I no longer class Cree as a "speculative" bet, and the company should be able to use the harsh financial climate to improve its position in the LED industry. 

#9:Lighting Science Group (LSGP.OB) Dec 27, 2007: $6.40 (split-adjusted), Dec 24, 2008: $0.40; -94%.

I sold my holdings of Lighting Science in September when the extent of the financial crisis became clear to me.  This company is too early stage to make it to profitability without outside funding, which would dilute current shareholders.

Here's an October article where I went into more detail on both Cree and Lighting Science.

#8 Maxwell Technologies (MXWL) Dec 27, 2007: $8.10, Dec 24, 2008: $5.93; -27%

Although I think ultracapacitors may have a role to play in electric vehicles, Maxwell is not currently profitable, and has only slightly more than a year's worth of cash on hand.  I sold most of my stake in the company since the crisis began, although I am waiting for better prices to sell the rest.

#7 Electro Energy, Inc. (EEEI) Dec 30, 2007: $0.68, Dec 24, 2008: $0.18; -74%

I no longer follow this company, and sold all my holdings in September and October.  I discussed my reasons for selling Electro Energy here.

#6 Capstone Microturbine (CPST) Dec 30, 2007: $1.62, Dec 24, 2008: $1.11; -31%

Although Capstone is closer to profitability than Maxwell, the company can only survive about a year without raising more money.  The company has a chance of getting a boost from Obama's planned stimulus package, since its microturbines are often used in Combined Heat and Power (CHP) systems.  These systems may be installed as part of energy efficiency retrofits of Federal Buildings.  Because of this, I am waiting to see the form the stimulus takes, and if any speculation picks up about how Capstone may benefit.

#5 FuelCell Energy Inc. (FCEL) Dec 30, 2007: $10.30, Dec 24, 2008: $3.65, -74%

Like Capstone, FuelCell might benefit from CHP in Federal Buildings.  Unlike Capstone, even that would be unlikely to bring the company anywhere near profitability.  I am short some cash covered puts in the company, but do not intend to sell more if they expire unexercised, and will probably sell the stock if it is assigned to me.

#4 Composite Technology Corp. (CPTC) Dec 30, 2007: $1.37, Dec 24, 2008: $0.26; -81%

Composite also has a fairly long way to go before achieving profitability, and has slightly over a year's worth of cash with which to do it.  However, readers know that I have long been enthusiastic about the company's ACCC cable for electricity transmission.  This enthusiasm led me to only sell part of my holdings in response to the crisis.  As with Capstone, I'm waiting to see what the stimulus package will do for transmission before deciding what to do with my remaining holdings.

#3 Nevada Geothermal Power (NGLPF.PK) Dec 31, 2007: $1.29, Dec 24, 2008: $0.30; -77%

Although Nevada Geothermal is currently unprofitable, their Blue Mountain geothermal project has sufficient financing to take it to production, which the company expects near the end of 2009.  As the expectation of revenue draws nearer, I expect the stock price to appreciate.

#2 Finavera Renewables (FNVRF.PK Dec 31, 2007: $0.3371, Dec 24, 2008: $0.0238; -93%

I sold my stake in this most speculative of my long picks early in the year, as the darkening financial climate convinced me that a speculative frenzy for ocean power stocks was unlikely to emerge.  I no longer follow the company, 

#1 SHORT First Solar (FSLR) Dec 31, 2007: $267, Dec 24, 2008: $133.73; +50%

I took my profits on this in June.  I don't usually follow solar companies, because I feel that they are generally too widely followed for me to add much value.  I don't have any particular expectation of how First Solar will fare next year.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE,  MXWL, CPST, FCEL, CPTC, and NGLPF.

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.

December 24, 2008

Seasons Greetings!

The team at AltEnergyStocks.com wishes all of our readers a happy and safe holiday season 2008.

In 2007, we brought you the Cleantech News service. In 2008, we were delighted to bring you individual and category stock pages.

We intend to continue looking for ways to create value for our readers in 2009. As always, we invite you to submit comments and suggestions on how you think we can improve AltEnergyStocks.com. We also always love to hear from you through your comments on the site - keep them coming!

You all helped make 2008 a great year for AltEnergyStocks.com, and we look forward to a great 2009 with you!

Charles, Tom and Brian

December 23, 2008

Solar Stocks As the Best Play On The Cleantech Revolution? (Part II)

A couple of weeks ago, I wrote about a recent report claiming that solar PV was going to be at the fore of the "cleantech revolution." I've never doubted solar PV's potential. What I like most about it, besides the fact that it's the most abundant energy form on Earth, is the ability for solar technologies to be deployed either through the building stock as a load-abatement measure or in large arrays of panels as solar parks. No other power generation technology can be scaled simultaneously through these two routes.

Besides investments in Energy Conversion Devices (ENER) and Suntech Power (STP) in 2006, I've largely stayed away from solar PV stocks in the past two years. For one thing, the onslaught of coverage initiation from the sell-side has made it difficult to gain a real informational edge for a retail investor such as myself. Throw on top of that the onslaught of retail investor interest in the sector, and you're starting to have a very unattractive asset class as far as I go. Investing in solar has become, over the past three years, either about momentum trading or the belief that incredibly rich valuations will endure for a while.

