On Sunday, John Laumer at TreeHugger told us that Waste Management was going to fuel Altamont (CA) area trucks with landfill-harvested liquid natural gas. Landfill gas (LFG) can be used for both power generation and for liquid fuel production. I did a bit of research into this a few months ago and, with the right kind of incentive, LFG could become a valuable asset for firms and municipalities with the right to it. This is an area to keep an eye on.

On Tuesday, Jozef Winter at ecogeek discussed Xcel Energy's announcement of a $100 million investment for 'Smart Grid' initiatives. This is good news for the energy efficiency space, especially as smart grid/efficiency stocks have been struggling over the past while (see COMV and ENOC). I see energy efficiency as a low-hanging fruit with plenty of potential, but unfortunately there aren't sufficient incentives yet to drive massive investments in this space. It is therefore encouraging to see a mainstream utility make a large capital commitment to the concept.

On Friday, Keith Johnson at the WSJ's Environmental Capital wondered why pricey oil wasn't helping cleantech stocks more. Sure, alt energy stocks are decoupled from the price of oil on the upside, but it's still unclear whether this decoupling would hold on the downside. The broader point from this story: alt energy earnings remain volatile and so alt energy stock prices are volatile.

On Friday, Eric Savitz at Barron's Tech Trader Daily told us that Citi sees a solar glut in 2009 and 2010. So the solar-cell makers with low cost structures will get a competitive edge in a situation of general oversupply - no big surprise here. But who will have an edge in consolidating the industry?

I'm having trouble uploading the presentation (it's too large for my server.) However, it should soon appear on NREL's presentation's page. As usual, I own most of the stocks mentioned in the presentation (too many to list,) and the Guiness Atkinson Alternative Energy fund (also mentioned) is an advertiser on AltEnergyStocks.com.

Although I had to cut it off because of time, if you have more followup, please leave a comment here.

Also, a note to the woman who asked me about career development opportunities in Colorado for a financial analyst interested in Energy, there were some openings at the Colorado PUC... "Rate Financial Analyst energy/Demand Side Management" looks especially interesting.

The application deadline was May 9, but I got the feeling that there is a dearth of qualified candidates, so it's probably worth inquiring.

Since I wrote this article many things have changed with AAER. The Katabatic contract, which is what attracted my attention initially, is no longer in effect. AAER has nonetheless forged ahead and entered into a number of supply agreements to get its hands on turbine components, not the least of which is with American Superconductor (NASDAQ:AMSC), a stock many wind investors have on their radar (or in their portfolio). SkyPower, a Canadian wind heavyweight and affiliate of Lehman Brothers, bought about 20% of AAER's equity in the fall of '07. In fact, it is formally Lehman Brothers Inc. that owns the stake. Then, only a few weeks ago, the company announced another round of equity financing through a bought deal at C$1.20/shr, for a total of C$7.5m (US$7.82m). Finally, the company managed to sell a few of its turbines in Canada, the US and France.

Overall, AAER looks it is getting the right things done. However, the stock's latest run was tied to one event in particular.

The Hydro-Quebec Bid

AAER's partnership with SkyPower as well as another partnership with TransCanada Energy Ltd appeared to position AAER very well for the much-awaited Hydro-Quebec request for proposal (RFP) for wind power. This RFP, calling for the installation of 2,000 MW of wind power in the Canadian province of Quebec, represents the single largest block of wind power contracts to be awarded anywhere in North America to date. Under these contracts, Hydro-Quebec, the state-controlled power utility, buys the electricity under a 20-year agreement from private sector projects at a rate of C$0.087/kWh. Consortia of developers and turbine makers were invited to bid projects into RFP.The call attracted a fair deal of attention with 66 bids totaling 7722.2 MW - significantly more than the 2,000 needed.

