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July 31, 2010

The Pure Technologies Takeover of Pressure Pipe Inspection Company

Tom Konrad CFA

In February, I published an interview with Sam Healey portfolio manager at Lamassu Holdings about Pure Technologies (PUR.V, PPEHF.PK), a company that can find and repair leaks in water systems without shutting down the system. Last week, Pure Technologies announced that it intended to acquire Pressure Pipe Inspection Company for cash and stock worth as much as C$34.9 million.  The market's reaction was initially positive with PUR.V gaining C$0.29 on Wednesday, the day following the announcement, but most of these gains were given back on Thursday and Friday.

My initial feeling is that this will be a good merger for Pure Technologies, but since Sam Healey follows the company much more closely than I, I thought I'd ask for his take, and also share it with you.  He was kind enough to share his thoughts even though he was on vacation.  Here is what Sam had to say:

The biggest plus of the PPIC acquisition is that they were PUR largest competitor and were active in Markets that PUR wanted to increase share in.  NA, mostly.  Also, PPIC would have provided an easy entrance into the space for larger competitors looking to expand into the space.  Thus, PUR has effectively increased their "moat".

PPIC did not sell any products, they functioned as a service company which means they ran at higher margins and thus the acquisition will not hurt PUR margins going forward.  The earn out (over 20 MM C$) suggests that annual revs will be in that neighborhood, up from 14.6 MM C$ last year, a 30% growth rate, which is encouraging.

What I am most excited about here is that there may be very large cross selling opportunities for PUR to sell its AFO permanent monitoring product to PPIC existing customers.  PPIC customers rely on PPIC for service related to inspection of large diameter pipe.  Many of these customers would benefit greatly from a permanent monitoring system, AFO, and given the success AFO has demonstrated in DC (recently announced - June I think - do not have my notes here) I suspect the sale will not be difficult should there be customer demand.  If that were to materialize it would result in both a nice ramp in product sales and recurring revenue at high margins for monitoring services.  That is the potential home run here.

That all makes sense to me.  The cross-selling opportunities can be especially important for a company like Pure Technologies which is creating a market for a new technology.

You can read the original Pure Technologies article here.

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.

July 26, 2010

The Big Short and Picking a Money Manager

If you're going to have someone else manage your money, consider their incentives carefully.

I just finished reading Micheal Lewis's excellent book The Big Short: Inside the Doomsday Machine on the Wall Street's role in the subprime mortgage meltdown and the few investors who saw it coming.The Big Short Cover

I began with a low opinion of the effectiveness of the vast majority fund managers and advisors who manage other people's money for a living, but the the highly-paid gross negligence and/or incompetence of the people running the CDO operations of the big Wall Street banks in the years leading up to the crisis shocked me anyway.  I may be cynical, but perhaps not cynical enough.

Incentives and the Crisis

Micheal Lewis makes the case that these people behaved the way they did because of their incentives.  In the concluding chapter he writes:

Greed on Wall St. was a given---almost an obligation.  The problem was the system of incentives that channeled the greed.

The few foresighted people Micheal Lewis writes about who shorted Collateralized Debt Obligations (CDOs) based on subprime mortgages made tens of millions of dollars for themselves, but the people who took the much larger long side of the bet also made (and were allowed to keep) tens or even hundreds of millions for themselves, even after their companies went bankrupt or were bailed out by the government.  Many are still running those same companies, and still being paid tens of millions of dollars to do so.  Back to Micheal Lewis:

What are the odds that people will make smart decisions about money if they don't need to make smart decisions---if they can get rich making dumb decisions?  The incentives on Wall Street were all wrong; they're still all wrong.

The financial reform package tries to address a few of these perverse incentives.   Unfortunately, any benefits of the package are likely to be short lived.  Rather than addressing the underlying structure of compensation and incentives for financial professionals, the reform bill attempts to micromanage a few details.  This may prevent the same problems from recurring in exactly the same way, but the great complexity of the bill makes it inevitable that perverse incentives will remain; they will just be different from the old ones, and lead to financial crises which appear different.

The People Managing Your Money

Perverse incentives may underlie financial crises, but their damage is not limited to a few spectacular banking implosions.  They can also cause slow, steady drains on investment returns that are so common that most people assume they are normal, and don't even notice their effects.

Last month, I was hiking with an angel investor who had just read The Big Short.  He came away from the book feeling that the market is rigged against the small investor.  I agreed with him, and asked what he was doing with the part of his portfolio that wasn't in his private Angel deals.  He told me it was being managed by an advisor at a large Wall Street bank, and he seemed comfortable with that.  I was shocked, but I should not have been.

How could a relatively sophisticated investor, who does not trust Wall Street banks, use those very same banks to manage his money? 

To answer my question, we first should try to understand the investing landscape open to small investors.  They have two choices to make.  First, they can try to beat the market, or adopt a passive investing strategy.  In this context, I am using a passive investing strategy to refer to portfolio allocation.  Within any possible portfolio allocation, it is possible to use a passive or active approach to stock selection, but for the purpose of simplicity, I will focus on passive vs. active asset allocation only.

A passive allocation will be the same regardless of market conditions; it depends only on the investor's needs.  An active allocation strategy considers the investor's needs, but also takes into account market conditions.

With a passive investing approach, portfolio selection involves choosing a sector selection to match the investors risk profile.  The use of a questionnaire and the ability to use simple software is enough to come up with an appropriate assets allocation.  Given the ease of designing passive portfolios, a passive investor should focus on keeping fees and expenses as low as possible.  An individual investor can find an appropriate allocation by using free web based software offered by most mutual fund families and discount brokers, or by paying an advisor to do the same.  Since most advisors charge 1% to 2% of Assets Under Management (AUM) annually, or will place the client in equally expensive mutual funds if they are paid by commission, the clear choice for a passive investor is to avoid the advisors, and use the least expensive index funds available.

Incentives Again: Why Most Advisors Advocate a Passive Approach to Asset Allocation

If passive investors should avoid advisors, do most advisors focus on active investing approaches?  They don't.  Most advisors will provide an investor with a passive portfolio allocation, and will in fact believe that this is the best choice for their clients.  While I believe this is far from the best approach for their clients, there would be a lot less employed advisors if most people agreed with me.  In other words, advisors' belief about the best way to manage money has more to do with advisors incentives than their client's best interest.

Consider the incentives shaping most investment advice.  For a start, SEC rules prohibit investment advisors and mutual funds from charging performance based fees, with only a few exemptions for rich or sophisticated clients.  If advisors could charge performance based fees, they would probably focus on performance: if the investor made money, the advisor would make money; if the investor lost money, so would the advisor.

In practice, most fees are a percentage of Assets Under Management (AUM) ("fee-based"), or based on commissions (again a percentage of assets invested) for mutual fund transactions.

Commission based advisors are the lowest rung, and are generally only the best choice for those with small portfolios.  Their incentives often lead them to place investors in high-fee mutual funds, and trade far to frequently.  The incentives of fee-only advisors with flat fees or fees based on a percentage of assets under management are just less bad, rather than good.  First of all, it's mathematically impossible for the average advisor to produce above average performance on a consistent basis.  And even the few who can produce above average performance have great difficulty demonstrating that ability, since it's near impossible to distinguish investment skill from a long run of good luck.  This is why mutual fund disclosures always have to include the phrase "past performance is no guarantee of future results."

"Model" is a Fancy Word for "Excuse"

Both fee and commission based advisors can increase their income more by acquiring new clients than by working hard to achieve a percentage or two more of extra return for existing clients.  So most advisors focus on attracting new clients, while working to persuade them that active portfolio management is either unnecessary or does not work.   Modern Portfolio Theory (MPT) is both the tool for passive portfolio allocation, and the theory used to back up the arguments that active portfolio allocation does not work.