There's no doubt that the bashing of solar stocks that has taken over the past few months has rekindled many people's interest in the sector, including my own. Although from a fundamental point of view the ugliest is probably still to come for solar, there is no doubt that the space is looking a lot cheaper than it did six short months ago. With the overall market seeming like it's begun the process of finding a bottom, is now a good time to consider entering the solar PV space for the long-run (>18 months)? Even though I do think solar will probably continue to underperform for a few more months, I have been thinking about re-entering the space as a long-term play since I mostly share the perspective put forth in the report. Moreover, since I'm a lousy market-timer, now seems like a good time to get in and I'd prefer to sit through a bit more downside than to let upside escape me because I haven't timed my entry appropriately.  

Since I haven't been following the space closely over the past couple of years, and because there is a good deal of uncertainty out there, my preferred approach is to go with one of the two solar ETFs: the Claymore/Mac Global Solar Index ETF (TAN) or the Market Vectors/Van Eck Global Solar Energy ETF (KWT). This approach allows me not to have to do a detailed analysis of any one company in particular, a process which can be very time consuming for someone not intimately familiar with the sector. Moreover, the portfolio approach inherent to ETF investing allows for a spreading of risks. I've therefore conducted an analysis somewhat similar to the one I did for wind ETFs a few months ago.

Solar ETFs              

Solar ETFs: Basic Metrics

Item TAN KWT
Expense ratio 0.65% 0.65%
# securities in portfolio 25 35
Weighted avg. PE 34.5 (Sep. 30) 33.97 (Oct. 31)
NAV/closing pr (12/12) 0.987 1.008

As can be noted from the table above, the PE figures available are a bit outdated and are therefore not particularly useful. For the NAV/closing price, large discrepancies can provide interesting long (NAV>closing prices) or short (NAV<closing price) opportunities. In this case, neither shows a huge difference between asset value per unit and closing price. Both ETFs have the exact same expense ratio. 

One of the key differences between these two securities is the number of stocks within each and the relative concentration of risk. For TAN with 25 stocks, the average holding accounts for 4.00% of total fund value, whereas for KWT with 35 the average holding accounts for 2.86% of total fund value. However, the top ten holdings make up about 64% of fund value for KWT versus roughly 58% for TAN - risk is therefore more concentrated at the top for KWT than it is for TAN. Top-ten holdings for both ETFs are as follows:

Solar ETFs: Top-10 Holdings
TAN Weight KWT Weight
First Solar Inc. 11.21% First Solar Inc. 13.68%
Renewable Energy Corp AS 6.95% SolarWorld AG 9.85%
MEMC Electronic Materials Inc. 6.46% Q-Cells S.E. 7.85%
Solarworld AG 5.66% Suntech Power Holdings Co. Ltd. ADR 5.94%
SunPower Corporation 5.09% Renewable Energy Corp. ASA 5.06%
Q-Cells AG 4.89% Evergreen Solar Inc. 5.01%
Energy Conversion Devices, Inc. 4.60% SunPower Corp. Cl A 4.57%
Evergreen Solar, Inc. 4.42% PV Crystalox Solar PLC 4.52%
Yingli Green Energy Holding Co. Ltd. ADR 4.27% Energy Conversion Devices Inc. 3.95%
LDK Solar Co. Ltd. ADR 4.20% Yingli Green Energy Holding Co. Ltd. ADR 3.86%
 

TOTAL

57.75%

TOTAL

64.29%

The main thing I really wanted to examine was relative exposure to the various segments of the solar supply chain. At a broad level, my preference is for the ETF with the greatest exposure to the wafer, silicon cell and thin-film segments, all of which have higher barriers to entry because of larger technological requirements. I want to stay away from heavier weightings into the silicon end of the market because of the commodity nature of it, and the modules and installation ends of the market because of the low barriers to entry and relative labor-intensity. I thus classified stocks in the two ETFs into the following categories: silicon, wafer, cells, thin-film, module, installation, solar thermal, integrated and other. I created categories to account for the companies that span two segments, and companies that spanned three or more segments are considered integrated. "Other" is made up mostly of firms providing manufacturing technologies for solar firms.

Solar ETFs: Segment Allocation
Segment TAN (% fund value) KWT (% fund value)
Silicon 0.00% 0.00%
Wafers 16.62% 9.47%
Cells 11.61% 14.11%
Thin-film 15.81% 17.87%
Modules 2.64% 3.44%
Installation 0.00% 3.20%
Cells & Modules 10.63% 8.66%
Modules & Installation 4.66% 5.25%
Integrated 28.51% 30.36%
Solar Thermal 0.00% 1.85%
Other 9.53% 5.82%
TOTAL 100% 100%

Unsurprisingly, both firms have First Solar (FSLR), the recent poster boy for the solar PV sector's success, as their top holding. Also unsurprisingly, the largest category for both is "Integrated", as more and more firms try to extend their reach up and down the supply chain. Both ETFs are overall quite heavily tilted toward pure-play solar stocks with little in the way of indirect plays. These two ETFs don't provide as clear-cut an alternative to one another as do the wind ETFs. KWT has a slightly higher weighting in stocks in the "Modules" and "Installation" ends of the supply chain. Coupled with the higher concentration of fund value (i.e. risk) toward the top-ten holdings, that makes me lean toward TAN.    

Decision

As someone who hasn't followed the solar sector closely and am not intimately familiar with many of the companies, I'm hoping taking a position in one of the solar ETFs is a good way to benefit from the upside associated with solar's long-term potential. These two ETFs are relatively similar in terms of supply chain segment allocation, and are likely to perform in a roughly similar fashion. As I said above, I'm leaning toward TAN and have put in a buy order for it. Barring a major recovery of the solar sector in 2009 that would make me want to take profit - something I believe has a small probability of occurring - my time horizon is at least 18 months. I'll provide an update then.  