Through its partnerships with SkyPower and TransCanada, both of which submitted bids into the RFP, AAER believed it had a serious shot at jumpstarting its business. AAER is headquartered in the province of Quebec, and local assembly of the turbines as well as local economic development considerations more generally were key criteria in judging the bids (along with factors such as costs, reliability of turbines, ability to manage community relations, etc). Moreover, both partners have strong reputations in the Canadian wind market and SkyPower is already active in Quebec. In both cases, the consortia appeared very well positioned to be selected and AAER (and many of its shareholders) saw this as: a) an opportunity to fill the order book in the near-term and b) a chance to establish its reputation in the North American marketplace for the long run by getting a few hundred MWs of turbines going in the real world. If this was successful, it could bolster AAER's assault on a North American marketplace in dire needs of turbines and that is currently being underserved by the incumbents.

The winning bids were announced on Monday (May 5) at 11:15am and the AAER consortia were not a part of them. The stock immediately collapsed, so much so that Canadian market regulators suspended trading and expunged a bunch of trades because the news conference was in French only and the info was not disseminated to American and English Canadian investors at the same time as the French Canadian ones. When trading reopened on Tuesday morning, the share price immediately tumbled and found resistance for most of the day at around $0.60.

In the end, two turbine makers were selected to provide all of the 2,000 MW: Enercon and REPower (RPWSF.PK)

What's Next?

As pointed out in the article linked to initially, I entered my positions in AAER at C$0.39 and C$0.38. In early January, I got the majority of the dollar value of my initial investment out at C$1.15. On the morning of the announcement, I wrestled with getting another chunk of my position out at C$1.80, but ultimately decided not to budge - this was a gamble and I lost it. However, at around $0.39 with the information that was available in March 2007, this looked to me more like a high-risk value play than like a gamble.

Reading through an AAER investor discussion board Tuesday afternoon, I came across the usual mix of anger and amazement. One fellow claimed he and his family had lost $70,000 (not sure whether it's realized or not). Others, who had pulled the trigger right on time after the announcement and had still been able to get out with a fat profit, saw their trades expunged by the regulator and were later forced to accept significantly lower bids.

This episode speaks to the risks of investing based on a story alone. The AAER story sounded too good to pass to many people, and few folks bothered to figure out what the firm was worth without those Hydro-Quebec contracts. Beyond just a story, valuations in this stock were driven by a single high-probability event, and this is where gambling instincts take over rational analysis.

For me, the main lesson from something like this is that it reinforced the importance of risk management. Risk is inherent to investing, and it is important to take at least some steps toward managing it. In this case, I applied the simplest possible form of risk management: I pulled my initial money out. The only cost of doing so, unlike using derivatives, is the opportunity cost of potential future capital gains - so it's in effect free. This was mentally difficult to do in this case, as it often is, and I am actually guilty of not pulling any money out the first time the stock peaked in October and November 2007. Like many other people, when I did a rough mental computation of what I believed to be the probability of AAER getting at least one of the contracts, I felt I would be surrendering a lot of upside by pulling out too early.

Many pure play alt energy stocks are either unprofitable or are profitable but trade at very high multiples. Like AAER, many of them also receive rich valuations based on nothing more than a good story. There is therefore a good chance that pure-play alt energy stocks will add at least some risk to a portfolio. If calls and puts aren't for you, a good idea is to set targets at which to exit part of a position to protect some gain. The more something looks like a gamble rather than an investment, the more disciplined one needs to be about this and the lower the threshold should be.

As for AAER, I'm hanging in there for now. I like some of the progress that's been made to date, and I think their strategy of targeting community-based projects under 50MW, which are the projects that are having the toughest time getting any attention at all from the turbine majors, could pay off. There is no doubt that this firm's prospects look a lot less bright than they did a few days ago, and the C$7.5 m financing discussed above could be in jeopardy (or at least may be renegotiated). With the momentum crowd gone, I don't expect this stock will shoot up again for an appreciable period of time. If you're still holding AAER, the question you have to ask yourself is: do I really want to own this business?