MPT is an asset allocation model that has three very attractive characteristics to your average investment advisor who is more interested in gathering AUM than achieving good returns.
  1. MPT sounds impressive and scientific.  The very name tells us it's "Modern." "Theory" sounds very scientific.  How many advisors do you know who choose to use the more sophisticated and accurate Arbitrage Pricing Theory (of which MPT is a special case) instead?  I'll wager the answer is "none," and I think a large part of the reason is that the word "Modern" is more attractive to the general public than the word "Arbitrage."
  2. MPT relies on the assumption that markets are efficient.  The consequence of the efficient markets assumption is that no one can beat the market on a risk-adjusted basis, and so this leads to the conclusion that the best investing approach is a passive approach.  This is a very convenient assumption if you are an advisor with a mediocre track record trying to persuade a prospective or current client not to look for someone better.  The main problem with the efficient markets assumption is that it's completely contrary to the evidence.  If markets were efficient, Micheal Lewis wouldn't have had anyone to write about in The Big Short, and no one would have ever heard of Warren Buffet.  In fact, if markets were efficient, we would not have had the financial crisis in the first place, because CDOs would have traded for a fraction of the price they did in reality, and lenders would not have had incentives to make $750,000 mortgage loans to California strawberry pickers (an actual example from the book.) 
  3. MPT is easy to use.  While understanding the intricacies (and flaws) of MPT is beyond your average investment advisor, readily available software makes it very easy to implement: just interview the client to determine his or her risk tolerance and return requirements, and Voila! out pops a portfolio.  This leaves the investment advisor plenty of time to go about the business he is actually paid to do: finding more clients.
  4. Regulation leads to conservatism.  In a regulated industry, where every security in a client's portfolio has to be "appropriate," it's very convenient to have a widely accepted model to measure what is "appropriate."  The more widely accepted the model the easier it is to argue that it produces results that are appropriate to each client.  This is also about incentives: if an advisor is being audited by the SEC or his state regulator, they're very likely to ask if the advisor is recommending appropriate securities to clients.  They're not at all likely to ask if the advisor is actually making money for those same clients.  The stock of a large, well-regarded bank like Citigroup (C) would have probably been considered appropriate for a conservative investor at the start of 2008, while a speculative put betting the same stock would fall 50% by the end of the year would generally not be considered appropriate.  But Citigroup started 2008 at $30, and was down to $8 a year later.  The appropriate, conservative investment would have been down almost 75%, while the inappropriate, "risky" investment would have been up something like 600%.  While it's certainly possible to defend a long put as an appropriate part of a conservative portfolio, it takes real thought and work.  The path of least resistance is to do what everyone else is doing, and use MPT to explain the mediocre returns that result. 
In other words, Modern Portfolio theory is a pretty-sounding excuse that provides mediocre investment advisors reasons not to do the very difficult work of trying to outperform the market.  In a sense, it's a lot like the models described by Micheal Lewis used by the rating agencies Standard & Poors and Moodys to rate CDO tranches when they did not even have all the data that would be needed to perform an accurate assessment of the riskiness of the underlying loans.  Traders at the big Wall Street banks knew the weaknesses of the rating agencies' models far better than the people who used them, and they gamed them to get investment grade ratings on CDOs which would end up being worthless.  Because these CDOs were highly rated, nearly everyone felt safe buying them, including many traders at the same banks which were gaming the rating agencies' models in the first place.  

Using a Passive Investing Approach

That brings us back to the money-management options for a small investor.  Above, I made the case that unless you're going to try to beat the market, you should avoid investment advisors.  The self directed investor can replicate the results of the risk-adjusted passive portfolio allocation approach using free, widely available, portfolio analysis tools.  You can get yourself a MPT-based portfolio by using any of the portfolio analyzers on discount broker or mutual fund websites, and not have to pay for it.  You don't have to understand MPT to use it.  MPT's very good at producing average results, with tweaks to make your portfolio appropriate to your risk tolerance and investment goals.  I use Charles Schwab for most of my trading, and I've looked at their "Portfolio Analysis Tool" (sorry, the link only works if you are logged in to a Schwab account) and it will give you the same sorts of results you will get from your standard MPT-dependent investment advisor, without the hand-holding or the fees.

Attempting to Beat the Market

An investor who wants to beat the market has two options: attempt to do it himself, or find an investment advisor who has the skill to do it for him.

Managing your own money in an attempt to outperform the market  requires the most time, effort and skill.  I only advise it to people who are willing to and interested in spending a great deal of time and effort learning the necessary skills.  To successfully manage your own money, you'll need to find a mix of investing and analysis skills suited to your aptitude and emotional make-up.  Far more people try than succeed. 

Finding a Skilled Investment Advisor

If you want to take an active approach, but have decided that you don't have the time or dedication to invest your own money, you should look for a skilled advisor.  This will take considerable time and dedication, but it can be done, and if you do it right, you'll only have to do it once, while active investing is a never-ending process. 

Here is how I would go about finding a skilled advisor:  I'd begin with a process of elimination.  I'd want someone who at least attempts to analyze the market or securities he's investing in, and not just run them through a widely accepted model.  The main purpose of market models is not to produce superior returns, it's CYA for money managers. 

If an advisor utters any of the phrases "Modern Portfolio Theory," or "Efficient Markets" with anything other than derision, I'd leave immediately. These are signs that the advisor prefers a passive investing approach.  The rare advisors who follow active approaches do exist, despite the incentives.  I've met a few, although they have been far between.  But finding an advisor who does real analysis is just the first step. Next, you must determine if he or she is any good at it.

Looking at the advisor's track record is unlikely to help distinguish luck (good or bad) from skill.  Probably the smartest investment manager profiled in The Big Short was Mike Burry, and he suffered three years of negative performance from 2005 to 2007, right before he made incredible sums of money in 2008.

The only way I know to decide if an analyst is any good is to understand his or her methods.  Here are some positive signs I would look for:
  • Does he or she knows more than 99% of other investors about his or her specialty, without being reliant on some model from a third party.  In-house models are potentially okay, but I'd want to talk to the person who invented the model, and make sure they have an edge over all the other model-makers.
  • Has the advisor often been wrong before being right?  Ask the advisor to give an example of a time when they took a position, based on their analysis, that was contrary to market consensus and the position moved against them for an extended period.  If the position has since paid off spectacularly, you might have found a Mike Burry.  If the position is still moving against him, you may have found something even more valuable: you may have found a Mike Burry in 2007, right before his gigantic bet against the mortgage market paid off. 
Neither of these is a guarantee of competence.  Rather, I'm saying that knowledge is a much better sign of competence than ignorance, and always following the herd is another way to produce average results.  The reason to ask about trades that started off bad is to test if the trade was lucky, or based on astute analysis.  It's much easier to spot a profit opportunity than it is to predict when that opportunity will pay off.  Mike Burry got into his CDO bet three years too early because he could not believe that other investors would not soon be piling in to the same bets as the ones he was in, pushing the price up.  Investors who get into a position too early but are ready and able to stick with it still make money.  Investors who get in too late don't.

Final Thoughts  
Will it be easy for you to trust your money to an advisor who speaks candidly about times the market has moved against him?  It almost certainly won't be.  That is why such advisors are few and far between: despite their skill, they often have trouble gathering and keeping assets under management.  Mike Burry was particularly bad at handling people: he so annoyed his investors during his down period from 2005 to 2007 that nearly all of them abandoned him as soon as they could, even though he had just produced gigantic returns as the market imploded on nearly everyone else.

None of the three options I recommend is without flaws.  Managing your own money using a passive approach will produce average results.  Managing your own money with an active approach can be very risky, and takes more time, effort, and skill than most people have.  Finding a skilled active money manager is a good deal of work because there aren't very many of them, and it's often difficult to distinguish skill from luck.

Given these unpalatable options, many people who read this article will probably ignore my advice and decide to work with an MPT-touting investment advisor anyway.  To those who are tempted to do so, I ask: "What are your incentives?  Are you more interested in avoiding putting in effort today, or in achieving your investment goals?"


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.

July 23, 2010

Battery Cost Forecasts and The Origin of Specious*

*with humble apologies to Charles Darwin
John Petersen

The Oxford Dictionary defines the adjective 'specious' as:
  • Superficially plausible, but actually wrong;
  • Misleading in appearance, especially misleadingly attractive.
The Wiktionary offers a broader definition as:
  • Seemingly well-reasoned or factual, but actually fallacious or insincere; strongly held but false;
  • Having an attractive appearance intended to generate a favorable response; deceptively attractive.
Over the last two years I've patiently analyzed the evolving price and performance forecasts of electric vehicle advocates and lithium-ion battery developers. In the process I've shown them to be possible, but unlikely, and interdependent to the point where a single flawed assumption can level the entire house of cards.

I've also puzzled over the broader question of why supposedly reasonable businessmen would encourage market expectations that are so aggressive that the probability of delays, cost overruns, performance shortfalls and other predictable failures approaches certainty. Everyone knows that the stock market reacts badly to disappointment, so I've never been able to figure out why companies would voluntarily set themselves up for that kind of pain.

I found my explanation last week. The lights went on when I downloaded a new DOE Report titled "Economic Impact of Recovery Act Advanced Vehicle Investments," which just happened to coincide with groundbreaking ceremonies for Compact Power's new plant in Holland, Michigan that will create one new job for every million dollars of capital investment. When I compared the conclusions of this seven-page DOE report with the exhaustive technical discussions in the 380-page Annual Progress Report on Energy Storage Research and Development the DOE released in January, the differences were breathtaking.

Who'd have dreamed an industry could make that much progress in only six months.

The answer fell into place when I noticed that (a) the DOE press release uses a hyperlink to the White House for people who want to read the full text of the Report, and (b) the Report is not even hosted on the DOE's server. Since I've never encountered a situation where the government agency that generated a report left it out of their official record, the clear inference is that the Report is political theatre wrapped in a DOE cover.

Once you understand that The Origin of Specious is political rather than technical, everything else makes sense. Armed with barrels of taxpayer money, the political class has sought out battery developers who will adopt the party line and add technical credence to questionable ideological goals. Faced with a Hobson's choice between needed funding and technical integrity, the developers make the rational business decision and take the money, confident that future apologies will be easier to spin than current failure. Sprinkle in a healthy dose of optimism from journalists who don't bother checking facts and you have the perfect political story for the next five years.

American presidents are supposed to inspire with challenges like putting a man on the moon or tearing down the Berlin Wall. The great ones sometimes succeed. For lesser men, the grand visions of their day target the highest fruit on the lemon tree and bring us wars on poverty, drugs, terror, foreign countries and CO2 that inevitably fall short of the mark while leaving us no wiser, but a little poorer and a little less free.

We all know how well pre-election promises work out. While it gives me no end of comfort to hear presidential assurances that battery prices, healthcare costs and budget deficits will collapse over the next five years, I'm not quite ready to pay a premium price to invest in those outcomes.