               


DISCLOSURE: Charles Morand does not have a position in any of the ETFs discussed above, but has an open buy order on TAN.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 21, 2008

Geothermal Heat Pump Stocks

Geothermal heat pumps (GHP), also know as Geoexchange, or ground-source heat pumps have been recognized by both the Environmental Protection Agency and the US Department of Energy as the most efficient and environmentally friendly way to heat and cool a building available.  The downside of GHPs has always been the large up-front cost associated with the cost of the ground loop.  

With Obama promising a massive energy efficiency overhaul of federal buildings, the up-front cost is unlikely to be important so long as the expected returns on the investment are sufficient to pay for the upgrade.  Since geothermal heat pumps on medium and large buildings typically have internal rates of return in excess of 28%, this should not be a problem.  Many federal buildings also have significant open space or parking lots near them which can be used t install ground loops.  In addition, a new federal tax credit for geothermal systems was passed in 2008 (10% for commercial installations, $2000 for residential), may provide additional stimulus to the rapidly growing market in the private sector.

Hence, now seems an opportune time to consider investment in companies selling GHPs.  I know of two such publicly traded companies in North America (there are also a large number of private players, especially installers.)

Waterfurnace Renewable Energy (WFIFF.PK)

Waterfurnace manufactures heat pumps for both residential and commercial buildings, as well as heat pump pool heaters.  According to their third quarter financial statements, the company is in good shape from a liquidity perspective, so much so that they eliminated an unused line of credit in the quarter, and paid off the balance of outstanding bonds they had used to build their facilities.

The company has a strong Current Ratio of about 2.5.  In fact, current assets exceed total liabilities.  Their cash flow from operations is growing and more than sufficient to continue funding current levels of investment.  I've previously mentioned Waterfurnace in my articles about Wind and Heat Pumps and how to invest in the Pickens Plan.  As I also pointed out recently, Waterfurnace pays a dividend of over 3%.

LSB Industries,  Inc. (LXU)

A reader recently left me a comment pointing me to LSB as a GHP play.  Unlike Waterfurnace, the company is not a pure-play on heat pumps.  They also sell chemical products for a broad range of industries including mining and agriculture.  Their climate control division, which includes heat pumps and air handling systems, accounts for about 41% of sales.   

Like Waterfurnace, LSB has a strong balance sheet and has been repurchasing convertible notes with available cash from operations.  They also have an excellent current ratio of over 2.5 and current assets exceed total liabilities.  A review of their most recent quarterly statement shows that working capital growth has been a drag on cash from operations, while income has been reduced by losses on natural gas hedging contracts and an unplanned stoppage at one of their facilities.  Despite these hiccups, I see little reason to doubt that they will continue to be able to fund their business growth and investment from cash flow.

Conclusions

Both of these companies boast strong balance sheets and inexpensive valuations.  In today's volatile markets, that is no reason to expect that the stock price cannot fall further, but that would be a (better) buying opportunity for companies I'm comfortable owning for the long haul.  And which are likely to receive short term boost from the stimulus package.

DISCLOSURE: Tom Konrad has long positions in WFIFF and LXU.

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.

December 18, 2008

Smart Grid Stocks For The Obama Stimulus Package

A few weeks ago, I wrote about how a new Obama administration would renew with Keynesianism (i.e. large-scale counter-cyclical infrastructure spending) but with a green twist to: (a) get the US economy out of its funk and (b) propel America into the 21st Century by providing a massive push for its green industries. I discussed certain rail stocks and electric grid stocks that could benefit as a result. By-and-large, I've been right on both counts about the President-elect's strategy (i.e. Keynesian and green), but I did forget to mention an important part of the plan's focus: energy efficiency and the smart grid. Tom did discuss energy efficiency.

The smart grid, however, is increasingly being thrown around as a priority of the Obama plan insofar as the transmission system is concerned. It's thus not just about expanding transmission capacity but also about making the transmission infrastructure smarter and more efficient.

Stocks for the Smart Grid Build-out       

I'm therefore adding to my two previous lists some potential plays on large-scale smart grid expenditures.

EnerNOC (ENOC). EnerNOC designs, among other things, demand response solutions for grid operators and utilities. The company is earning-less at the moment. 

Itron (ITRI). This company is a leading maker of smart meters, the key tool on the consumer end of a smart grid. ITRI is a stock that I've found richly-priced for as long as I've followed the alt energy sector, and at a trailing PE of about 70x, I continue to find it very expensive.

Comverge (COMV). Comverge also makes smart meters and works with utilities to design smart grid solutions revolving around demand response. It's EnerNOC's direct competitor. The company is also earning-less.

RuggedCom (RUGGF.PK). RuggedCom, as its name indicates, designs communication applications for rugged environments such as electric utility substations. That communication equipment embedded at various points of the grid  is also critical in building a smart transmission and distribution system. This is a company that already makes money and trades at a reasonable PE of around 17x (reasonable given this sector's growth potential).     


DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 16, 2008

Ten Solid, Clean Companies Ready For Stimulus, and Five That Aren't

by Tom Konrad

Last February, I wrote "[Since] I expect the Fed-induced reprieve to be fairly short lived, [here are] ten solid companies I'd be happy to buy more of if and when the bottom really falls out of the market."  When I wrote those words, the Dow Jones Industrial Average was over 12,700.  Now, it's around 8,500, and I doubt anyone remembers the "Fed-induced reprieve" I was referring to.  The "bottom fell out" in September and October.   