DISCLOSURE: The author is long AAER

On Wednesday, Craig Rubens at earth2tech featured an interview where the CEO of PG&E painted the future of utilities for us. An interesting interview on the potential and challenges of plug-in hybrids and net metering.

On Wednesday, Scott Krisner at Innovation Economy suggested that battery-maker A123 Systems had signed, sealed but not yet delivered on an IPO. Cleantech investors have been yearning for battery pure-plays for some time, so if this is indeed an accurate report it is sure to draw a lot of attention. The question is, will capital markets be ready for something like this in the fall?

On Thursday, Felicity Barringer and Andrew Ross Sorkin at the NYT told us that a prominent green group was helping an equally-prominent buyout firm becoming greener. KKR certainly raised eyebrows last year when, as part of the TXU deal, it decided to cancel a number of coal power plants on grounds that they represented a potential future liability. This week's announcement will, once again, re-ignite the debate as to whether shareholder value can be created (or at least material risks averted) by managing environmental matters in the same systematic way other areas of the firm such as HR or accounting are handled. PR or good business...what do you think?

In yet another indication that solar is slowly moving toward the mature industry status, Good Clean Tech informed us on Thursday that OptiSolar was planning on building the largest solar farm in the world. 550 MW of PV solar panels is a big deal, and at that scale the economies make the returns on projects like these very attractive.

On Tuesday, Toby Shute at The Motley Fool argued that Google's gigawatt was gaining steam. What gives Google an edge in renewable energy, according to the author? The firm's expertise in scalable solutions. I've never been a big fan of launching into things in which you don't have a competitive advantage or even expertise, so I'm somewhat skeptical of Google's forays into wireless and especially clean power . Nevertheless, the folks at Google can certainly tell a strong business model from a bad one, and I'm sure they know a thing or two about execution. Maybe one day I, too, will be silenced.

On Thursday, Matthew Hougan at Seeking Alpha shone light on solar ETFs. This piece provides a detailed overview of two solar ETFs launched recently. ETFs are a great way to balance concentrated exposure to a sector with a healthy amount of firm-level diversification, at a cost that makes sense for retail investors. For solar, you have the choice: you can go pure play or solar light.

On Thursday, Katie Fehrenbacher at earth2tech asked if PG&E would own solar power plants. The argument made here is interesting, namely that large utilities can leverage their strong balance sheets to acquire cheap capital for the construction of large-scale renewable energy projects like a solar thermal plant. Given the nature of these projects, where there is long-term revenue certainty and costs is where big gains can be realized, the ability to come in with cheap capital can make a notable difference over time. In fact, as the solar industry follows wind and consolidates, there is where you should expect the big players to have a significant advantage.

On Friday, Dan Lewis at AEI wondered whether Brazil's latest oil find would undermine its booming ethanol industry. Broadly speaking, he is wondering whether whatever oil can be found and economically extracted from unconventional sources is enough to put a dent in the current supply-demand imbalance, if indeed there currently is an imbalance, and therefore shift political and investor attention and resources away from the search for alternatives. This is every alt energy company's CEO's greatest fear, as there is no doubt that expensive oil has increased their access to, and lowered their cost of, capital. It has also provided some of the political justification for the generous subsidies alt energy has enjoyed in many jurisdictions. So the question begs asking: given the lengths to which certain governments have gone to promote alt energy, would a sharp drop in the price of oil be as much of a shock to the system today as it may have been five years ago? I think not, although alt energy stocks would take a serious beating for a time.

To those of you who have emailed me looking for advice or networking, I'm never very good responding to email (When it comes to advice, I try to respond to comments on the blog rather than email... people who want free advice should be willing to share.)  If I have not gotten back to anyone, it's not personal.