At the close of business on Thursday, the electric vehicle complex including Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technology (VLNC) had combined 12-month revenues of $258 million and sported a combined market capitalization of $3.4 billion, including $900 million in stockholders' equity and $2.5 billion in blue sky premium.

In comparison, the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) had combined 12-month revenues of $4.6 billion and a combined market capitalization of $1.6 billion, including $1.2 billion in stockholders' equity and $460 million in blue sky premium.

Something is out of kilter when the electric vehicle complex has 6% of the sales and 77% of the stockholders equity of the lead-acid battery complex, but trades at twice the price.

Within a couple weeks, all of these companies will report second quarter results. The electric vehicle complex is likely to report bigger than expected losses - again, and at least for Ener1 and Valence, weak financial condition. In comparison the lead-acid complex is likely to once again report better than expected revenues, margins and financial condition. At some point the market will accept the cruel reality that political promises cannot repeal the laws of economic gravity, we can't waste scarce resources in an effort to conserve plentiful resources, and investments in vehicle electrification are bound to follow the tragic value trajectory blazed by fuel cells and corn ethanol, which have been favorites of the political class since I was a baby lawyer.

It's your money, but at least you understand The Origin of Specious.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

July 21, 2010

The Best Peak Oil Investments: Ten Electric and Hybrid Car Stocks

Tom Konrad CFA

Tesla Motors (TSLA) is not the only electric vehicle (EV) stock.  Here are nine other public companies helping to replace petroleum with electricity in our cars and trucks.

Early in this series on the Best Peak Oil Investments, I put together an in-depth comparison of alternative fuels.  I concluded that the best prospect for displacing oil in the long term is electricity supplemented by biofuels.  Vehicle Electrification is likely to come to dominate the transportation sector because only renewable electricity can supply energy on the scale that we currently use for transportation with limited use of land area.  Biofuels require far more land area to propel a vehicle the same distance.

Many investors see the long term promise of Electric Vehicles (EVs) and think it means that the first EV stock to go public on a North American exchange, Tesla Motors, Inc. (TSLA), will inevitably take off.  Similar thinking lead to the strong investor response to the A123 (AONE) IPO last year.  Such investors should remind themselves that just because an industry has great long term prospects does not mean that the early IPOs are great investments.  Solar energy also has great long term prospects, but investors who bought Sunpower (SPWRA) in the month after its IPO in 2006 for $26 to $32 would now only have half their initial investment after four years.  Earlier solar IPOs were even worse.  Does anyone remember Astropower?  The company declared bankruptcy in 2004.  I can't find the date that it went public, but I remember that it was public in 1999 when I attended an investor presentation by the company President Dr. Barnett.  I bought and sold a small position in the stock shortly after for a nice profit, holding it less than a month.  I believe the people who make the most money on Tesla will also be the traders, not the long term investors, at least in the next few years.

A great technology does not guarantee a great stock, and buying the high-profile leader in a hot sector does not make an investor's prospects any better.  So if you still want to invest in vehicle electrification, here are nine other companies to consider.  Most are dogs, but one or two will almost certainly do better than Tesla, and the fact that these stocks are getting so much less investor attention means that you have a much better chance finding a diamond in the rough.

The Dogs

Li-ion Motors (LMCO.OB) develops and markets lithium-ion powered vehicles, from electric bicycles, scooters, and mopeds, to cars.  It's unclear if they have much proprietary technology.  Financially, the company is on shaky ground, with an annual loss of about $2M and net current assets of only $570,000 in the most recent quarter, the majority of which is "advances to related parties."  The cash flow statement is dominated by advances and payments from related parties, which raises questions in my mind about financial transparency and controls.  However, even without that, Li-ion Motors appears to need to continually raise substantial cash in order to continue operations.  Opinion: Avoid.

Raser Technologies (RZ) Raser Technologies is primarily a geothermal power development firm with a hybrid vehicle arm.  The hybrid vehicle division has developed a drive train technology for larger extended range electric vehicles such as SUVs and light trucks.  Raser is currently experiencing a severe cash flow problem requiring it to sell assets to repay debt.  Opinion: Avoid

ZAP (ZAAP.OB) Zap has been around for quite a while, and has earned a reputation for over-promising and under-delivering its neighborhood electric vehicles.  They recently acquired a large stake in a Chinese automaker and intend to ramp up production.  Given the company's continuing losses and weak balance sheet, they will have to continue to raise new equity and convertible debt, most likely diluting current shareholders.  Opinion: Avoid.

Speculative Bets

ZENN Motor Company (ZNNMF.PK)  ZENN Motor Company develops electric vehicle technologies and solutions that will incorporate EEStor's solid state electrical energy storage units. The Company markets its products primarily to original equipment manufacturers.  ZENN has a large stake in the secretive Austin, TX based EEStor.  If EEStor succeeds in commercializing its novel energy storage devices at reasonable cost, they will be transformational for the electric vehicle industry because of their promised high energy density, quick charge time, and light weight.  Zenn shareholders will stand to profit handsomely.  If not, ZENN is likely to continue to bleed cash rapidly, and will probably need to raise more money before the end of 2010, to the detriment of current shareholders.  Opinion: Avoid.

Balqon Corporation (BLQN.OB) is a developer and manufacturer of zero emission heavy-duty electric trucks and tractors for both off-highway and on-highway applications.  I think that the short-haul electric trucks and heavy equipment that Balqon focuses on have much better short term prospects than electric cars because such trucks are typically fleet vehicles and have predictable driving patterns.  The high up-front costs, low operating costs, and limited range of EVs mean that constant-length routes, heavy usage, and a fixed home base all greatly improve the economics.  The industrial and large commercial owners of such trucks are also likely to already have the heavy-duty electric grid connections needed for rapid charging of such vehicles.  Like most of the other companies listed here, Balqon is also not profitable, and will need to raise money on a fairly regular basis before they reach profitability, and which they have been doing through the sale of convertible debt and warrants.  Because of the continued fund raising, I would avoid the common stock, but expert accredited investors might find it worth their while to investigate the terms of the next convertible offering.  Note that I have not investigated the terms, and am not advising on any such investment.  I just think it might be worth looking into for expert investors.  Opinion: Worth watching.

UQM Technologies (UQM) designs and manufactures electric motors and controllers for EVs and HEVs.  They have experience with electrifying everything from bikes to military vehicles to buses, cars, and trucks.  UQM has a collaboration with first tier auto parts manufacturer BorgWarner (BWA) to develop electric powertrain components, and last year signed an agreement with Coda Automotive (a private Califronia based EV maker) to supply electric proplusion systems for ten years.  They have also received one of the ARRA manufacturing grants.  Although UQM is not profitable and has negative cash flow, they have several years' worth of cash on the balance sheet, and so may be able to reach profitability without further fund raising, although they will most likely continue raising money to fuel expansion to meet their rapid growth in orders.  Opinion: Worth watching.

The Profitable Companies

NEO Material Technologies (NEM.TO) is a producer, processor and developer of neodymium-iron-boron magnetic powders, rare earths and zirconium-based engineering materials and applications, and other high value niche metals and their compounds through its Magnequench and Performance Materials business divisions.  NEO's products are useful in miniaturization, emissions control, and the efficient, lightweight motors needed for electric vehicles.  Although most of the company's revenues come from products other than electric motors, a rapid expansion of the EV industry should increase demand for the company's products.  Unlike most of the other EV stocks listed here, NEO is a global company operating in ten countries with a record of positive cash flow and earnings, and no net debt.  With trailing 12 month earnings of C$0.31, the stock is a reasonable value at the July 13 closing price of C$3.62.  Opinion: Worth watching.

CPS Technologies Corp. (CPSH.OB) develops and manufacturers components using advanced materials, especially combinations of metals and ceramics.  While only a small portion of their business currently comes from hybrid and electric vehicles, they are profitable, have a strong balance sheet and cash flow, and no net debt.  Other alternative energy applications for the company's products include mass transit and wind turbines.  Earnings have been only $0.05 per share for the last year, but the company is experiencing rapid growth, with sales doubling between 2008 and 2009.  If this growth were to continue for the next few years, the company should be worth its recent $1.60 share price, but I don't know the company well enough to come up with my own projection. Opinion: Worth researching further.

BYD Company, Ltd. (BYDDY.PK) is a Hong-Kong Chinese battery manufacturer which launched a electric vehicle division in 2003.  They are already selling electric cars and buses in China, and expect to have models meeting Western safety standards for sale in 2011.  The BYD gasoline-powered F3 sold 24,000 units in China in the first five months of 2010. If any company is going to mass produce an affordable, mass market electric car at high volumes in the next couple of years, I think it's a lot more likely to be BYD than Tesla.  BYD's battery business is profitable, with total company 2009 earnings about $0.26 a share.  Warren Buffett's MidAmerican holdings took a 10% stake in BYD for $232 million in 2009, which would value the company at $2.3 Billion, or about $1 per share.  Buffett's investment helped the company by lending credibility and raising investor interest, but at current prices I would not expect new investors to make money.  Opinion: Worth further research if the stock falls below $3.


I've not looked at any of these companies closely enough to make a buy decision, although it was easy to rule out several.  Of the ones that are left, I think Neo Material Technologies, CPS Technologies Corp, and UQM Technologies are the most likely to be good values at current prices.  I'd buy any of these three before I'd buy Tesla.

This article is part 18 of my Best Peak Oil Investments Series, the index of which is here.

DISCLOSURE: No Positions.

