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The New Power Fund with Sam Jones at Renewableenergystocks.com and Investorideas.com
More articles: http://www.renewableenergystocks.com/NPF/Default.asp
Buy This Dip
I’m normally not the kind of guy that posts sensational headlines but I’m going to make an exception this time. I would shamelessly recommend that investors in the renewable energy sector begin increasing their exposure to leading stocks RIGHT NOW. I’m even going to do something that you won’t hear very often from those of us who write financial commentary. I’m going give you three good reasons.
The Only Growth Game in Town
Renewable energy and clean tech. is quickly becoming the only identifiable growth game in town. Critical investors are finding respectable growth rates in top line revenues and quickly falling net operating losses. Granted, every sector of the economy including renewable energy and clean tech have had dramatic slowdowns since September but in this case I only see a slowing growth rate, healthy balance sheets, solid business plans and cheap stock prices. Honestly, I can’t find another industry that offers such a compelling mix.
Spire Corporation (SPIR) is a new addition to our portfolio and fits that description nicely. It is in the solar cell generation, LED and Biotech sectors, a nice combination for the current environment. For the nine months ending September 2008, gross revenues increased 93% to $49M while net loss from operations decreased 84% to $347k. Did the market reward SPIR after September for a job well done? Not exactly. Like many of these growth stories, stock prices were crushed in October and November across the board. No prisoners, no discretion, “just get me out of everything” type selling. SPIR fell 80% over the next 34 market days. In washouts like these, we don’t pay much attention to which companies lose the most as much as who recovers the fastest and I’m impressed that investors seem to be coming back to their senses. SPIR’s stock price has recovered very quickly from $3 to almost $7 since the November lows.
Enernoc (ENOC) is another name I discussed last month as an undervalued growth story. They are another smaller technology company who sit directly on the railroad tracks of future spending on utility scale efficiency and demand response projects. Enernoc has suffered from a bit of bad timing in coming to market in June of 2007 at $33. Our New Power fund began buying Enernoc around $7 and we have been accumulating shares since late last year. Investors need to be a bit careful with this one as it has already moved strongly off the lows but again for those willing to buy dips, I think there is much more upside. Enernoc has completed two strategic acquisitions in the last 12 months and is showing a 100% increase in revenues through June of 2008. Net income could certainly show better and should as they get control of their expenses.
Fuel Tech (FTEK) is the last company I’ll throw out as an example of an under loved growth story. Currently, we do not own FTEK but it’s on the buy list. FTEK is another cost saving technology company that offers boiler optimization, utility efficiency and air pollution reduction systems. Again for the nine months ending Sept 2008, they grew revenues by 32% to $64M and doubled their net income to $4.2 M. Like the others, through last November FTEK is down over 70% from its high in 2007. They have a pile of free cash flow to work with, sitting right on the demand curve and trading at a 70% discount. Sound like a good investment? I’m betting it will be for several years to come.
Finishing the Basing Pattern
The broad stock markets of the world have been in a bear market since October of 2007 making this one of the longest and most devastating price declines in history (without a substantially price rally). Most of the real panic type selling occurred exactly one year later in early October of 2008 with a final price low in November. Now, this is important so pay attention. The price pattern that has developed since last October is all part of a massive “basing pattern” in stocks that is a necessary piece of every great and sustainable low in prices. As I write, several of the big spotlight indices are threatening to make new lows but I believe the downside for prices in aggregate is limited from here. If, and this is a big if, the broad market can find some buying enthusiasm at these levels (740 on the S&P and 7400 on the Dow), we will in fact have a successful retest of the lows from last fall and every technical market monkey on earth is going to get excited about buying for the long term again. Remember, this is a basing cycle and there are no hard lines when markets go through these retesting periods. This is a zone and until I see ALL of the benchmark indices head south on confirmed selling volume, I’m going to assume that we are approaching one of those “best buy” moments. Renewable energy stocks are holding up much better than the broad US markets this year which confirms underlying demand despite the recent increase in correlation between the two. The Powershares Clean Tech Index (PBW ) for instance is still a full 15% higher than the November lows while the Dow Jones Industrial Index is slightly below. Reason number two is therefore conditional on the assumption that our basing pattern will more or less hold at this level.
New Regulations Will Reignite Clean Tech and Renewable Energy
A few lead articles from recent press to set the stage:
LITTLE ROCK, Ark. — A proposed coal-fired power plant being built in southwestern Arkansas could end up paying $2.8 billion over 40 years because of new federal carbon penalties, a study by opponents released Thursday claims. – USA Today February 20th, 2009.
The California Public Utilities Commission on Thursday approved new regulations that ban state utilities from purchasing power from high-polluting power plants, including most coal fired power plants. – Fogcityjournal.com
On the long list of things that keep coal-industry executives awake at night is the possibility that the Environmental Protection Agency (EPA) will begin to regulate carbon dioxide as a pollutant. Now it seems that nightmare is at hand. – Time Health and Science, Feb. 20th, 2009.
Best of luck to the Coal industry because they are going to need it. Electricity produced by coal is clearly the benchmark for cost in power production. And it has been too cheap to drive a meaningful change toward renewables. Now, finally, after 25 years of painfully obvious evidence, our government appears ready, willing and able to drive UP the cost of dirty power generation. The promise of “clean coal” by the likes of James Rogers of Duke Energy is like saying Marlboro Lights are good for your health. Investors are always asking the question, what will make them buy? In the current environment, they might argue that solar installations are a discretionary item and do not make the short list during recessionary periods. I say, it’s all relative. Solar, wind, geothermal and hydro power may not be cheap enough to compete with yesterday’s coal prices but tomorrow is a different story. 2009 - 2011 will be the period of time when the cost lines of clean power and dirty power cross. Residential home owners all the way through utility scale projects will choose clean energy because will be relatively cheaper thus creating more and more demand. I realize this promise is not altogether a new concept but the evidence and likelihood that it will happen now is far greater than any time in our country’s history. Once again, smart and somewhat brave investors will use this opportunity to begin accumulating shares of strong companies who are direct beneficiaries of the changing regulatory landscape.
Make a Plan Using Risk Management
As always, I recommend every investor do their best to manage risk while seeking opportunity. Today, we are doing so through hedging techniques while we accumulate shares for longer term investment potential. At present, our New Power fund is short the Russell 2000 small cap index by almost 20%, we are still sitting on 30% cash and we have planted seeds for growth with the rest. “Short” positions make money when the markets move down. Once the current round of selling is over, we will lift our hedges and move our net equity exposure quickly up to 60%. I doubt our wait will be long. Best of luck to all.
Sam Jones
www.NEWPOWERFUND.com
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