NREL Presentation

A couple months ago, I agreed (against my better judgment) to do an investing presentation as part of an event at the National Renewable Energy Laboratory.  So if you have a burning question (and live near Golden), I plan to leave a good amount of time for Q&A.  The event will be May 10 from 9am to 1pm, "Consumer Power for the 21st Century."  Details are available on NREL's Events page.  I'll present a version of my Investing in Renewable Energy presentation, with updates for current market conditions and some of my more recent thinking on peak oil.  Also presenting will be Wade O. Troxell, Ph.D, on smart grid applications.  Since smart grid is one of my favorite investing themes, I'll be interested to hear what he has to say.

DISCLAIMER: Although the CFA® charter is a well respected designation, you have to wonder about the sanity of someone who voluntarily decides to go through the process, and even enjoys it.  Therefore, everything Tom Konrad says or writes should be taken with a grain of salt: He's obviously nuts (and probably sleep-deprived, to boot.)

On Tuesday, Ted Nace at Grist told us about the education of Warren Buffett. Interesting piece on how MidAmerican, a Berkshire Hathaway company, abandoned plans to build a number of coal plants. While Buffett typically adopts a hands-off approach with his managers, he does get involved in important capital spending decisions, so you can rest assured he had a say in this. Now for anyone who has been following what's been happening with coal power in the US, it's not exactly true to this decision went unnoticed at the time. Moreover, while Buffett does not have a track record of making high-profile pronouncements on the environment, MidAmerican has built a significant portfolio of wind generation assets and, again, you can bet the Oracle had a hand in making this happen. Were these decisions made because Buffett has suddenly turned environmentalist? Not a chance! Am I happy that the greatest visionary in US capitalism is seeing green in green? You bet!!

On Tuesday, the WJS's Environmental Capital about the latest large oil producer to throw the peak production towel. The May edition of Bloomberg Markets also featured an interesting article discussing declining production at Pemex, the Mexican oil giant (unfortunately this article isn't available free of charge). In both cases, it probably doesn't help that federal authorities have done everything in their power to discourage foreign investment. Nevertheless, given the opacity surrounding the state of global oil reserves generally, these tidbits of info can't help but lend further credence to the peak oil theory.

On Thursday, Chris Baltimore at Reuters told us about a certain billionaire Texas oil man who is making big bets on wind. Projects of this magnitude will do wonders for the economics of the sector by helping prices come down. I also like the idea of a north-south wind corridor and an east-west solar corridor. I'm not sure, however, that natural gas will ever power a significant portion of cars. It would appear illogical to me to switch out of a non-renewable fuel source at great costs to replace it with another.

On Thursday, Jim Fraser at the Energy Blog informed us that Trina Solar had canceled a $1 billion polysilicon plant. The reason? The poly supply shortage is easing and Trina can sourse all that it needs in the market place. Polysillicon has been the main enemy of margins in the solar PV industry over the past couple of years. Could it be time to start looking at some of the solar stocks that were particularly exposed to this?

Deflating Valuations = Happy Value Investors

One of the good things about the current state of equity markets for alt energy investors is that several great company's stocks that had been trading at rich multiples for most of 2007 are now priced more reasonably. In fact, for value investors, markets such as these present wonderful opportunities to get in at acceptable levels on good stocks.

At its core, the value investing approach purports that, when buying a company's equity, you should only ever pay for one of two things: (a) the replacement value of the firm's assets (including intangibles like technology and client relationships) or (b) what is affectionately referred to as "the moat", meaning some form of strategic edge that competitors cannot replicate.

With regards to replacement value of the firm's assets, this effectively means that if a stock is trading much above its book value per share plus certain adjustments (say higher than 1.4x), value investors won't find it too interesting. This metric represents what it would cost a competitor to exactly replicate the business, and so adjustments to the balance sheet include intangible items like patents and customer relations. On the second point, the moat can be thought of as a market position that is nearly untouchable for one reason or another. For example, First Solar's (NASDAQ:FSLR) trailing PE of 132x can be partially explained by the company's unchallenged manufacturing and cost leadership in the thin film PV space - investors perceive a moat and implicit in this high multiple is a belief that earnings won't come under attack from competition any time soon.