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.

July 19, 2010

Metrics for Thin Film Solar CIGS Company Comparisons

Joseph McCabe

Many people ask me, “which CIGS company is going to emerge as winner in the race towards high efficiency thin film PV’s? To provide an enlightened perspective to the question, some historical perspectives are needed.

First Solar (FSLR) has helped the Thin Film PV Industry by proving that respectable solar to electric area efficiencies can be achieved in a low cost manufacturing processes, with respectable performance over time. First Solar’s technology is cadmium telluride (CdTe) on glass. Previously, amorphous silicon was the thin film leader, with the highest commercially available thin film area efficiencies; currently they have a challenge in today’s low cost, higher efficiency, crystalline PV market. CIGS (copper, indium, gallium and selenium) currently holds the world efficiency record for a single layer thin film PV deposition in a laboratory setting. The promise of CIGS is that it can surpass the commercial manufacturing efficiency of the other thin film technologies in the near term.

In a recent presentation at Intersolar in San Francisco by David Eaglesham of First Solar showed their CapEx (the capital expense for the plant and manufacturing equipment) at $0.75/W, roadmapping (RM, future expected levels) to $0.65/W; manufacturing (mfg) costs (including depreciation and recycling) currently at $0.81/W, RM to $0.52/W; and current area efficiencies at 11%, RM to 14%. So a CIGS-on-glass company will need to compete with these current and future benchmarks to be at least competitive with First Solar. Flexible CIGS might have some greater market opportunities discussed below.

A second order performance factor in the PV technology race is temperature correction. PV is a direct energy conversion technology, which works better at lower temperatures. As PV modules are integrated into conventional building materials such as single ply roofing, standing seam metal roofing, or automobile surfaces, the modules will become hotter, and thus perform less than rack mounted PV modules which have air movement on the back sides. The moral of the finer system level details is that annual performance can vary with the various manufacturers’ module technology and should be a consideration when comparing various companies and technologies. Perhaps this can be a topic of a future altenergystocks article.

There is an additional economic metric which is required of PV systems, called balance of systems costs (BOS). Most PV on glass has similar BOS, between $1 and $3 a watt system level installation costs. The lower the module efficiency, the higher the area related BOS costs. Comparing 10% and 20% efficient modules both with area BOS of $2/W, the lower efficiency module has twice the costs because it uses twice the area. As the price of modules is reduced, the BOS becomes a more dominant factor in the installed system costs. A Deutsche Bank (DB) report expresses the concepts better than can be accomplished here. {July 9, 2007, DB “Technology and economics; thin films and crystalline silicon”} The costs are no longer valid, but the technology discussions are valuable. All manufacturers are being judged on their products utilization in a system that provides long term performance, expressed in the levelized cost of energy from the lifetime costs of the system.

From the previously mentioned DB report: “CIGS on flexible substrates offers a potential low cost, higher conversion efficiency modules, but has yet to enter commercial production.” And “We believe that flexible substrate CIGS based modules could have excellent applicability for building integrated PV (BIPV) applications as well as other applications like consumer electronics, and portable devices.” Be looking for the flexible CIGS products which have both TUV and UL certifications indicating successful completion of both long-term performance and safety testing.

Some CIGS on glass companies have been around for a long time, for example Solar Frontiers (Formerly Showa Shell, formally Shell, formally Siemens…). They make a beautiful, monolithic black glass modules with respectable performance, perfect for a vertical building integration application. Other companies are newer, some deposit CIGS on glass and others have flexible products and one coats the inside of glass tubes with CIGS. For CIGS, there is an inherent CapEx embedded in the deposition process. Current and RM CapEx should be considered for the various sputtering, electrodepositing, co-evaporation-in-vacuum or sintering processes used in CIGS manufacturing when comparing the various company technologies.

In summary, look for low manufacturing and capital equipment costs for a high efficiency CIGS technology which can reduce balance of systems costs. The winner in the race towards higher efficiency CIGS thin film PV systems will be the company that can provide long term confidence in their product, at system level costs similar or lower than First Solar, and solid business plan execution.

Joseph McCabe is a solar industry veteran with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. Joe can be reached at energy [no space] ideas at gmail dotcom.

July 16, 2010

My #1 Rule of Investing

Tom Konrad CFA

Rules of Investing

Warren Buffett says "The first rule of Investing is don't lose money; the second rule is don't forget rule #1."

Jim Hansen at Ravenna Capital Management and publisher of the Master Resource Report about oil and other energy news has a "prime directive" (a la Star Trek) about oil prognostication which is "never predict prices."

These rules have to be taken metaphorically, not literally. 

Buffett's rule is too general to be useful.  I take his message to mean that care to avoid losses is more effective than chasing gains.  That's sage advice.  Last year I showed how a stock market investor gains more by being out of the market on the worst months than he gains by being in the market on the best months

What Buffett's rule does not tell us is how not to take losses.  "Don't lose money" is a great bumper sticker or pithy saying to keep on your desk, but not of much practical value taken alone.  All investments hold risk, and you might lose money in anything.  If we took him literally, we'd never invest in anything.

As for Jim Hansen's "prime directive," I agree with the subtext: If you predict the oil price, you will be wrong.  In fact, I think this prime directive applies to a lot more than just oil: if you try to predict price in any somewhat efficienct market, you will be wrong.  But again, the directive is far from useful in investing practice.  Investing is all about making predictions.  If I buy any security, be it a stock, a bond, a commodity such as oil, or a mutual fund, I've made a prediction about price.  I've essentially predicted that the price of the security (plus any income from it) will go up fast enough to meet whatever goals I have for the investment. 

A Rule You Can Use

As an investor, I have to predict price or stop being an investor.  Yet I know that my prediction will be wrong, and I want to be careful not to lose money.  So my rule is:

Be Prepared to be Surprised

Any time you make an investment, you're making a prediction about price.  You can be surprised in a good way (your stock goes up 200% when you only thought it would go up 50%), or you can be surprised in a dangerous way (the company goes bankrupt).  We don't need to prepare for the good surprises, but we do need to prepare for the dangerous ones.  Investors who tell themselves that something bad isn't going to happen may be right a few times, but the more times they are right, the more confident they become that they can ignore risks.  Usually sooner, but sometimes later, they are surprised, and they lose everything because there was no contingency plan.

Surprises Everywhere

The market is not the only place where this rule applies. 

For example, if you are single, and want a date, be prepared to be surprised.  Suppose you do find that tall, dark, and handsome doctor or blond bombshell who always laughs at your jokes and who seems to have every item on your wish-list.  The tall, dark and handsome doctor might not be forthcoming with the fact that he's a mini-Tiger Woods: i.e. he has two kids, a wife and a few other women on the side.  The blond bombshell could be laughing at your jokes because she is sizing up your paycheck and calculating her future alimony payment.

When anything seems too good to be true, it probably is. 

Preparation beats Prediction

Dating may be complex; but investing is simpler.  There's only one type of bad surprise: surprises that lose you a lot of money.  Be prepared for the catastrophic event even though you're certain that there is no way it could happen.  

You did not need to predict the 2008 stock market meltdown to be prepared.  When the Dow was over 12,000, you could have bought puts betting it would fall below 10,000 for pennies on the dollar, enough to cover all your losses when the Dow hit 9,000, and even have a net gain when it fell below 8,000.  Buying those puts is preparation.  A stop-loss order that automatically sells a position if it falls to far is also preparation, although they open you up to liqidity risks during market turmoil, as we saw when the Dow fell 9% and then rebounded on May 6th.  A watchful eye on the market and a willingness to sell at a small loss can also protect you from much worse losses, but only if you are a dedicated market watcher and have thought through what a disaster might look like before it happens.

How do you know what a disaster might look like?  The exercise I did in February is a start: Try imagining what it would take to make you lose all (or most) of your money over the next year.  Once you've dreamed up as many such doomsday scenarios as you can, you can change your portfolio to reduce your vulnerability to the most worrying scenarios.  If you've already considereed what a potential investing disaster might look like before it happens, you'll be much more ready to sell and cut your losses while it's still developing than if you had never given a second thought as to what it might look like.  You won't think of everything, but if the news or market action does not fit with a scenario you've thought of, it's time to start expecting the worst.


The most important way to prevent market surprises from becoming large portfolio losses is to keep an open mind.  While we can't think of everything that might go wrong and cause our stocks to tank, a prudent investor remembers that there are always dangerous possibilities.  Expect to be surprised, and plan defensive strategies.  If we don't expect to be surprised, we're much more likely to ignore the early warning signs of a catastrophic market move, thinking that they are just momentary aberrations that will soon correct themselves.

We must predict price to invest, so we need to recognize quickly when our predictions go wrong.  Being prepared to be surprised will help keep us in compliance with Buffett's first rule: "Don't lose money." 

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.

July 14, 2010

Why Energy Storage Investors Must Understand Resource Constraints

John Petersen

This Saturday marks the second anniversary of my blog, which began with an article titled Lithium-ion Batteries and Centerfolds. Over time my archive has grown to 142 articles on energy storage devices, the companies that make them and their crucial role as enabling technologies for wind and solar power, transportation and the smart grid. While cleantech bloggers usually focus on new technologies that might be game-changers, I'd rather focus on major enhancements to proven technologies from established industry leaders. The reason is simple, hot new technologies have limited investment value if the world can't produce enough raw materials to implement them.