On October 12, with the DJIA at 8451, I wrote "I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall."  With the market gyrating wildly but basically treading water since then, I still feel that many companies (if not the market as a whole) have seen their lows.   However, like my partner Charles, I'm interested in investing in companies which are likely to benefit from the stimulus.   I think energy efficiency stocks and electric grid infrastructure stocks are likely to be good bets, but I'm leery of any companies which depend on the consumer.

This is a reexamination of those companies in the new context.  The company names link to the articles where they were included in the series.

Building Retrofits

One of the major points which the President-Elect outlined for his stimulus plan was an energy efficiency overhaul for government buildings and schools.  Hence companies which sell services and equipment for building retrofits should be well placed to take advantage of these programs. Such companies include Johnson Controls (JCI), General Electric (GE), Owens Corning (OC),  Philips (PHG), United Technologies (UTX), Waste Management (WMI), and Honeywell, Inc. (HON).

Grid Infrastructure

During his campaign, Obama put much emphasis on the Smart Grid, but less on long distance power transmission, which I believe to be at least as important.  Fortunately, Steven Chu, Obama's pick to head the Department of Energy, is a strong advocate of transmission, and it also has support from Senate Majority Leader Harry Reid.  I am now fairly confident that, even if the initial stimulus package does not contain large spending on transmission, a more robust national electric grid is in our future.  From my list of Solid, Clean picks, those companies best positioned to benefit from this sort of spending are Quanta Services (PWR), General Cable (BGC), Siemens (SI), The ABB Group (ABB), and National Grid (NGG).  Quanta and General Cable perhaps the best positioned of these.

All of these were included in my partner Charles' list of companies well placed to benefit from electric infrastructure spending.  Given Obama's enthusiasm for the smart grid, it might also be worthwhile to consider these metering and energy management stocks.

Roads and Rail

Any spending package is likely to include considerable spending on roads, and, many of us hope, rail as well.  Not being a fan of the car, I generally don't pick road-building stocks, but one of my favorite rail picks, Trinity Industries (TRN), owns a leading producers of concrete, aggregates, and asphalt in Texas and neighboring states and the only full-line US manufacturer of highway guardrail and crash cushions, meaning that they are very well placed to benefit from the stimulus. My other rail pick, Greenbrier (GBX), seems less well placed because they are primarily in railcar leasing, which I don't expect to get immediate benefit.

Consumer Goods

Although General Electric (GE) and Philips (PHG) may benefit from building retrofits, they are likely to be weighed down by their exposure to the suddenly frugal consumer.  My solar pick Sharp (SHCAY.PK), also has this problem, without many obvious ways to cash in on other spending.

Others

My remaining February picks, John Deere (DE), and Applied Materials (AMAT) don't have any obvious way to cash in from a stimulus package, but don't seem overly exposed to consumers, either.

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

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.

 

December 14, 2008

How Are We Doing On Our Stimulus Plan Stocks So Far?

A few weeks ago, I wrote a series of two articles on the yet-to-be-unveiled Obama stimulus package for the economy, arguing that things pointed in the direction of massive infrastructure spending with a green twist. I argued that this would benefit a certain categories of rail-related stocks and electric grid stocks. How am I doing relative to the market as a whole, which has had several positive trading days for the past while on the back of the eventual stimulus plan?   

Railway Stocks

I discussed four railway stocks in an article published on October 18. On October 17, the Dow closed at 8,852.22 and the S&P 500 at 940.55. Last Friday, December 12, they respectively closed at 8,629.68 and 879.73 for losses of 2.51% and 6.47% over that period. My stocks performed as follows:

Railway Stocks: Oct. 17 to Dec. 12 (Closing pr.)
Company Oct. 17 Dec. 12 Δ %
Koppers Holdings 20.28 21.99 8.43
LB Foster 22.89 31.68 38.40
Stella Jones 20.18 13.25 (34.34)
Global Railway Indust. 1.00 0.75 (25.00)

Not bad. Stella Jones and Global Railways are Canadian companies and their primary listings are on the TSX, so they are not directly comparable to Koppers Holdings and LB Fosters which trade primarily on US exchanges. Nevertheless, I chose to include both Canadian companies and they both underperformed pretty badly, so my railway recommendations were good as far as the US went but mediocre overall.

Electric Grid Stocks

I discussed ten electric grid stocks on November 2. The last trading day before that was October 31. On that day, the Dow closed at 9,336.93 and the S&P 500 at 968.75. Last Friday, they respectively closed at at 8,629.68 and 879.73 for losses of 7.57% and 9.19% over that period. My grid stocks performed as follows:

Grid Stocks: Oct. 31 to Dec. 12 (Closing pr.)
Company Oct. 31 Dec. 12 Δ %
ABB Group 13.15 13.80 4.94
Allegheny Technologies 26.54 24.05 (9.38)
Composite Tech 0.29 0.39 34.48
General Cable 17.08 16.97 (0.64)
MasTec Inc. 8.72 8.78 0.69
Quanta Services 19.76 18.13 (8.25)
Resin Systems 0.15 0.26 73.33
Schneider Electric 50.75 71.00 39.90
Siemens 60.15 63.92 6.27
Valmont Industries 54.78 57.46 4.89

A little better. Only one of my picks, Allegheny Tech, underperformed both benchmark indexes. If you ignore the two penny stocks (Composite Tech and Resin Systems), which most folks aren't touching at the moment, my picks performed overall decently, with five in positive territory, one that underperformed both indexes, one that underperformed only the Dow and one that's in negative territory but still outperformed the Dow and the S&P 500.   