Needless to say, certain alt energy sectors such as solar PV have seen PE ratios deflate appreciably since the fall of 2007. PE ratios of 15x and under are the ideal range for value investors and, while many alt e stocks still have PEs far above that, certain good opportunities have certainly emerged in the past few months.

Now I don't want to delve too far into this just yet as I intend on doing a full value analysis of a stock I'm considering buying in a few week's time. But for those who don't know a lot about the value investing philosophy, I would recommend familiarizing yourself with it. It can be a powerful, and, if you truly follow it, disciplined approach to investing that has had a very respectable track record over the past four decades, thanks in large part to...

Warren Buffett

Mr. Buffett, the world's richest man and the most famous disciple of value investing's inventor Benjamin Graham, generally needs no introduction.

A few of my classmates and I had the extreme pleasure and honor of traveling to Omaha, Nebraska, to spend the morning and lunchtime with Mr. Buffett a couple of weeks ago. It was a truly once-in-a-lifetime experience. While I admire the work and talent of many people, I don't often come across individuals that I find inspirational on a personal level. Warren Buffett's thinking on many issues related to investing and business has definitely influenced my own, and it turns out that his approach to life in general makes a lot of sense to me. His most memorable advice to us: "The number one thing you should look for in a spouse is not humor or smarts, but low expectations." I've tried to convince my wife of this since to no avail.

So, as a prelude to a post dedicated to the value investing approach to security analysis in a few weeks' time, I figured I would share a few thoughts and pictures with our readers on the man who has had the most impact on the field of value investing, and, truthfully, on investing in general.

Some Pics

This sign in medium-sized letters next to an innocuous-looking door is about the only thing in the building telling you where you actually are

Lunchtime at Piccolo's Steakhouse. Mr. Buffett loves a good steak for lunch and a rootbeer float for desert

Mr. Buffett and myself after lunch

Why Energy Efficiency and Health Matter

    Last summer, I explored why the economic benefits of energy efficiency measures had little relation to their actual market acceptance.  I concluded that businesses need strategies beyond touting financial savings to overcome barriers to acceptance.  One strategy I highlighted was making energy efficiency measures an emblem of social status (something I believe is behind the success of the Toyota Prius.)

    In this docket, I have been working with the Energy Efficiency Business Coalition, which brings together manufacturers, distributors, and Retail providers of energy efficiency products and services in order to support energy efficiency-friendly legislation and regulation.  For those who sell to the retail public, their primary messages have little to do with either financial rewards or social status.  Their marketing emphasizes the increased health, safety, and comfort of energy efficient homes.

    A home with properly sealed ducts will not only use much less energy, but it will not pull toxins from the garage or crawlspace into the living area of the home.  Properly functioning furnaces and water heaters save energy, but they also do not emit carbon monoxide.  A well insulated house lacks hot and cold spots, allowing the occupants to be comfortable everywhere in the home.  

    All of these facts are effective marketing tools for energy efficiency.  They're so effective, that a Google search for "insulation comfort" returns 597,000 hits, of which the first six are companies with something to sell.  In contrast, a search for "insulation savings" returns a slightly lower 540,000 hits, but of the first 10, only one (#6) has anything to sell.  The rest are information sites from government, nonprofits, or for DIY'ers.  

Survival of The Fittest (In Competitive Markets Only)

    Those businesses which stay in business by successfully selling insulation do so by selling the comfort benefits, not the energy savings.  The energy savings are instead pushed by organizations (such as government) which will remain in business regardless of who buys what they are selling.  

    I find it quite telling that Xcel Energy (NYSE:XEL), the utility we have been dealing with in the DSM docket, markets their energy efficiency programs almost entirely on financial savings.  But then, Xcel is not going to go out of business if they don't sell as much energy efficiency as possible: their main business is selling energy, not energy savings.  I don't mean this as a condemnation of Xcel; the company is quite progressive, as public utilities go.