Last month I spoke at the Ecologic Institute's Smart Energy Dialogue in Berlin. Since most people have a hard time internalizing immense numbers like a trillion dollar budget deficit, I used the following table to summarize global mineral production in 2009 and translate the huge numbers to more digestible per capita figures.

Natural Annual Production Per
Resource (Metric Tons) Capita
Crude Oil 4,189,210,000 616 kg
Raw Steel 1,100,000,000 162 kg
Aluminum 36,900,000 5.4 kg
Copper 15,800,000 2.3 kg
Lead 3,900,000 1.6 kg
Nickel 1,430,000 570 g
Cobalt 62,000 201 g
Uranium 42,700 6 g
Lanthanum 32,900 5 g
Silver 21,400 3 g
Neodymium 19,100 3 g
Lithium 18,000 3 g

This is scary stuff for baby boomers like me who grew up thinking surplus and plenty were god-given rights and part of the natural order. Production of minor metals can be increased with enough time, effort and investment. Significantly increasing global production of core industrial metals is a different story altogether.

If you're reading this blog, you used more than your share of last year's global resource production. The only reason you got away with it is that somebody else, actually a lot of somebody elses, used less than their share. That, by definition, is an unsustainable long-term dynamic. The ugly truth is we all have to change our wasteful ways because the world's emerging economies are forcing the issue. The following cartoon from Jan Daraz was published in the last issue of Batteries International and is almost too true to be funny.

7.14.10 BI Cartoon.jpg

The biggest challenge of our age is finding relevant scale solutions to persistent shortages of water, food, energy and every commodity you can imagine. The trick will be finding ways to raise the standard of living in emerging economies without crushing our own. We simply can't dig our way out of this hole.

I'm a strident critic of plug-in vehicles like the Nissan Leaf (NASNY.PK), the Mitsubishi MiEV (MMTOF.PK), the Tesla Roadster (TSLA) and the GM Volt because they use pornographic amounts of highly processed new industrial and exotic metals to save a couple hundred gallons of gas per year. Since it doesn't take more than a cursory glance at the mineral production table to see that the natural resource balance is unsustainable, the only rational conclusion is that plug-in vehicle business models are a catastrophe in the making for investors.

While I've occasionally been harsh with lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI), my criticisms have focused on their fawning eagerness to support the plug-in vehicle hysteria instead of focusing on applications that need the size, weight and energy density benefits of their products. There's no escaping the reality, lithium-ion batteries are too valuable to waste on plug-in vehicles. The following table summarizes potential uses for lithium-ion batteries:

Device Type Battery Capacity Price Sensitivity
Cellphones & Smartphones 5 to 10 wh Lowest
Portable medical devices 10 to 50 wh Very low
Laptop computers 20 to 50 wh Low
E-bikes and scooters 500 to 1,000 wh Moderate
1,000 to 1,500 wh Moderate
PHEVs 10,000 to 16,000 wh High
BEVs 24,000 to 50,000 wh Very high
Utility applications 500,000+ wh Highest

Since I learned in kindergarten that one can't buy for a dime, sell for a nickel and make it up on volume, I have a hard time understanding the logic of a business model that's focused on customers who need a premium product but don't want to pay a fair price. That kind of price pressure may be a good thing for consumers, but it's never a good thing for stockholders of battery manufacturers.

In an effort to milk the plug-in vehicle exuberance for all it's worth, many lithium-ion battery developers wax prophetic on how great things will be once they finish their R&D, build their factories, slash their production costs, find customers that aren't insolvent or teetering on the brink and show Asia how to manufacture efficiently. Until these companies accept their own limitations and develop the business sense to focus on the highest and best uses for their products, they'll continue squandering stockholders' money chasing pipe dreams.

I'm a big fan of lead-acid batteries because the raw materials typically come from recycled batteries and offer a sensible balance between conservation and sustainability. In other words, they're cheap and plentiful. Lead-acid may not be the best technology for all uses, and it certainly won't work in cellphones and other devices where size and weight are mission critical constraints, but for mundane storage applications where costs and benefits matter, lead-acid and perhaps molten salt are the only battery technologies that have a chance of success.

Notwithstanding disparaging gossip that compares the best lithium-ion batteries with ordinary starter batteries, the lead-acid sector has experienced a renaissance over the last few years as new manufacturing methods and materials were used to enhance vintage technology. There's no way around the size and weight limitations, but gains in energy, power and cycle life for the best lead-acid batteries have been impressive. As a result today's advanced lead-acid batteries bear little or no resemblance to common starter batteries and offer extraordinary price performance when compared with other advanced batteries.

Despite impressive product performance gains, the leading lead-acid battery manufacturers like Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP), along with advanced technology developers like Axion Power (AXPW.OB), trade at a fraction of the valuations for their riskier cousins. Over the next few quarters the valuation disparities will become painfully obvious as growth rates the lead-acid sector soar while the lithium-ion sector stagnates.

Like many observers, I believe these turbulent times are the dawn of the Age of Cleantech, the sixth industrial revolution. I also put a lot of stock in Ray Kurzweil's theory that "we won't experience 100 years of progress in the 21st century—it will be more like 20,000 years of progress." Notwithstanding a firm conviction that we're entering a new age, I'm painfully aware that technology alone cannot change resource production constraints, it cannot change population growth, it cannot change the human desire for something better and it cannot change the laws of chemistry. Unfortunately, investors who believe that Moore's Law and the other rules we learned during the IT revolution apply to cleantech are in for a very rude awakening.

The one factor that makes the cleantech revolution different from all its predecessors is the unbridled arrogance of policy wonks who don't understand things like resource constraints and sincerely believe they can control the direction and pace of technological development by spending money on the pet projects of ideologues. A brief history of the serial failures of our technology du jour energy policy follows:

25 years ago Methanol
15 years ago Electric Vehicles
10 years ago HEVs and Electric Vehicles
5 years ago Hydrogen Fuel Cells
3 years ago Ethanol and Biofuels
Today Plug-in Vehicles
2012 Whither bloweth the wind?

The Spanish poet and philosopher George Santayana wrote, "Those who cannot remember the past are condemned to repeat it." The government's track record of picking energy technology winners currently stands at 0 for 5. Any questions?

Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its stock.

July 13, 2010

Ten Green Energy Gambles for 2010: Q2 Update

Tom Konrad CFA

My speculative green gambles still have chips, but the mild decline of the stock market so far this year is not enough to make them really pay off, yet.

In January, I brought readers a collection of nine bearish puts on non-green companies and ETFs and one tiny energy efficiency company with a chance of taking off big before the end of the year.  They considered of bets against three fossil energy companies, four travel and leisure stocks, a Mexico ETF [EWW], a Trucking company (JB Hunt [JBHT]), and a long bet on Power Efficiency Corp [PEFF.OB].   These puts are intended as a complement to my more conservative Ten Green Energy Stocks for 2010, and as a possible hedge for those stocks in a green portfolio.

The energy companies are Consol Energy [CNX], Peabody Energy [BTU], and Chesapeake Energy [CHK], all of which have fallen considerably since the start of the year, making the Puts against their stocks the best performers in the portfolio.  The fall in these coal and shale gas companies seems to be mostly unrelated to BP's Deepwater Horizon oil spill, since the fall relative to the general market predates the disaster.

The travel stocks I thought worth betting against are airlines Delta Airlines [DAL], AMR Corporation [AMR], and Southwest Airlines [LUV], trucking company JB Hunt [JBHT], and Starwood Hotels [HOT].  These stocks have been strong this year, making the puts against them the worst performers of the lot.  The two remaining gambles were puts against the Mexican ETF [EWW].  My one long bet was Power Efficiency Corporation, which has also fallen since the start of the year.

Overall Performance

Overall, a speculator who decided to buy this portfolio in January, would still be at the table six months late, having lost about a quarter of his money.  However, in my most recent update on these gambles in late April, I concluded that "it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price."   That has so far turned out to be excellent advice, since I gave it right before the stock market started falling in April.

The chart below shows the performance of the portfolio of all ten gambles (dark blue), and each of the portfolio segments (Travel, Energy, and Miscellaneous) against a benchmark that is 80% composed of a put against the Dow Jones Industrials and 20% of the Powershares Wilderhill Clean Energy Index (PBW).  The light blue "Portfolio 2" line shows the returns that would have accrued to an investor who followed my April 27 suggestion, and moved 30% of his invested funds into additional puts against HOT, LUV, and JBHT.  An investor who had invested new funds in the puts on HOT, LUV, and JBHTwould have done even better.
10 Green Gambles for 2010 Q2 Performance chart
Although the market as a whole has fallen this year, the fall has not as yet been drastic enough for most of these gambles to pay off, although investors who followed my April 27th suggestion to increase their bearish gambles would be slightly ahead for the year so far. 

The Second Half

Going forward, I remain bearish for the second half of the year.  At the start of the year, stocks were generally priced for a swift economic recovery, which I have long though was unlikely to happen, and now the general economic consensus seems to me moving in my direction.  If the stock market begins to price in a double-dip recession or just a long period of little or no economic growth as I expect, we will see further economic declines.

I continue to think that these gambles are an excellent hedge against the very real possibility of a considerable market decline in the second half of 2010, and since they are mostly focused on fossil fuel producers and fossil fuel dependent industries, they will also continue to make your portfolio that much greener while providing protection against general stock market declines.  You can find the full list of ten green gambles here, although if you are considering investing now, it probably makes sense to choose puts on the same underlying stocks that will expire in January 2012, rather than January 2011.