What's Next?   

Of course none of the stimulus money has been spent or even approved yet, so at this stage in the game all of this remains speculation. Although I did not recommend any these stocks specifically, my thematic choices appear to be performing decently and may thus provide decent sub-sets for picking individual plays on the stimulus plan. I will reassess both sets of stocks once the Obama administration is in power and the stimulus strategy is being implemented. 


DISCLOSURE: Charles Morand is long ABB.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 11, 2008

Solar Stocks As the Best Play On The Cleantech Revolution? (Part I)

I just got around to reading a new report by Merrill Lynch (link at the end of this article) identifying cleantech as "The Sixth Revolution" (the other five being: Industrial Revolution; Age of Steam & Railways; Age of Steel, Electricity and Heavy Engineering; Age of Oil, the Automobile and Mass Production; and Age of Info and Telecommunications). Periodically, sell-side firms will release free cleantech/alt energy reports, which lay out their macro theses but stop short of providing stock picks to non-clients.

I don't generally pay these reports too much attention as I find they rarely - if ever - present new information or look at things in a different way (i.e. they are packed with existing and sometimes dated data and are quite predictable in their orientation). This isn't surprising, as their clients don't pay them to give away all of the goodies. This one, however, was quite interesting. The author, Steven Milunovich, is Merrill's "cleantech strategist." He comes from a technology equity research background and uses his knowledge of tech's historical development path, along with theories of disruptive technologies, to predict how cleantech might evolve.

In his view, once the current funding storm has passed, cleantech will enter a secular growth phase that will last many years, and that he calls nothing short of a revolution. While he likes energy efficiency applications like smart-grid, he points out that, somewhat paradoxically, greater energy efficiency will lead to higher absolute levels of energy consumption. This perspective, based on the Jevons Paradox, states that as efficiency increases and the energy intensity of a unit of output decreases, energy costs also decrease across the system, eventually boosting absolute demand because the increase in throughput outpaces efficiency gains. According to Milunovich, the "counterintuitive conclusion is that the ultimate goal of cleantech should be to provide essentially limitless energy that can be wasted."

Where does he think this energy should come from? Well, a variety of places, but he is particularly bullish on solar, for two reasons: (1) solar is by far the most abundant energy source on Earth, and (2) solar is on the steepest price-performance improvement curve. Interestingly, the author is also bullish on solar because he views the structure of the electricity market as eventually moving from vertical to horizontal, much like technology pre-1990s was dominated by large, vertically-integrated firms (e.g. IBM), only to be overtaken in the 1990s by small firms working on disruptive technologies. He thus sees a much greater role for distributed generation in the future, and it is therefore logical he should like solar given the degree to which solar can be deployed through the building stock as a load-abatement measure.

Here are a few interesting quotes:

"In our view, practical peak oil is real, so oil prices should eventually move back up."

"[U]pgrading transmission adds 30-40% to the cost of renewable energy."

"Energy storage is the holy grail of cleantech and a difficult problem."

"Huber and Mills point out that more than 85% of the growth in US energy demand since 1980 has been met by electricity."

"[O]ur early take is that increasing electrification of the economy will continue with solar the most promising approach."

"DOE's Pacific Northwest National Lab estimates that plug-ins would have to constitute over 80% of the coutnry's 220 million passenger vehicles before new base load plants would be needed."

Find the press release here, and the actual report here (PDF document).

 

Charles Morand                

December 10, 2008

Avoiding a Carbon-Price Backlash

by Tom Konrad, Ph.D.

Economics and Greenery, a Belated Rapprochement

It is truly a triumph of economic ways of thinking that many of environmental activists are championing market-based approaches to tackling climate change.   Those people who are not for cap-and-trade on global warming gas emissions promote the even more economically rigorous carbon tax.  The most common defense against criticisms of subsidies for renewable energy is to retort that the fossil fuel industry benefits from much large subsidies.  Not only do fossil fuels get generous subsidies in direct and indirect payments, but they seldom pay anything like the indirect costs of the environmental harm they cause.

The simple and obvious conclusion that many environmentalists have drawn (and which I subscribed to only a few years ago), is that if we can just get the price signals right, people will start using renewable energy and stop building coal plants, and we'll be able to live on this planet without destroying it for a few more centuries.

Classical Economics' Dirty Secret

H.L. Mencken said, "For every human problem, there is a neat, simple solution; and it is always wrong."  

Greens putting their faith in market orthodoxy are also likely to be unpleasantly surprised.  The problem is that the classical economic dictum that if you raise the price of something, people will use less, and if you lower the price, people will use more, often fails outside the classroom.  Humans often act against their economic self interest, often because doing so requires much less effort than not.  

At the recent Energy Star Summit, I was speaking to an Energy Star employee whose job is to help people make more energy efficient choices.  Even though he has the resources at his fingertips on a daily basis, he still has not made many of these cost effective changes in his own home.  If he isn't making changes he knows are cost effective, it's no surprise that most people are doing even less, because most have the added step of lack of information about just what they should be doing and how to do it.

As an aside, I picked up a copy of Homeowner's Handbook to Energy Efficiency after a chat with one of the authors, Chris Dorsi, at the Summit.  Like the Energy Star employee, I'm immersed in energy day in and day out, but while I have a theoretical understanding of the comparative advantages of electricity transmission and utility scale storage, that does not mean that I know how to install a Water Heater Blanket, or how much I will save by doing so.  This book gives a clear and concise description of how, and some idea of expected payback.

