Constructing your New Power fund

The New Power Fund
By Sam Jones
Exclusively for InvestorIdeas.com
March 12, 2007

In the last update, I discussed the general concepts of how we want to manage our “New Power” fund. We looked at the methods to identify leadership among the various stocks, ETFs and mutual funds in the renewable energy sector. I also talked about our rank and sort model which finds the best risk adjusted returns looking backwards at a 30 day rolling window of time. And I discussed the tools you’ll need to accomplish all of the above. Interestingly, the market carnage of early March offered us an interesting opportunity to see exactly how well our methodology holds up during a mini-crash environment. If you didn’t notice, the Dow recently lost ~5.5% in a single week ranking in the top 10 worst down weeks in history. Looking closer at our sector, our benchmark ETF (PBW) lost 9% and the pure renewable energy funds lost a little over 7% for the week. Our own New Power fund lost 4.6%. My point is not shameless advertising, but to show that taking steps to remain invested in the leading sectors and the securities with the lowest volatility provides a lot of value both in return and risk aversion. Let’s get into the actual construction of our “New Power” fund. Again, you’ll have to make your own decisions for your own money and any recommendations I make in this column are in regards to our own in-house strategy.

Diversify When Possible

The bulk of the New Power stocks are generally found in three sub-sectors; Industrials (electrical equipment), information technology (semiconductors) and utilities (electrical). As such, we want to keep the bulk of our assets in these three food groups in order to stay in sync with the general trends in the industry. However, there are a few stocks that make the Green Tech investing lists that fall outside the three primary subs sectors and whenever possible we want to attempt to hold these for diversification reasons. They are Hexcel Corporation (HXL), Spire Corporation (SPIR), and Ormat Technologies (ORA). HXL is branded as part of the aerospace and Defense sector as it produces advanced structural materials for use in the military (at present). SPIR is in the health care sector despite the fact that the company is listed in the solar technology game. They maintain business units in the biomedical and orthopedic areas. And ORA is probably one of the only pure play stocks in the geothermal world despite being listed as an electric utility. Today, we own only ORA, but am looking to add HXL and SPIR as they are both moving up the ranks. In our own model we attempt to keep our portfolio 70-80% invested at a minimum while owning between 10- 12 stocks, as well as holding positions in our benchmark (PBW) and one of new favorite funds Guinness Atkinson Alternative Energy fund (GAAEX) .

Overweight the Leaders

Today, you may have noticed that the semiconductor sector is beginning to behave well relative to the entire technology sector and the broad US market as a whole. What luck! Semiconductors happen to be well represented in the New Power sector. Our portfolio currently owns IRF, ITRI and AMSC and STP all of which are classified in the semiconductor sector. Remember, we came to own these stocks simply because our rank and sort exercise lead us to this sector as these stocks are now under accumulation. The whole semiconductor sector as an average is trading at the lows of the last 3 years, but these stocks are showing life! That’s the way it works. By the time you recognize a whole sector move, many of the stocks inherent to the sector are already 30-40% higher so we need to be open to buying selectively when our system dictates such a shift. All of these stocks took a hit last week as expected, but looking back over the last month, I’m not losing a lot of sleep (IRF -.79%, AMSC +26%, ITRI +8.2% STP -7.93%).

Industrials have been in the dumps, but are starting to show some signs of life as well. We own Evergreen Solar (ESLR) at present for a full position and I still think it’s one of the best looking chart patterns out there. I am also on tap to add Ballard Power Systems (BLDP) and Fuel Cell (FCEL) both of which are back to their long term support lines. Remember, we don’t want to buy anything that is not in an uptrend. This is critical to understand because, what looks like an obvious landing pad may only be a temporary stop on the way to lower lows.

And finally, our lovely utilities are carrying the weight of the portfolio with core positions in ELE, FPL and ETR. We have made 30-50% on these positions and I am actively cutting back our exposure to these stocks as they are overbought on all time frames. I suspect strength in the technology sector in the coming weeks will be at the expense of the more conservative utility sector.

Why Own A Renewable Energy Mutual Fund?

As I said, we currently own the Guinness Atkinson Alternative Energy mutual fund (GAAEX) in our portfolio for almost 10% of assets. Why? Because they are in a position to own a great number of foreign stocks that are not available on the US exchanges or don’t have an ADR (American Depository Receipt) equivalent. In fact, a full 80% of assets are held in foreign securities in the fund. The fund is bound to be somewhat volatile as we just witnessed however, many of the largest and best renewable energy companies are not trading in the US. At present, I still have a lot more confidence in the international arena than the US equity markets so this fund is our “go to” foreign position in our New Power Fund.

Remember, our positions are never held “for the long term”. I simply don’t believe there is any investment that should be held for the long term unless it magically stayed in the top of our ranks beyond a normal cycle (9-12 month). We want to try to hold our positions in excess of 12 months for tax reasons, but I haven’t been able to do so yet in over three years. Theses stocks are just not the type to sit on and hope it works out over the course of a year. Managing your New Power portfolio with taxes in mind is an excellent recipe to lose a lot of investment capital as far as I’m concerned. Hopefully, you’re getting the flavor for my recommendations. You might find it out of sync with your personal understanding, tolerance for risk, tolerance for research and maintenance, or tolerance for me. Again, it’s your money and I encourage everyone to adjust any of my commentary to your personal situation. That’s it for this update, have a great week/ month.

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