Change since 1/7/2010
CHK Jan 2011 17.500 put 36%
CNX Jan 2011 35.000 put 97%
BTU Jan 2011 30.000 put 8%
DAL Jan 2011 7.500 put -41%
AMR Jan 2011 5.000 put -32%
LUV Jan 2011 7.500 put -70%
HOT Jan 2011 25.000 put -57%
JBHT Jan 2011 20.000 put -46%
EWW Jan 2011 30.000 put -30%
Power Efficiency (PEFF.OB)
Portfolio -24.0%
Portfolio 2 -0.3%
Benchmark -13.6%
Energy 49%
Travel -50%
Misc -34%


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.

July 11, 2010

Modern Energy Investor Forum: Denver, CO – Sep. 22-25

In more than 20 years of brokering relationships between investors and the natural resources industry, I’ve never had as many investors tell me in the last year that they’re having a difficult time identifying and engaging with high-quality companies in clean technology.

Why is this? Some complain that the industry is too new and unsettled to differentiate between top-grade businesses and pretenders. Others have told me that too few companies have strong business plans and can account for the uncertainty in the markets or in federal legislation. They go to conferences and are inundated with pitches from companies that may or not be real players.

In response, I tell them that the Modern Energy Investor Forum, held in Denver from Sep. 22-25, is designed to address their concerns.

The Modern Energy Investor Forum is guided by a 1:1 philosophy. For 25 years, we have specialized in putting investors and businesses together in a comfortable, personalized atmosphere. We go beyond prescreening businesses and investors – we work with attendees to identify the types of investors or companies they want to meet, and then facilitate 1:1 conversations to the benefit of both parties. Specifically, this means that:

1. We accept only the most qualified companies that meet certain criteria designed to make them attractive to investors.
2. We maintain a pre-specified ratio of investors to businesses, which allows investors to spend their time getting to know executives from good companies.
3. We make time for 1:1 meetings.

To qualify for attendance, click here. To view the invitation for the conference, click here.

This year’s conference will feature:

  • Presentations from some of the highest-potential modern energy companies in the world.
  • Engaging, informative panel discussions, including on the topic of “Green Economics and the 21st Century Challenge.”
  • Sessions dedicated to:
    • Power Generation: Base Load and Renewables
    • Power Management: Smart Grid and Infrastructure
    • Transportation and Fuels
  • Keynote speakers including:
    • Jigar Shah, CEO, Carbon War Room
    • Richard Ashby, CFO and Treasurer, RES Americas
    • Robert Glennon, Author, Unquenchable
    • Robert Dixon, Leader, Climate and Chemical Investments, The World Bank Group

For more information on this year’s conference, or to register to attend, please visit the Meetings International Natural Resources Enterprise Website or contact Alexis Bogart at 303-377-6463 or alexis@minellc.com.

Michele Ashby

The preceding post is a Special Information Supplement by our Featured Company MiNELLC.

July 10, 2010

Toyota's Straight Talk On Plug-in Vehicles

John Petersen

Most investors know that Toyota Motors (TM) is the world's biggest manufacturer of hybrid electric vehicles, or HEVs. Since 1997, Toyota has sold over two million cars using its Hybrid Synergy Drive® and earned a sterling reputation for fuel efficiency and customer satisfaction. What many don't realize is that Toyota is also the world's biggest manufacturer of advanced automotive battery packs. Toyota entered the battery business in 1996 when it bought a 40% interest in Panasonic EV Energy, a joint venture company that was formed to make NiMH batteries and battery packs for the Prius. Over time, Toyota gradually increased its stake to 80.5% and Panasonic bought a controlling interest in Sanyo. In June of this year, Panasonic EV Energy changed its name to Primearth EV Energy, presumably to reduce confusion over the fact that Toyota made Panasonic branded batteries while Panasonic made Sanyo branded batteries.

Historically Toyota has been quite conservative about the potential use of lithium-ion batteries in vehicles and has unequivocally stood by NiMH for its HEV lines, primarily because of battery cost concerns. Despite its dominant position in the HEV markets, Toyota has been quietly developing lithium-ion batteries for plug-in hybrid vehicle, or PHV, systems and late last year it launched a three year program to deploy and test a 600 vehicle plug-in fleet in Japan, North America and Europe. Last week a reader sent me a link to Toyota's ESQ Communications, an easy to navigate, feature-rich and informative website filled with straight talk and balanced information to help consumers and investors separate hype from reality in the battery and plug-in vehicle space. I think the ESQ Communications website is a "must read" for every investor that's interested in the advanced automotive battery and electric vehicle sectors. It's short on hype, glittering generalities and promises of an all-electric future, but the depth and accuracy will surprise if not shock some of the more ardent EV advocates that frequently comment on this blog.

The first big surprise is that the Plug-in Prius is a PHV-13, meaning that it has 13 miles of electric drive range as opposed to the 40-mile range of the GM Volt, the 80-mile range of the Nissan Leaf and the 200-mile range of the Tesla Roadster. On the FAQ page for the Prius PHV, Toyota explains the reasons as follows:

"Toyota is of the belief that the smaller the battery in a PHV the better, both from a total lifecycle assessment (carbon footprint) point of view, as well as a cost point of view. Research has shown that plug-in hybrid vehicles with smaller batteries, charged frequently (every 20 miles or less) with average U.S. electricity produce less green house gas emissions than conventional hybrid vehicles. (according to a 2009 Carnegie Melon University study). And as battery size increases, so does the battery cost resulting in higher overall vehicle cost."

The second big surprise is that with over two million HEVs on the road, Toyota doesn't believe it knows enough about how PHVs will perform in the hands of ordinary people. So instead of simply launching a product and praying for the best, Toyota plans to conduct a three-year test of clustered fleets in a variety of locations and publish detailed performance data to inform potential customers instead of treating them like lab rats. The FAQ page for the Prius PHV explains the reasons as follows:

"The Prius PHV will come to market in 2012. The PHV demonstration program is designed to gather real world driving data and customer feedback on plug-in hybrid technology. In addition, the program will confirm the overall performance of the first-generation lithium-ion battery technology in a variety of use cases. Toyota must ensure that the vehicle/battery meets customer’s expectations before it is brought to market. The results of this program will make sure that the vehicle coming to market in 2012 will exceed customers’ expectations and meet plug-in customers’ demands."

The third big surprise is Toyota's skepticism over claims that the cost of lithium-ion battery packs for vehicles will fall into the $500 per kWh range over the short-term. The FAQ page for the Prius PHV discusses the issue as follows:

"In summer 2009, Toyota was asked to testify in front of a committee at the National Academy of Science in Washington, D.C., on the current state of plug-in technology, which of course included a discussion on advanced batteries. That testimony is a matter of public record and has been reported on in the media.

During that testimony a Toyota representative was asked Toyota’s opinion on current battery costs and how significantly it might be reduced. What Toyota said then was that the very rough estimate was approximately $1200 per KWH for a complete pack including instrumentation and ventilation systems…and that efficiencies in scale alone will not create major cost reductions in the near term. Significant reductions in cost will require major technological breakthroughs."

There is no question that many electric vehicle advocates will find Toyota's approach to their dream technology overly conservative. The FAQ page for the Prius PHV describes the reasons for Toyota's conservative approach as follows:

Toyota believes that PHVs can be part of a solution to climate change and for energy security,
  • for certain customers,
  • in certain geographic areas,
  • with certain grid-mixes,
  • with certain drive-cycles,
  • and with access to charging.
There will be an important role for PHVs, but it will not be in high volume until there are significant improvements in overall battery performance…and battery cost reduction.

For the last two years I've been an unrepentant critic of lithium-ion battery and plug-in vehicle hype that ignores the short-term challenges while focusing on vaguely defined "long-term potential." It's more than a little gratifying to learn that the world's biggest and most experienced carmaker shares my concerns and is taking a rational baby-steps approach to vehicle electrification that focuses on quality, performance and cost, and may very well result in a PHV that works in the real world of paychecks and monthly budgets, as opposed to the go-for-broke eco-bling approach that GM, Nissan (NSANY.PK), Tesla (TSLA), A123 Systems (AONE) and Ener1 (HEV) are pursuing with government subsidies and stockholders' money.

This article will no doubt draw outraged comment from advocates who will argue Toyota is simply protecting its turf. I think the more plausible explanation is that Toyota is simply telling the unvarnished truth.

Disclosure: No positions

July 08, 2010

The Best Peak Oil Investments: Nine Mass Transit Stocks

Tom Konrad CFA

In 2007 and 2008, high gasoline prices gave a large boost to mass transit ridership. Here are the stocks that might benefit if that scenario repeats itself.

Americans are notoriously attached to their cars, but high oil prices in 2007 and 2008 led many to get on a bus or train.  According to a 2009 paper Transit Ridership Models:
Present Status and Future Needs [pdf]
by Grace Galluci and John D Allen, Ph.D. from Chicago's Regional Transportation Authority, current published transit ridership models do not yet incorporate changes in gasoline prices.  The authors consider this a serious omission, since, in addition to the obvious intuitive link between gas prices and ridership, they found a strong correlation between gas prices and transit ridership using CRTA ridership data and local gasoline prices.  The following chart comes from this paper, and shows ridership following the local gas price (with a slight lag.)