Other examples of price signals failing to move energy markets abound.  

  • Todd Litman, of the Victoria Transport Policy Institute, an economist and advocate of sustainable transportation policies, says that pricing schemes designed to get people out of cars are only effective when there are acceptable or appealing other transit options to get people to their destinations.  If my commute by car to work goes up in price from $2 to $20, I'm only going to consider taking transit if transit is available and it will get me there reasonably comfortably.  If my only option is a bus which I have to walk a mile to at either end, and the trip takes an hour longer than it would in my car, I'll just pay the $20.  I'll also be mad at the people who I see as causing me the extra expense.
  • The water heater blanket I referenced above costs about $20, and it will pay for itself in a year in a home with an older water heater. 

Most energy efficiency improvements are manifestations of market failures. After all, classical economics demands that no investment be available which have very low risk and which return more than their cost of funds.  Yet all of us have countless examples of such investments we can make, and the main "risk" to the return on an energy efficiency improvement are that energy prices fall, and the savings fall with them.  The correlation of energy efficiency returns with a risk factor (energy prices) actually makes energy efficiency improvement more, not less attractive from the perspective of portfolio theory.  Risk aversion would lead individuals to invest more, not less, in energy efficiency.

How Not to Cause a Backlash

If price signals are not enough, what is?  On carbon pricing, I brought you ten insights last year, which I can sum up by saying that it's not enough to just get the price right, you also have to make sure that the person paying the price has other acceptable choices.  It does little good to tax the emissions of a newly build coal plant, since the plant owner will simply pay the tax and pass it on to his customers because his recent large investment would have to be abandoned otherwise.  If the coal plant owner is a regulated utility, this will not even hurt profits, because the full cost of carbon will be passed on to the consumers.

The key to getting price signals right is exactly what Todd Litman recommends above for transit pricing.  That is, in addition to a price signal, the payer also needs acceptable options which can be adopted by a casual consumer, without requiring significant sacrifices of time, effort, or comfort.  This means that the information to make good energy decisions has to be readily available, and that reliable contractors or how-to books, be available at reasonable prices and without requiring extensive research on the part of the individual.  

In terms of economics, this can be seen as increasing the price-elasticity of demand.  Price-elasticity of demand measures how much demand is able to fall for any given increase in price.  If price elasticity is low, then demand does not fall, and consumers are likely to lash out, and demand that "someone" bring prices down, regardless of whether that someone has the ability to do so.  Last summer, we saw this phenomenon in outrage at oil speculators, Big Oil, and calls for "Drill, Baby, Drill."

In the example of a carbon tax (or cap and trade) above, consumers need easy access to programs to help reduce their usage of more-expensive electricity, either through efficiency or renewable energy, or the result will again be a backlash against the carbon pricing scheme. People don't like to see their bills go up.  If they have an easy way to lower them, they will, but if lowing their bills is hard, they'll find it much easier to get angry, and will put more effort into making the tax go away than into lowering their usage.

The economic crisis and a new administration have given us an opportunity to capture the benefits of clean energy.  The Economist recently wrote why they thought a Green stimulus package would be a bad idea. The package they outlined, which was heave on subsidies for the most expensive forms of renewable energy, would have been a bad idea.  Fortunately, the package which the President-Elect recently outlined is heavy on energy efficiency and electricity infrastructure, much like the response to the crisis I hoped for in early October.  

The energy efficiency programs in the stimulus not only will be good for the economy, but they will also help cushion the blow when we finally have a country-wide cap-and-trade for carbon emissions.  Giving people the tools they need to reduce their energy bills will give consumers an opportunity to respond to the new price signals productively, rather than with anger.  

We're lucky to finally have leaders who opt for the more complex solution which has a chance of being right, rather than the neat, simple solution, which is always wrong.  But we can't assume that once we get the price right everything will follow.  Getting the price right is just the beginning; helping people adjust to the new prices will be a long, uphill battle.  If we're not prepared, we may find that we've lost ground, not gained it.

December 07, 2008

Comparing Electricity Storage and Transmission

Electricity Storage and Transmission are naturally complementary, and more of both will be needed.  But given limited time and resources, where should those of us who want to see as much renewable electricity on the grid as soon as possible concentrate our efforts?  The choice is not immediately clear.

Dennis Ray, ED of Power Systems Engineering Research Center (PSERC) was quoted [pdf, p.11] as saying “Regardless of contractual arrangements that are subject to environmental regulation, the ultimate dispatch pattern that will determine the actual emissions is largely dependent on transmission constraints and reliability considerations.”

Horses for Courses

At a basic level, the preference of transmission over storage will depend on your goals.  For those interested in energy self-sufficiency and distributed generation, improved transmission runs contrary to their goals.  

The related goal of energy security can cut both ways: while a more integrated national grid might be more vulnerable to large scale blackouts, its greater size would make it less vulnerable to disturbances caused by the loss of any one source of generation.  Since transmission can either cause or prevent blackouts, a smarter, more fault tolerant grid seems a better way to combat blackouts than a less connected, more Balkanized grid.

When it comes to goals of increasing the penetration of renewable energy into the grid, electricity storage will likely be essential at high levels of penetration, and new transmission is essential to bring electricity from areas where renewable resources are plentiful to where they are plentiful to population and load centers.  

Relative Value

Leaving aside necessary new transmission to bring renewable electricity to market, and electricity storage which will likely be necessary to reach high degrees of grid penetration for renewable electricity, there is considerable scope for both electricity storage and a more robust national grid to make it cheaper and easier to allow quick renewable electricity integration.