    Because public utilities are regulated, it falls on the regulator to ensure that the utilities incentive includes those factors which will actually increase the adoption of energy efficiency.  Normal businesses have found that the factors to emphasize are non energy benefits such as comfort, health, and safety.  These factors are out of favor in regulatory circles, because they are difficult to value in dollars and cents.  

    Difficult to value does not mean without value.  People buy things they value, and when it comes to home energy efficiency, they are buying health and comfort, with a dash of energy savings... not the other way around.  DSM programs which take this into account are likely to be much more successful than those which do not.

    Regulators take note.

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.

I'm more than a little obsessed with finding investments which will increase with the price of oil, but not contribute to global warming.  This is quite tricky, because most forms of renewable energy produce electricity, which we cannot use in our current fleet of cars.  Biofuels ( even cellulosic) can be used in cars, but are limited by supply of feedstock, and by the environmental degradation that growing and collecting biofuel feedstocks can cause.  Not to mention the impact on food prices (despite the fact that this may help poor farmers even as it hurts poor city-dwellers.)

A Drastic Peak Oil Scenario

When the supply of oil cannot grow to meet increasing demand, the price must increase to keep demand in check.  However, the fastest growing consumers of oil are countries where the government subsidizes oil as an attempt to avoid civil unrest or political discontent.  That means that demand destruction in developed markets must make up the difference for markets where demand destruction will not occur due to the lack of price signals.

How elastic is gasoline demand in North America?  While there is some evidence that we are already responding to the long term rise of gas prices, demand is almost always much more elastic in the long term.  Most people are more willing to skip going out to eat once a month than they are to start riding the bus.  That means that a slow, gradual rise in the price of oil might be accommodated through a shift to more efficient vehicles, the construction of light rail systems, and people choosing to live more densely.  On the other hand, it will take a much more drastic oil price spike (say $10 per gallon within 3 years) to pry Americans' white knucklrideres from the steering wheels of their SUVs.

That is precisely what I expect to happen.

$10 Gas Would Mean...

People who have been cutting back on other things in order to keep up with the increasing cost of driving will not be able to afford a new Volt or Prius Plug-in Hybrid Electric Vehicle, or even my favorite, the Aptera.  For people forced out of their cars by pure economics, the only options will be those that cost no more than a few thousand dollars, or even no down-payment at all.

Of all the options, mass transit has the lowest up-front cost for the user, and the only option which can be expanded quickly is bus rapid transit.  Busses can typically be ordered and delivered within a year, the upfront cost is fairly low (the largest component cost of bus operation is the driver, not the cost of capital), and new routes can quickly be added by converting lanes of existing roads to dedicated bus lanes.

Long haul bus operations are already taking off in the United States.   Mass transit ridership reached a new 50 year high in 2006 (I have not been able to find 2007 numbers yet.)  Bus mass transit is additionally likely to be a response of municipalities to peak oil because 80% Federal funding for bus purchases to meet increased ridership or replace old busses has been available since 2005.

New Flyer

New Flyer Industries (NFI-UN.TO, NFYIF.PK) is the largest supplier of heavy duty busses in North America (42% delivered market share in 2007, and a 50%+ market share in terms of new orders in the last year.)  They have a broad product offering, and including a wide variety of alternative fuel options, including LNG, CNG, Hybrid, and Electric options.  They even have an exclusive agreement with Ballard (NASD:BLDP) to develop Hydrogen Fuel Cell busses.

The Company has a strong position in the North American market, a market which has high barriers to entry due to the need for many US buyers to "Buy American" (New Flyer qualifies), and the fact that US fleet operators are interested in an established brand with good local service.  Since many American buyers only pay 20% of the capital cost (but all the service costs), service and maintenance is likely to be more important in the buying decision than the initial purchase price.  This should also help push purchasers towards cleaner running busses such as New Flyer's natural gas and hybrid versions, despite the increased capital costs.