CRTA ridership vs Gas Price

Gas Price and Transit Profits

Although it may be safe to assume that transit ridership will increase with rising gas prices, a higher gas price may not make mass transit companies more profitable, since diesel to fuel buses and locomotives is a major expense for many mass transit agencies.   Hence, an investor expecting increases in the price of oil should prefer mass transit operators with fleets that use less diesel per passenger mile, and the suppliers to such operators.  Operators and suppliers of electric rail and trolleys are best in this regard, followed by operators and suppliers of fuel efficient hybrid buses and similar vehicles.  Vendors of Smart Transportation systems that allow transit operators to match vehicle capacity to demand in real time should also benefit, since the simplest way to reduce fuel use per passenger mile is to replace fuel guzzling buses with smaller vans at non-peak times, while adding vehicles at peak.

Mass Transit Stocks

Most transit authorities are public entities, but there are still a good number of public companies that provide goods and services to the sector.  What follows is a list of those companies culled from our Alternative Transport Stock List with significant exposure to mass transit.  For each stock, I include a description of its mass transit business, and how exposed the company is to rising oil prices.

Mass Transit Vehicle Suppliers

Alstom (ALO.PA, AOMFF.PK).Thalys and Eurostar at the Gare du Nord station, Paris  About one third of Alstom's business is as a supplier of locomotives for transit and high speed rail applications, in addition to signaling and support services.  Alstom supplies the locomotives for France's high-speed TGV trains.  The balance of Alstom's business is in electrical power generation, with strong presences in Hydropower, Natural Gas, Steam, and Nuclear generation, in that order.  Rising oil prices should benefit Alstom's transportation business, since high speed trains are a much more fuel-efficient alternative to air transport.

Bombardier Inc (BDRBF.PK, BBD-B.TO, BBD-A.TO).bombarier locomotive  Bombardier is another high speed rail stock, with a slightly greater market share for high speed locomotives than Alstom.  A little over half of Bombardier's revenues and profits come from high speed rail, with the balance coming from aerospace: they also sell regional and corporate jets.  Hence, while Bombardier has a larger percentage exposure to high speed rail than Alstom, the company is more likely to be hurt by rising oil prices than helped, because of the large exposure to aviation. 

New Flyer Industries (NFI-UN.TO, NFYIF.PK)New Flyer's Excelsior Bus New Flyer is the largest manufacturer of heavy-duty transit buses in North America, and also one of my Ten Clean Energy Stocks for both 2009 and 2010.  New Flyer builds transit buses for transit operators powered by a wide variety of fuels, from diesel, to diesel-electric hybrids, Compressed and Liquefied Natural Gas, electric trolley buses, and even supplied the fleet of Hydrogen Fuel Cell buses for the Vancouver Olympics.  Rising bus ridership from rising oil prices increases the demand for buses, and also increases the incentive of transit authorities to invest in the more expensive (and profitable to New Flyer) electric hybrid buses.  The beneficial effects of rising oil prices should be felt more quickly by New Flyer than by suppliers of passenger locomotives, since transit authorities can expand bus systems and switch to hybrid buses much more quickly than they can expand rail transit systems.

My most recent in-depth look at New Flyer is here.Vossloh rail switch

Vossloh AG (VOS.DE, VOSSF.PK).  Vossloh supplies rail fastening systems, switching, services, and locomotives, both diesel and electric.  Unlike Alstom and Bombardier, all of Vossloh's business is related to rail transit, making it a good bet in an era of long term rising oil prices.

Mass Transit Operators

Firstgroup, PLC (FGP.L, FGROF.PK).FirstGroup/First Student school busses  Firstgroup operates mass transit services in Britain and North America.  In North America (37% of revenues), they operate the Greyhound bus brand, and subcontract the yellow student bus service for school districts.  In the UK (53% of revenues), they operate both bus (19%) and rail (35%) services both competitively and on behalf of transit authorities.  The balance of revenues comes from mass transit contracts in the rest of Europe.

Fristgroup uses financial markets to hedge fuel price risk, and so stands to benefit in the short term from increases in ridership caused by oil prices.

Mass Transit Equipment and Service Suppliers

Cubic Corporation (CUB).BART toll kiosk  Cubic is primarily a defense contractor (70% of sales) that also provides fare collection systems and services to transportation authorities (30% of sales.)  While I like the Smart Transportation potential of the company's IT and fare collection expertise, Cubic is only likely to benefit over the very long run as increases in mass transit ridership lead to increased demand for the company's services.

L. B. Foster (FSTR). L B Foster supplies a diversified mix of construction materials to the transportation industry, L B Foster railwith 47% of sales coming from rail (although not exclusively mass transit) products.  The balance of sales come from sales of steel pilings, fabricated bridges and concrete buildings, and tubular coated products.  The large fraction of sales to the rail industry should help the company over the long term in a rising oil price environment.  The benefit of rising oil prices should increase if L B Foster succeeds in its cash takeover of Portec Rail products, discussed below.  An in-depth discussion of the L.B. Foster bid for Portec Rail Products is available here.

Portec Rail Products (PRPX).Portec track lubrication device  As its name implies, Portec exclusively provides products and services to the rail and rail transit industries.  Products include lubrication and friction management (reducing noise, wear, and fuel use), track components, load securement, rail car repair, and environmental protection products for rail corridors.  If the L B Foster buyout goes though, shareholders will be paid in cash, so Portec is not currently a way to speculate on rising oil prices, but if the takeover fails, Portec's pure-play rail exposure should serve it well in a rising oil price environment.

Wabtec Corporation (WAB). Wabtec, also known as Westinghouse Air Brake Technologies Corporation, primarily serves the freight and passenger rail industries, supplying braking and other safety systems for both rail cars and locomotives.  As a pure-play rail supplier, Wabtec is well-placed to benefit from long term, sustained higher oil prices.

Percent of Sales from Transit & Rail
Alstom (ALO.PA) 33%
Bombardier Inc (BDRBF.PK) 55%
New Flyer Industries (NFYIF.PK) 100%
Vossloh AG (VOS.DE) 100%
Firstgroup, PLC (FGP.L) 100%
Cubic Corporation (CUB) 30%
L. B. Foster (FSTR) 47%
Portec (PRPX) 100%
Wabtec (WAB) 100%

Thanks to Jim Hansen of Ravenna Capital Management for bringing Vossloh AG to my attention.


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.

July 05, 2010

Great Lakes Dredge and Dock (GLDD), An Oil Spill Cleanup Stock

Tom Konrad, CFA

Great Lakes Dredge and Dock is curiously in the center of a many emerging trends, some of which are not yet being talked about.

I've been watching Great Lakes Dredge and Dock (GLDD)GLDD logo for a few months as a possible alternative transportation stock to talk about for my Best Peak Oil Investments series.  My thinking goes like this: barge and river transport are two of the most fuel efficient ways to move bulk cargo.  Barges are even more energy efficient than rail freight for most uses, according to the Congressional Budget Office.

One barge company I watch is Trinity Industries (TRN) which also manufactures and leases rail cars, as well as building wind towers.  I profiled Trinity in 2008.  While not extremely overvalued at current prices, Trinity is not a bargain at the recent price of $21.60, so I've had my eye out for other companies that might benefit from an increase in barge transport, which is why I started watching Great Lakes Dredge and Dock (GLDD).  The more barge traffic there is, the more need for channel dredging and port expansion projects, both staples of GLDD's business.

The Business

Revenue by Work TypeGLDD is the largest provider of dredging, land reclamation, and beach nourishment services in the US.  The company builds and deepens ports, reclaims land, excavates underwater trenches, builds and maintains beaches, and maintains the depth of shipping channels, both in the US and internationally.  They also have a small demolition unit, which accounted for 8% of 2009 revenues.

Geographically, the company has significant operations in high growth emerging markets, supplementing its dominance in the US market.  About 15 to 30% of revenues come from foreign markets, while the US market is effectively protected from foreign competition by two laws passed in the early 1900's: The Foreign Dredge Act of 1906 and the Merchant Marine Act of 1920.  

Growth Drivers

There are many potential growth drivers for the dredging business, some of which GLDD is talking about, and some of which it isn't.  The company lists the following drivers of growth going forward:
  • An increase in maintenance dredging due to increased interest in increasing port operating capacity by the US Army Corps of Engineers, the largest domestic user of dredging services.
  • Coastal berm construction to protect the Louisiana coast from the oil spill.  A GLDD dredge has recently begun work on these berms.  The size of the spill make me think that berm construction and coastal restoration will continue to create high demand for dredging equipment in the Gulf for years to come.
  • Expansion of the Panama Canal and the Port of Los Angeles
  • New legislation in congress will create a harbor maintenance trust fund which will add $250-$400 million to the annual US dredging market.
  • The 2009 Mississippi coastal improvements program created an additional $400 million demand for barrier island and ecosystem restoration work starting in 2011.
In addition, I see a couple of potential drivers for long term demand growth for dredging servicesDredge pic.  Rising sea levels due to global warming will increase the need for artificial barrier islands, wetlands restoration, and beach nourishment.  Global warming is also expected to lead to an increase in severe hurricanes.  That should in turn lead to more contracts such as the recent award as part of the Maryland shoreline protection project.  Meanwhile, increasing fuel prices will increase the demand for fuel-efficient transportation such as barges, and increase the need to maintain and expand port facilities.


