Fear, Loathing and Extraordinary Opportunity in Energy Storage
2011 has definitely been one for the record books; a dreadfully wonderful year for the energy storage sector that reminds me of the opening paragraph from A Tale of Two Cities:
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
On December 31, 2010, my core list of 18 pure-play energy storage device manufacturers had a combined market value of $5.9 billion. At last Friday's close, the 12 survivors had a combined value of $2.4 billion. The following table summarizes the price performance of my current tracking list of 16 energy storage device and EV manufacturers for the year-to-date and quarter-to-date.
While the broader markets haven't exactly been a box of chocolates, there's blood in the streets in the energy storage sector; the polar opposite of what any reasonable investor would expect from a sector that's certain to be an investment mega-trend for several decades. With the exception of Johnson Controls (JCI), Enersys (ENS) and Maxwell Technologies (MXWL), the entire universe of pure-play energy storage device manufacturers are at or within spitting distance of their thirty-three month lows. Fear and loathing are running rampant as timid investors run for cover and elephant hunters prepare for a feast. There are significant risks in most of the companies I track, but in several cases the opportunities are up to an order of magnitude greater than the risk.
I've pared and restructured my Cool Emerging Companies group to cull two companies that cratered this fall, reflect the growing awareness that vehicle electrification will be a slow and painful process, acknowledge a looming supply glut in the lithium-ion battery space and reclassify Altair Nanotechnologies (ALTI) as a Chinese Battery Company since voting control was sold to Canon Investments Ltd. earlier this year. While I think 2012 will be a tough year for many lithium-ion battery manufacturers, A123 Systems (AONE) is solidly financed and seems to be gaining ground in the commercial EV space while its last standing competitor Valence Technologies (VLNC) seems to be losing ground. A123 is also making significant headway in large-scale energy storage systems for minute-to-minute output smoothing of wind and solar power. In light of a growing awareness that coupling renewable energy generation with energy storage can increase investment returns by up to 50 percent, I continue to believe that A123 Systems is undervalued while Valence is overvalued. My long-term Weighted Moving Average Prices vs Volume charts for AONE and VLNC follow. The red line in each chart represents the 200-day moving average trading volume while the straight blue line is a calculated trend line based on the 50-day weighted moving average stock price. Readers who want to download a two chart per page version of the stock price charts used in this article can do so by clicking here.
In the Cool Sustainable Companies group Maxwell Technologies has been trending steadily upward since the dark days following the 2008 crash and its business shows no signs of reversal. Ultralife (ULBI), on the other hand seems to be slowly losing ground and hasn't done much to fire the market's imagination. My long-term Weighted Moving Average Prices vs Volume charts for MXWL and ULBI follow.
In the Cheap Emerging Companies group I expect good things from ZBB Energy (ZBB) and Axion Power International (AXPW.OB) in 2012. Both of these companies carry market capitalizations in the $25 million range but are on the cusp of transitioning from research and development to full-scale product commercialization. While both companies have fairly weak financial statements, they've both learned how to conserve cash and control spending while pressing forward with pre-launch product testing and market development activities with high quality business partners. More than 32 years in the trenches have taught me that small companies, like babies in sub-Saharan Africa, rarely die of starvation but frequently perish from dysentery, I'm not concerned that either company will follow their more free-spending brethren down the road to pink sheet perdition. What Axion and ZBB need most is a clear path to target; an identifiable trajectory. As testing and demonstration programs begin to generate meaningful orders, the market's healthy skepticism over their late-stage R&D projects should quickly fade and their stock prices should ramp rapidly. My long-term Weighted Moving Average Prices vs Volume charts for AXPW and ZBB follow.
In the Cheap Sustainable Companies group JCI and Enersys are performing well but both companies are significantly below their long-term trend lines. The two stocks in the group that strike me as table pounding bargains are Active Power (ACPW) and Exide Technologies (XIDE). Both are down almost 75% year-to-date but their underlying businesses are performing well. I find Exide particularly attractive because I'm highly confident that its recent price swoon is attributable to forced sales by a hedge fund that owned over 20% of Exide's outstanding stock in late 2009. My long-term Weighted Moving Average Prices vs Volume charts for JCI, ENS, ACPW and XIDE follow.
It wouldn't feel like Christmas if I didn't take a minute to caution readers that Tesla Motors (TSLA) is sporting a nosebleed market capitalization of 9.9 times book value and 14.5 times trailing twelve month sales. Over the last couple weeks Tesla's chart has peaked and taken an ominous turn to the downside. My long-term Weighted Moving Average Prices vs Volume chart for TSLA follows.
Despite the fear and loathing that's been obvious for much of the year, the energy storage sector is an opportunity rich environment as 2011 draws to a close. My favorites for a strong 2012 include AONE, MXWL, AXPW, ZBB, JCI, ENS, ACPW and XIDE. They all merit serious attention from investors who want exposure to the energy storage sector.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.