 Unfortunately, comparing transmission and storage is very much apples and oranges.  Storage, in essence, takes electricity produced now and stores if for use later (transfer in time), while transmission takes electricity produced here to where it's needed there (transfer in space).  The relative value of transferring electricity in time and in space depends on the relative price of electricity here and now, to the price of electricity used there and then, as well as the cost in losses from the transfer.

In the balkanized North American grid, we have both daily fluctuation in price and wide geographical price differences, as well as differences in price fluctuations in timing.  These variations will make storage relatively more valuable in a location which is far from other parts of the grid, and which sees high daily variation in electricity prices due to variable supply and/or load.  A common example of this is that it is often cheaper to build a completely off-grid home if the home is more than a half mile from existing electricity lines.

In contrast, the low cost of connecting to grid service means that no one is envisioning building off-grid homes where electricity service already exists.  Note that policymakers are talking about Net Zero Energy Homes (i.e. homes which both import and export electricity from the grid,) not true Zero Energy Homes, which would supply all their own energy all the time.

In a 2005 study "Improving the Value of Wind Generation through Back-up Generation and Storage" from the California Energy Commission (CEC Study) evaluating the use of storage to allow wind to operate as a firm resource found that "even under fairly optimistic assumptions, the energy storage approach is unlikely to perform as well as operating under an Intermittent Resources."  If the economics of wind cannot be improved through the direct use of storage, a more robust transmission system will have to achieve benefits at significantly lower costs in order to improve wind economics.

A Simple Example

In order to directly compare the benefits of transmission and storage amid all these variables, I start with a simplified example where the two are more or less comparable.  Traveling from West to East is in many ways analogous to traveling forward in time as you cross into new time zones.  It's always an hour later in New York than it is in Chicago.  

Let's assume then that we have a single transmission line connecting two similar areas of the grid, where the marginal costs of electricity have identical patterns throughout the day, but located in time zones an hour apart. Sending electricity from West to East would then have the same economic value as storing the electricity for an hour in the Western grid, and releasing it an hour later.  Sending electricity from East to West would have the same economic value as discharging the same amount of electricity from storage, and then re-charging an hour later.

If, for simplicity, we assume that the electricity storage and transmission line have the same capacity, then the transmission line can operate similarly to electricity storage with capacity large enough to charge or discharge discharging continuously for two hours.  The two-hour capacity is necessary to compensate for the ability of the transmission line to move power into the past (East to West) as well as the future (West to East)

Still Apples and Oranges?

Some readers may protest that electricity storage has the advantage of charging when electricity costs are low (usually at night), and not discharging until prices peak (usually in the afternoon or evening.)  This actually makes less difference than might be expected, because the transmission line can be operating continuously, and the sum of one-hour differences in price will equal the difference between the peak price and the price in the overnight trough.  In other words, transmission makes up for the smaller price differentials with increased volume of electricity transferred.  

On the other hand, the value of transmission deriving from different prices between locales are assumed to be negligible in this example.  A look at a map of average electricity prices in the United States

Figure 4 is a large U.S. map showing the U.S. electric industry residential average retail price of electricity by State for 2003 in cents per kilowatthour. For more information, contact the National Energy Information Center at 202-586-8800.

shows that most East-West transmission lines across time zones will also benefit from highly significant differences in average electricity prices.  Since my example completely ignores these differences, my simple example is likely to greatly underestimate the value of transmission relative to storage.  

What Does it Cost?

According to the Electricity Storage Association,  the best storage technologies other than pumped hydropower (which I exclude from this analysis because new pumped hydropower developments are severely limited due to environmental and water rights issues) can store electricity for an incremental cost of about 2-5 cents per kilowatt-hour.  

In contrast, Wikipedia puts the cost of "[l]ong-distance transmission of electricity (thousands of miles) [at] US$ 0.005 to 0.02 per kilowatt-hour."  A one time-zone transmission line needs to be long enough to cover 15 degrees of longitude.  This is slightly over 1000 miles at the equator, but gets smaller as you move to higher latitudes.  In the United States, this varies between approximately 800 and 900 miles.  The shorter distance should put the cost of transmission at the low end of the range above, or 0.5 cents per kWh, or about a quarter to a fifth the cost of storage.

In my simple example, the cost of transmission per kWh will have to be increased to compensate for the greater number of kWh transferred, since a storage system would likely only be cycled once per day (for two hours of charge or discharge), while the transmission system will be operating whenever the hour-to-hour price differentials are high enough to make up for line losses.

A look at hourly prices for electricity in Ontario for December 3rd (the day I am writing this) show that prices are rising or falling significantly about 16 hours a day, meaning we expect the transmission line to handle about 8 times as many kWh as the electricity storage.  Hence the incremental costs for transmission may need to be increased from the above estimates to reflect the greater incremental costs due to line losses.  However, all the "cents per kWh" numbers above contain assumptions about frequency of usage to allocate capital, maintenance, and electricity losses between kWh used.  Storage technology for grid stabilization is most likely assumed to cycle approximately once per day, while this paper uses the assumption that a transmission line will be operated at 65% capacity, similar to the line in my example.  Therefore, if the cost for transmission needs to be scaled up to reflect the higher usage, it should likely be increased by a factor significantly below 8, and perhaps not at all.