GLDD pays a $0.07 annual dividend for a modest 1.2% yield at theJuly 2nd $5.84 closing price.  At that price, the 12 month trailing earnings is a somewhat expensive 17.59.  However, the company has fairly low debt when compared to cash flow, and most analysts are expecting fairly rapid (25%+) annual growth over the next five years, so the company does not seem particularly overvalued at current prices, but neither does it seem to be a bargain, as it was when it fell below $4.50 in early March. 

Investor interest arising from the oil spill may keep GLDD from ever returning to the cheap valuations it saw in March.  But I'm not ready to buy just yet... a continued decline in the overall stock market is likely to create another great buying opportunity in either Great Lakes Dredge and Dock or my other barge transport stock, Trinity Industries.


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.

July 02, 2010

Cleantech is a Bunch of Hot Air!

David Gold

While renewable energy often captures most of the cleantech headlines, if anyone doubts why energy efficiency must play a significant part in the cleantech effort – as significant, if not more so, than the role of renewable energy -- just examine the energy flow graphic developed by McCall and Bassett and reprinted in the June edition of Technology Review.  At least half of U.S. energy consumption goes to nothing more than creation of hot air through waste heat.  And, when one realizes that much of the 13.9% of electricity output from power plants shown in the graphic also ends up as hot air from our computers, lights, etc., the portion of energy consumption going up in hot air is actually greater than 50%.

Couple this with the following facts… According to the Energy Information Administration (EIA), on a worldwide basis renewable energy currently supplies roughly 10% of the energy consumed.   Over the next 25 years the EIA forecasts worldwide energy consumption to grow by more than 50%. They also forecast a 100% increase over that period in the supply of renewable energy, which, in isolation sounds modestly impressive.  But this would equate to less than 15% of all energy being consumed because consumption would have increased 50%.   Worldwide renewable energy production would have to increase upwards of four fold to equal just about 25% of the energy consumption forecasted for 25 years from now.  Meanwhile, with 50% growth in consumption, the other 75%, representing fossil fuel consumption, would still equal more fossil fuel than the world consumes annually today!

Energy efficiency not only saves on total energy consumption today but also is magnified as consumption increases because the additional devices consuming energy will consume less if they are more efficient.  For example, increasing the average efficiency of all vehicles on the road an average of 50% (e.g., from 20 mpg to 30 mpg…not such a high hurdle) would reduce overall U.S. energy consumption by over 9%...that’s 9% of today’s consumption and tomorrow’s increased consumption because all the additional miles forecast to be driven would also be in more fuel efficient vehicles.  To achieve that same impact with renewable energy would require about a 150% increase in U.S. renewable energy production and about a 225% increase to achieve the same offset in 25 years.

I’m not diminishing the role of renewable energy as an important piece of the long-term equation.  Disruptive development of cost effective renewable energy sources will need to be a key piece of the long-term equation for removing our addiction to fossil fuels.  However, energy efficiency often doesn’t receive as much press as renewable energy because it isn’t as sexy.  Yet, energy efficiency provides leverage that renewable energy does not because the benefits automatically scale as consumption increases.  To say it another way, if we can figure out how to clear up some of the hot air, we can have a tremendous impact on of fossil fuel consumption! 

  (See Larger Image)

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

A Contrarian's Take On Goldman's Advanced Battery Report

John Petersen

On Wednesday a reader sent me a new Goldman Sachs research report on the advanced battery sector titled "Advanced Batteries: Light, but the tunnel is long; Buy ENS, HEV Neutral, AONE Neutral." If the essence of legal argument is "the plausible boldly asserted," then I'd suggest that the essence of sell-side analysis must be "the implausible accepted without question." While I agree with Goldman's conclusions that Enersys (ENS) is a bargain at the current price and caution is best when it comes to A123 Systems (AONE) and Ener1 (HEV), I have major problems with their assumptions about lithium-ion battery costs, safety and consumer acceptance.

Since we're starting a long holiday weekend, I'll keep it brief.

Cost Assumptions

There is no issue in the advanced battery sector that's more contentious and wildly speculative than the future cost of lithium-ion battery packs. While reliable numbers are scarce, there are a couple of clear reference points. In May,  Nissan's chief product planner for North America told the Wall Street Journal that their manufacturing cost for the 24 kWh battery pack used in the Leaf is roughly $18,000, or $750 per kWh. By the time you include a normal markup, the OEM price from an independent battery manufacturer would be about $1,000 per kWh. In its most recent Form 10-Q, A123 reported $1,375 in cost of goods sold for each kWh shipped in the first quarter. While these two examples are not conclusive and rumors of low prices are common as weeds, I tend to believe a pack level cost of $1,000 per kWh is a safe current estimate.

According to Goldman Sachs, the United States Advanced Battery Consortium is targeting pack level costs of $500 per kWh by 2012 and $300 per kWh at volume production by 2014. The long-term goal is $250 per kWh, the current cost of the least expensive consumer batteries. Faced with ambitious auto industry and government expectations, battery developers are caught between a rock and a hard place. They can either tell the automakers, the financial markets and the government "your goals are unattainable" and reject the funding opportunities, or they can say "we think we may be able to reach that goal," trusting that the money will flow and forgiveness will be easier to come by than permission.

In its manufacturing cost discussion, the Goldman report breaks down the current cost of a typical automotive lithium-ion battery pack into the following broad classes of economic inputs.

5% Lithium
7% Other active materials
Purchased parts

Later on, in the appendices, Goldman identifies the principal manufacturers of binders, foils, coating equipment, separators and electrolytes, and manufacturing systems, which are with very few exceptions Asian.

I'm not a trained industrial engineer, but I am a trained cost accountant. When I take time to consider the classes of economic inputs and their relationships to total product costs, I can't imagine where savings of 50% to 70% will come from.  We live on a resource constrained planet and commodity prices have been increasing for decades. With escalating global demand for all the necessities of life, it seems patently absurd to believe that the prices for lithium and other active materials will collapse or that prices for materials-based foils, separators, electrolytes, cases and other purchased components can fall significantly. It's possible to reduce labor costs and jobs through increased automation, but the trade-off is increased depreciation. When you factor in the reality that over 60% of the economic inputs are directly or indirectly attributable to imports, it's hard to see how medium term forecasts of $500 per kWh and long term forecasts of $250 per kWh are reasonable.

Economies of scale are easy to discuss as glittering generalities. They are extremely hard to achieve in volume manufacturing of a mature product. The Japanese have been making lithium-ion batteries for almost 20 years and it's highly unlikely that Sony, Panasonic, NEC and Toshiba have overlooked easy economies of scale while building billion dollar businesses. I won't argue that the widely hyped cost savings and performance gains can't happen, but I haven't seen anything that leads be to believe they will happen.

Safety Assumptions

In the lithium-ion battery industry the standard penetration safety test is conducted by piercing a single cell with a 3.5 mm steel rod. This is a wonderful test of the damage that might be inflicted if a carpenter drops his tool belt on a battery powered screwdriver, but it proves absolutely nothing about battery pack safety in the class of catastrophic penetration events that can and do occur in automobile accidents.

When automakers conducted safety testing of NaS battery packs in the mid-90s, they took fully charged battery packs and drove a foot long four-bladed wedge into them with a hydraulic ram because it was the only way to learn what the pack level interactions would be in a catastrophic penetration event.

The only event I know of that involved a cascade of battery failures was a spontaneous fire in a storage bunker at the Toxco recycling facility in Trail, B.C. last November. While the newspaper reports of the Toxco fire are sobering, they don't have the same impact as this YouTube Video that shows why pack level studies of cell interactions and failure cascades are an essential prerequisite to battery pack safety claims.

I understand that Tesla Motors (TSLA) is the only automaker that uses or plans to use lithium-cobalt-oxide cells, the most dangerous lithium-ion battery chemistry, but even the benign chemistries use organic electrolytes that are inherently flammable and react violently when penetrated. Single cell safety tests are interesting, but until lithium-ion battery developers conduct pack level tests of catastrophic penetration, there will be no basis to make any safety claims or assumptions.

Consumer Acceptance Assumptions

The nice thing about consumer acceptance forecasts is that they're only wrong in 20/20 hindsight. For most consumers, an automobile is the second most expensive asset they own. Car buying decisions are not made lightly, and while most buyers carefully consider their capital, operating and maintenance costs, they make a buying decision based on a subjective assessment of how well a vehicle suits their needs and driving habits.

All of the consumer acceptance forecasts I've seen assume that battery prices will plummet and large numbers of consumers will be willing to overlook the quirky limitations of EVs to make a political or ideological statement. That may be enough motivation for a few diehards, but it won't cut it for the average consumer who believes the green in his wallet is more important than the green in his cocktail party conversation.

In the final analysis, I believe forecasts about consumer acceptance rates are only as reliable as the future cost assumptions that underlie the forecast. Since there's good reason to believe the cost assumptions are garbage in, there's also good reason to believe the consumer acceptance assumptions are garbage out.

Investment Recommendation

The Goldman report was neutral on A123 and Ener1, but included a buy recommendation for Enersys with a six-month target price of $29. It also reiterated a buy recommendation on France's Saft Groupe (SGPEF.PK). While Goldman does not currently cover Exide Technologies (XIDE), which generates more annual revenue than Enersys and Saft combined, I expect that to change within the next 12 months if the earnings recovery Exide reported for its most recent fiscal quarter continues.

Disclosure: No positions.

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