Tom Konrad, CFA
If you like to take risks, want to fight climate change and prepare for the impact of peak oil, and would also like a chance to make a big return on your investments, here are ten investments you can make that might do all of those things.
Note (4/28/2010): A performance update for these picks is available here
A small part of my portfolio is usually in small, risky green companies with the promise of big returns. This year, however, I’m too bearish to own many small, risky companies, but I’m still making some long-shot bets that could pay off big. Last year, my list of ten green energy gambles had two stocks that returned over 100%. This year, I’m hoping to do better by looking for profit on the short side of the market.
In December, I made the case that green and peak oil investors should be looking to the short side of the market. Declining supplies of oil and gigantic debt are bound to be a drag on the economy for years to come. Some companies and industries will be hurt more than others. Action to reduce carbon emissions will have both winners and losers. No matter how many green jobs are created, some industries will be hurt. Spotting the companies that will be hurt is easier than spotting the beneficiaries: They’re the ones trying hardest to derail climate legislation. They may succeed, but if they fail, we’ll see it in their stock price.
Putting Your Money Down
On the short side, these gambles are going to be puts on companies or industries I highlighted in my Green Energy Investing for Experts series. I’m using puts because they have the right sort of payout for gamblers: if the stock does not fall much, you lose the premium you paid for the put. If the stock falls a lot, the put pays off in a big way.
One other advantage of puts is that they are more accessible to the ordinary investor than shorting. It’s much easier to get trading authority to buy options from your broker than it is to get permission to sell calls or short stocks. It’s even possible to buy puts in a brokerage IRA, where federal regulation prohibits shorting. Because this is a list of picks for 2010, I’m only going to use puts that expire in January 2011, giving us a target date of one year.
Should you be buying puts in your IRA? Your investment advisor would almost certainly tell you "no." But he’d probably also tell you that "you should hold stocks for the long run." This conventional wisdom makes no sense if you expect peaking fossil fuels to cause economic decline. Holding stocks for the long run also didn’t make sense when Jeremy Siegel’s book with that title was published in 1998. If you’d bought the S&P 500 at the high in 1998, and sold at the high in 2009, you would have lost 9% over 11 years. If you’d bought at the low in 1998, and sold at the low in 2009, you’d have lost 27%.
That’s not the kind of performance I want in my account. Nevertheless, you should use puts judiciously. This is gambling, even if peak oil is tilting the odds in our favor. For myself, the money in this type of bet is a very small part of my portfolio.
|Security||Ticker*||Portfolio Weight||Underlying||Price 1/9/10**||Related articles|
|EWW Jan 2011 $30 Put||XBLMD.X||20%||iShares Mexico||$0.825||Experts part II – Shorting Mexico|
|CHK Jan 2011 $17.5 Put||VECMW.X||7%||Chesapeake Energy||$0.865||Experts Part III – Shale Gas|
|DAL Jan 2011 $7.5 Put||ZQIMU.X||7%||Delta Airlines||$0.975||Experts Part IV – Airlines|
|AMR Jan 2011 $5 Put||VMRMA.X||7%||AMR Corp||$0.85||Experts Part IV – Airlines|
|LUV Jan 2011 $7.5 Put||VUVMU.X||7%||Southwest||$0.50||Experts Part IV – Airlines|
|CNX Jan 2011 $35 Put||VTLMG.X||7%||Consol Energy||$2.325||Experts Part V -Coal, Experts III Shale Gas|
|BTU Jan 2011 $30 Put||ZZTMF.X||6%||Peabody Energy||$1.45||Experts Part V -Coal|
|HOT Jan 2011 $25 Put||VVOME.X||10%||Starwood Hotels||$1.725||Experts/Index – Travel|
|JBHT Jan 2011 $20||ZORMD.X||10%||JB Hunt||$0.65||Experts/Index -Trucking|
|Power Efficiency Corp||PEFF.OB||20%||n/a||$0.275||see below|
*These ticker symbols will change after the second quarter 2010.