Taking this together, the value of the ability of the transmission line to act like electricity storage should be between 1 and 4 cents per kWh, still slightly below the 2 to 5 cents per kWh for most storage technologies.  If we assume that there are any significant other benefits to transmission (such as increased diversification of power supplies and the ability to buy low and sell high between different regions, as discussed above), electricity transmission becomes the clear winner where it can be built.

Too Simple?

Clearly, my comparison for a trans-time-zone transmission line and electricity storage is still far too simple to capture the full benefits of either technology.  However, in an age when storage technologies are still mostly experimental while transmission technologies are well-established, it seems clear to me that our first efforts should be to capture those large-scale gains we can with a robust national grid.  With President-Elect Obama promising "green" infrastructure spending to jumpstart the economy, neglecting electricity transmission would be a tragic mistake.

What's Stopping Us?

To a believer in free markets, it's probably quite surprising that such large economic opportunities exist.  Similar to the untapped opportunities in energy efficiency, market barriers have crippled the national electric grid.  The most obvious barriers are those of people who object to how they look.  Because of the need for long, contiguous corridors, negotiation with individual landowners has delayed many projects for years.  For many large projects, the power of eminent domain is essential.  This is why T. Boone Pickens combined his wind plan with plans for a water pipeline from the Ogallala Aquifer.  In Texas, water projects have eminent domain, while electricity projects do not.  

There are also significant regulatory barriers.  Electricity deregulation in many states meant that utilities often had no incentive to invest in new transmission infrastructure[pdf].  Furthermore, electricity planning is done state-by-state and region by region, with the North America carved up into nine independent regions.  

Currently these problems are only being addressed on a state and regional basis.  A robust national grid will require all these problems to be addressed at a national level.  One approach might be for Congress to create a national transmission planning authority with the right of eminent domain, or the right to use the right of ways along the interstate highways system.

Is that too much to hope?

Tom Konrad

December 04, 2008

Two Dividend-Paying Energy-Efficiency Companies

Charles recently recommended a few dividend paying alternative energy companies as safe havens in the current turmoil.  Since I've been thinking along the same lines, I thought I'd add my own picks.  I currently like energy efficiency companies with solid balance sheets, because I believe that Obama's fiscal stimulus will contain significant money for green, energy-efficiency related jobs.  

That said, here are two I'd add to Charles' list.  These two also have the advantage of being pure-play (or nearly pure-play) bets on clean energy.

Name Ticker Yield Focus Related Articles
Waterfunace Renewable Energy WFI.TO, WFFIF.PK 3.27% Geothermal Heat Pumps Wind and Heat Pumps
New Flyer Industries NFI-UN.TO, NFYIF.PK 17.7% (based on 12x last monthly distribution) Bus manufacture New Flyer Industries

The New Flyer yield is not strictly a dividend payment.  This is an "income deposit security" paying a blend of interest on a subordinated bond plus a cash dividend.  The dividend varies from month to month, based on earnings, but currently about two-thirds of the distribution is interest.

DISCLOSURE: Tom Konrad has owns shares of  WFI and NFI-UN.

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.

December 02, 2008

A Few Dividend Paying Alt Energy Stocks

As I've discussed previously, things haven't been easy of late for alt energy stocks, especially those of the pure-play kind. A few days ago, I was asked which, if any, alt energy stocks I could recommend in this environment. My answer was: none. While people continue to go on television claiming that alt energy's problem has to do with falling oil prices, in my view the real risk at the moment has do with financing - financing for the companies producing the technologies and financing for their customers. The two business models are simultaneously under attack: for technology firms, the model whereby a company burns through loads of cash in the hopes of eventually commercializing  a homerun application is dead, and for power producers and households installing solar panels and wind turbines current credit costs don't permit the necessary high degrees of leverage. As I've argued before, a temporary (i.e. 12 to 18 months) drop in oil prices will not phase policy-makers, and most of the demand right now is policy-driven.

So, for now, I would stay away from most pure-play alt energy stocks, at least until capital markets settle down and credit markets really normalize. However, as we've pointed out on many occasions, there are a wealth of companies out there with diversified revenue streams and appreciable market capitalizations that are moving into alt energy and cleantech. The dramatic drop in equity markets over the past few months has made the dividend yield on some those firms look quite attractive. For long-term investors, the advantage of purchasing a stock with a high dividend yield is that, provided the company can continue paying the dividend, you lock in an attractive yield on your security and you get to benefit from capital appreciation once markets recover.              

The table below lists a few diversified stocks with exposure to alt energy that currently have an attractive dividend yield (>4%). The next step would be to look into the ability of the firm to maintain this yield throughout the bad economy. 

Name (ticker)

Div. Yield (%)

Main Alt Energy Areas
General Electric (GE) 7.20 Wind turbine manufacturing; wind park ownership
Otter Tail Corporation (OTTR) 6.30 Power generation; wind turbine components (DMI)
Portland General Electric Co. (POR) 5.40 Power generation with strong exposure to wind
Xcel Energy Inc. (XEL) 5.10 Power generation with strong exposure to wind
The Timken Company (TKR) 5.00 Bearings for wind turbines
Koppers Holdings (KOP) 4.10 Railways ties and utility poles (treated wood)

Besides Otter Tail, the names in this table are not typically labelled "green energy" or "alternative energy" stocks. Most of the pure-plays pay no dividend. As stated above, a necessary next step would be to look into these firms to see if they will be able to maintain this dividend.

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed here.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 01, 2008

Apologies For The Lack Of Posting

We wish to apologize for the lack of posting in the past few days. Tom has been on holidays and I have been very busy with work. We will be back with our normal posting schedule tomorrow.

Best,

Charles


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