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Alternative Energy Storage: Cheap is Outperforming Cool

John Petersen

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution.

I hope old friends and new readers alike will find the change refreshing. I know I will.

I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:
  • Manufactured energy storage devices are just plain boring;
  • Energy storage stocks have historically traded at "rust belt" valuations;
  • As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
  • As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.
Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just yesterday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In November of last year, I published an article titled "Alternative Energy Storage: Cheap Will Beat Cool" that discussed the difference between cool innovations and successful products. That article was the first time I segregated companies into a "cool group" and a "cheap group." It concluded with the suggestion that investors who wanted to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

I'm delighted to report that over the last five months, the market performance of the stocks I classified as cheap has absolutely crushed the market performance of the stocks I classified as cool.

The following table provides comparative price data for the short-list of battery companies I track and includes price data for two flywheel companies that I talk about frequently but omitted from my original table. It shows closing prices on November 14, 2008 and May 1, 2009, calculates the percentage of change over the last five months, and calculates current market capitalizations based on recent SEC reports.



14-Nov 1-May Percent Market Cap
Cool Group
Symbol Close Close Change Millions
  Ener1 HEV $6.75 $5.61
-16.89% $636.59
  Valence Technology VLNC $1.88 $2.18
15.96% $267.60
  Maxwell Technologies MXWL $6.50 $10.22
57.23% $235.91
  Advanced Battery ABAT $2.13 $2.76
29.58% $150.87
  Ultralife Batteries
ULBI $9.08 $7.39
-18.61% $127.17
  China BAK Battery
CBAK $1.99 $2.05
3.02% $118.24
  Altair Nanotechnologies ALTI $0.87 $1.12
29.48% $106.57
  Beacon Power BCON $0.82
$0.85
3.05% $95.13
  Hong Kong Highpower HPJ $3.50 $2.00
-42.86% $27.13






Cheap Group




  Enersys ENS $6.86 $18.66
172.01% $895.21
  Exide Technologies XIDE $3.38 $5.70
68.64% $430.22
  C&D Technologies CHP $1.94 $2.10
8.25% $55.12
  Axion Power International AXPW.OB $1.30 $1.50
15.38% $53.00
  Active Power ACPW $0.40
$0.58
43.75% $34.76
  ZBB Energy ZBB $0.93 $1.22
31.18% $12.82

Between the reference dates, a $1,000 index investment in each of the DJIA, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 3.5%. In comparison, a $1,000 investment in each of the cool companies would have resulted in an average portfolio appreciation of 6.7%. The real shocker is that a $1,000 investment in each of the cheap companies would have resulted in an average portfolio appreciation of 56.5%. I'm reluctant to boldly predict future trends, but I have no reason to believe that the cheap companies won't outperform both the broader market and the cool companies for the foreseeable future because they started from very low valuation levels and have a lot of catching up to do.

Blogging about emotionally charged alternative energy and energy storage issues is always a challenge because the critics are smart, opinionated and outspoken. As a result the comments to my articles are often more interesting than the articles themselves. Since I've received more than my share of fair criticism and learned some things along the way, I've decided to restructure my presentation tables. I'm not going to change the core data or the companies I track, only the manner of presentation.

The biggest impetus for the change is that both of my original groups include two types of entities: established companies with sustainable business models and emerging companies that haven't reached a point where their business models are sustainable. The downside is that it gives me four analytical classes instead of two. The upside is that it will simplify analysis and make the results more useful to investors. My restructured group classification and presentation tables follow.



14-Nov 1-May Percent Market Cap
Cool Emerging Group
Symbol Close Close Change Millions
  Ener1 HEV $6.75 $5.61
-16.89% $636.59
  Valence Technology VLNC $1.88 $2.18
15.96% $267.60
  Altair Nanotechnologies ALTI $0.87 $1.12
29.48% $106.57
  Beacon Power BCON $0.82
$0.85
3.05% $95.13






Cool Sustainable Group





  Maxwell Technologies MXWL $6.50 $10.22
57.23% $235.91
  Advanced Battery ABAT $2.13 $2.76
29.58% $150.87
  Ultralife Batteries
ULBI $9.08 $7.39
-18.61% $127.17
  China BAK Battery
CBAK $1.99 $2.05
3.02% $118.24
  Hong Kong Highpower HPJ $3.50 $2.00
-42.86% $27.13