Securities Details

New Flyer's available securities are Income Deposit Securities (IDS), an approximate 50-50 hybrid between high yielding (but not well secured) debt and equity.  Because of Canadian withholding (I have not been able to determine if this applies, but I suspect it does,) these may not be the best choice for US based tax-advantaged investors, but for Canadian and US-based taxable investors, these income deposit securities should be an excellent hedge against the rising price of gasoline.  Unlike most gas price hedges available, the income from the security can directly be used to buy gas without selling even part of your original position.  (Although it does have the slight disadvantage as a hedge because the mechanism is not direct, and higher gas prices may take 1-3 years to flow through to higher earnings at New Flyer.

On the subject of hedging, the company runs a very sophisticated financial operation. The unusual nature of the securities arises from their sophisticated use of the US tax code to allow deductibility of the interest part of the monthly distributions.  They have fully hedged their exposure to exchange rate changes between the Canadian and US dollar (something I wish another favorite, Carmanah Technologies (CMH.TO, CMHXF) had done in recent years.)  They are also taking advantage of the strong loonie (C$) to buy back some previously issued securities using excess cash and the proceeds of a new offering of additional IDS in Canada.  Because of the exchange rate terms of the class B and C shares they are redeeming, this will have an immediate positive impact on cash flow. 

Conclusion

From listening to the most recent conference call, I get the impression that management is very conservative, and has not built a rising oil price into their projections for market growth.  None of the analysts on the call asked about the effects of rising oil prices either.  In fact, management had expected the current strong market for bus orders to slack off towards the end of the year, and they were surprised that they see no signs of slackening growth.  

Since management and most analysts have not incorporated peak oil into their projections, we can expect unpleasant surprises at the pump to lead to pleasant surprises during earnings announcements.

Note

Since I wrote the above, one of my New Years Speculations, Capstone Microturbine (CPST), received an order for 150 turbines for use in a fleet of hybrid busses.   Although this is not a new application for their microturbines, it was one I had forgotten when looking for bus stocks.

DISCLOSURE: Tom Konrad and/or his clients have long positions in NFYIF, CMHXF, CPST.

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.

On Tuesday, Green Wombat wondered whether it was too late for big solar to save the day. This is a huge deal and, in my opinion, a significant sign that solar thermal is coming of age (which I don't believe can be said of PV yet). But Wombat hits it on the nail when he says that bureaucratic and procedural hurdles, coupled with an uncertain policy environment, are slowing solar development down materially. My prediction (get ready for some real insight): don't expect those hurdles and uncertainties to disappear anytime soon.

On Tuesday, Neal Dikeman at Cleantech Blog wondered whether cellulosic ethanol would always be the bridesmaid. Interesting piece, especially in light of Neal's accurate predictions on the corn ethanol industry earlier. For my part, I have steered clear of all biofuels so far with my portfolio. When I look, I see big promises but no positive operating earnings for years to come in the case of cellulosic, or just a complete mess for corn ethanol driven mostly by wonky government policies. All in all, I yet have to encounter a good risk-adjusted value proposition in this space. Now don't get me wrong, there is a lot of smart money piling in, and I certainly get excited by the potential promises of cellulosic ethanol...I just have a hard time seeing where I can make money out of it.

On Thursday, Clarke Canfield at The Seattle Times told us about the latest commodity to be bubbling up: sawdust. While there isn't really an angle for most investors here, this is indicative of a broader secular trend of basic commodity scarcity, something the world has never really experienced for a prolonged period of time. While the sawdust story is amusing, tightness in commodity markets is not something to be taken lightly, as illustrated by recent unrest caused by global rice shortages.