**Since options are typically illiquid and often go without trading for days, this price is not the most recent trade, but the average of the bid and ask price.
y Long Pick
This stock is Power Efficiency Corporation (PEFF.OB.) I first heard about them over two years ago when BJ Lackland, the company CFO called us up and said he wanted to advertise on AltenergyStocks.com. They had read one of the many articles I write about energy efficiency, and why it should be at the core of a clean energy portfolio, and decided that our readers would get the benefit of cutting energy use of escalators, elevators, rock crushers, and other variable-load, constant speed motors with clever controllers. Did you realize that a single escalator can draw about 6kW? One kW is about the amount of energy used by a typical home. Power Efficiency’s controller cuts that to about 4kW. In other words, if an escalator runs 12h a day, one of their controllers will save enough energy to run an entire home.
When they first became an advertiser, I was reluctant to give them an extra boost by mentioning them in articles, because of the conflict of interest. I did mention them a couple times, but never as prominently as this, and always with a disclosure about the relationship. Last fall, however, I finally decided to take the plunge, and made a significant investment in the company, simply because I think it’s a good investment. Now that my own money is where my mouth is, I feel much better writing about the stock. I can now honestly say that this is a company that I would invest in myself.
Liquidity matters because PEFF trades on the Bulletin Boards. If too many readers rush to buy, the price will shoot up and make it no longer a good value. This happened in a small way to C&D Technologies (CHP) which I included in the top 10 list. That stock was up over 20% the three trading days after I published my top 10 stock list, despite the fact that CHP had a daily turnover of about $300,000 and there was no other news. There was news of an Army contract the following day, though, so part of the run-up could have been driven by people in the know illegally trading on the information. I’ve come to believe that that type of insider trading is quite common, because I often see stock prices moving in anticipation of this sort of announcement.
Power Efficiency only has a daily turnover of a little over $1,000. Since you’re gamblers, I’ll just suggest that you get in early, or wait and hope for a correction after this article bumps up the stock price.
You’ll note in the table that I’ve assigned weights. These are mostly intended for tracking the performance of the portfolio over the year, and were chosen to reflect my general confidence in each of the bets.
I expect that readers are not going to buy all these securities in these proportions. In fact, you will probably be better off if you only buy a few of the suggested puts, and use different strike prices than the ones I’ve listed. Only buying a few will save you money on commissions, while using different strike prices will help you get reasonable prices on these illiquid securities. I’d suggest using limit orders as well, to limit the price impact of your individual orders.
How Much to Buy
Unlike last year, this portfolio is meant as a complement to my 10 Green Picks for 2010. If you have a larger portfolio and an account where you can buy options, this portfolio can be used as a complement to that portfolio if you are worried about a fall in the market as a whole. The dollar investment in these puts should only be around one to five percent of your total long portfolio positions if you’re trying to hedge your exposure. If you are confident that the market will fall drastically and hope to profit from such an event in 2010, you might invest more. I personally don’t have that much confidence in my own sense of timing. I have a long history of being much too early on my market calls, going back to the start of my investing career in the late 90s, when I thought this Internet fad was going to end at any time. It took three more years.
Because this is a mostly a portfolio of Puts, ordinary benchmarks don’t make sense. Instead, in order to compare like to like, I plan to use a put on an index ETF which also expires in January 2010. My first choice for an underlying ETF would be SPY, but long dated puts on SPY expire in December, not January. Instead, I’ll use a put on the DIAMONDS Trust (DIA), which tracks the Dow Jones Industrial Average. In particular, my benchmark will be DIA Jan 2010 $75 Put for the 80% of this portfolio on the short side. This put is currently trading under the ticker ZAVMO.X, with the average of bid and ask prices at $1.49. For the long side of the portfolio, I’ll use the Powershares Wilderhill Clean Energy ETF (PBW), with a 20% weight, which closed on January 8 at 11.74.
How the portfolio performs relative to this benchmark will give some indication of how useful my sector and stock picking is, even though the profitability of this portfolio will mostly be determined by the direction the market takes in 2010. If we have another year like 2008, this portfolio should be profitable no matter how bad my sector picks were, while if next year is a repeat of 2009, no amount of sector picking is going to save this portfolio from a loss (barring some catastrophic event for one of the particular companies.) In other words, the benchmark is there to test how good my ideas in Green Energy Investing for Experts really were.
I’ll update you on how this portfolio and my top 10 picks are doing each quarter, just like I did last year.
DISCLOSURE: Long PEFF. Short EWW, DAL, AMR, LUV, BTU, CNX, HOT.
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.