Cheap Emerging Group





  Axion Power International AXPW.OB $1.30 $1.50
15.38% $53.00
  ZBB Energy ZBB $0.93 $1.22
31.18% $12.82






Cheap Sustainable Group





  Enersys ENS $6.86 $18.66
172.01% $895.21
  Exide Technologies XIDE $3.38 $5.70
68.64% $430.22
  C&D Technologies CHP $1.94 $2.10
8.25% $55.12
  Active Power ACPW $0.40
$0.58
43.75% $34.76

If I had used this four class analytical grouping from the beginning, the average portfolio performance for a $1,000 investment in each company would have been as follows:

Cool Emerging Group
7.9%
Cool Sustainable Group
5.7%
Cheap Emerging Group
23.3%
Cheap Sustainable Group
73.2%

All experienced investors know that equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last five months are an indication, the pendulum is starting to move back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.



Shares Price/ Price/ Price/ Book Value
Cool Emerging Group Symbol (000s) Earnings Book Sales Per Share
Ener1 HEV 113,474
6.47 97.60 $0.91
Valence Technology VLNC 122,754

9.39 -$0.51
Altair Nanotechnologies ALTI 95,153
2.53 18.87 $0.46
Beacon Power BCON 112,578
3.56 1367.00 $0.24
    Group Average


4.19 373.22







Cool Sustainable Group





Maxwell Technologies MXWL 23,083
3.58 2.81 $2.86
Advanced Battery ABAT 54,662 8.85 1.97 3.33 $1.40
Ultralife ULBI 17,208 9.43 1.40 0.48 $5.10
China BAK CBAK 57,680
0.73 0.47 $2.92
Hong Kong Highpower HPJ 13,563 13.16 1.87 0.41 $1.20
    Group Average

10.48
1.91 1.50







Cheap Emerging Group





Axion Power International AXPW.OB 35,333
6.69 60.25 $0.22
ZBB Energy ZBB 10,512
1.37 10.33 $0.88
    Group Average


4.03 35.29







Cheap Sustainable Group




Enersys ENS 47,975 9.24 1.24 0.38 $13.79
Exide Technologies XIDE 75,478 7.49 0.87 0.11 $6.21
C&D Technologies CHP 26,247
1.53 0.16 $1.43
Active Power ACPW 60,458
1.71 0.83 $0.35
    Group Average

8.37 1.34 0.37

As the cleantech revolution unfolds, the market will learn that every energy storage decision boils down to a cost-benefit analysis. It will also learn that the bulk of the incremental sales revenue will be funneled to companies that serve the average needs of the average user, rather than the extreme needs of the rare "power user." While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.
Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE), Enersys (ENS) Active Power (ACPW) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.



was posted on AltEnergyStocks.com.


       

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Comments

John,
Cheap companies will almost always have better valuations than cool ones... the re-alignment you expect is more likely to happen by some of the cool companies going bust, and others turning profitable and losing some of their cool.

Also, why do you categorize ZBB as a cheap company... I think flow batteries are pretty cool.

Tom, I personally believe that we are likely to see some price degradation in the Cool Emerging Group. But just once I wanted to write an article that didn't say anything bad about anybody. I also think the new presentation format does a pretty good job of highlighting the potential excesses without my beating on the issue.

I agree that ZBBs flow batteries are very cool. The fact is that most of companies are working on very cool initiatives, they're just not basing their entire public persona on cool.

My original cheap vs cool dichotomy was based on comparative cost per kWh data that I got from a Sandia report. Since ZBB's flow batteries are in the same price class as PbC, NaS and low speed flywheels, it ended up in the "cheap" category.

There has been a lot of talk about Warren Buffet's purchase of a 10% stake in BYD last year at a post-money valuation of $2.3 billion. I just pulled BYD's annual report and was able to calculate the following valuation metrics for the Buffet purchase:

Price/Earnings – 12.3
Price/Book – 1.18
Price/Sales – 0.6

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