On Friday, Jim Fraser at The Energy Blog informed us that Transalta Corp and Alstom were planning on building the first coal power plant CCS project in North America. Let us hope this one doesn't go the FutureGen way. This could also be an interesting proposition for Alstom. As in many other areas, a technological race is currently underway for end-of-pipe GHG management solutions, and emerging as a technology leader could mean access to booming markets for pollution control like China and India.

This is unlikely to change.  For a start, I'm not selling many alternative energy stocks... I'm using the downturn to add to my holdings, and intend to continue doing so even if the downturn becomes a full-blown bear market, as it well may.  What I am selling are stocks I bought in 2001-2004, mostly precious metals mining stocks, and I have not researched any of them for 3 years.  I don't have a lot to say about them, nor would an article fit the Alternative Energy Stocks theme.

In the absence of specific "sell" articles, I thought I'd outline a few rules of thumb I use to know when to sell.

Rule #1: Rebalancing

I have target percentages for both stocks and asset classes, above which I will sell part of my holdings.   For the mining stocks mentioned above, whenever they appreciate to more than 11% of my total portfolio, I sell some to bring the percentage back down.  For individual stocks, the target depends on how risky I believe the stock is.  For large, stable companies this is around 3-5% of my portfolio each, while for more speculative companies, this is less than 1% of my portfolio for any single stock.

Rule #2: Sell Half on a Double

For particularly speculative companies, especially one with negative earnings, I'll typically sell half of my holdings if the stock doubles from where I bought it.  This rule served me well last year with Composite Technology Corporation (CPTC), allowing me to take some gains, but then buy more recently when the stock fell back.  I failed to follow this rule with Electro Energy (EEEI) this January, and optimistically put in an order to sell 40% of my holdings at 2.5 times my purchase price ($1.30), but the stock peaked in intraday trading at almost exactly twice my purchase ($1.05.)

Both these tocks have since fallen back, but I was able to buy more of CPTC with part of the gains from my sale, while I have my original position in EEEI.

Rule #3: Capture Short Term Losses

Come tax time, I want all my capital gains to be long term ones, taxed at only 15%.  To that end, if I'm sitting on a good sized loss in a stock I bought 9-11 months earlier, I seriously consider selling so that I can use the loss to offset short term capital gains in the coming year.  If I'm very bullish about the stock, I will usually buy more, wait a month to avoid a wash sale, and sell the original position.  If I'm just neutral on the stock, I sell without buying more first.

Rule #4: Get Paid for Your Decisions

If I plan to sell some of my holdings because of one of the above rules, I often do so using covered calls.  For instance, if 4% of my portfolio is currently General Electric (GE) at $37, it would be over 5% if the stock goes to $50, and I would want to sell some because of Rule #1.  I can currently sell GE Jan 2010 $50 Calls for around $1.  If I sell calls covering half of my position, I make an immediate 1.3% (=1/37 x 1/2) gain on my holdings, and only if the stock goes up to $50 before January 2010 do I have to sell half my holdings... something would do anyway because of Rule #1.

This strategy is very similar to how I often buy stocks, using cash covered puts.

Rule #5: If You Need the Money

If you need the money for something else, it's quite likely that you will be forced to sell something at precisely the wrong time.   Because of that, I always try to keep enough cash around to cover several months of normal or anticipated expenses, and I never buy stocks on margin (because of margin calls).  If I need small amounts of cash anyway, I often sell covered calls or cash covered puts, as described in rule #4.  Try to plan ahead as far as possible in advance, and keep enough cash that you never have to sell on short notice..  

Conclusion

I often think that knowing when to buy and sell is often more important than knowing what to buy and sell.  All these rules are simple, but it's easy to lose track of them chasing the next hot stock tip.  These rules are especially valuable in the volatile world of alternative energy stocks, as the examples in Rule #2 show.  If you normally come to this blog for stock tips, remember that knowing when as what to sell is at least as important as knowing when and what to buy.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC, EEEI, and GE.

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.