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The New Power Fund
The New Power Fund
By Sam Jones
Exclusively for InvestorIdeas.com
September 21, 2007
Renewable energy investing is a bit like Colorado weather. If you don’t like it, wait five minutes. If it’s hot, expect a snowstorm. Calm and sunny? Head for the tornado shelter. Expecting rain? Bring your sun glasses. For this update, I’m going to digest the wild ride of this summer, make a few perhaps obvious comments regarding future public policy, and finish with my take on current trends in renewable energy investing.
Digesting The Summer Spike
Going into the summer, renewable energy stocks were trending higher nicely, perhaps a bit too nice. July hit and the turmoil began much as it did for the broad US stock market. However, beginning on August, something interesting happened. Many of the stocks in this sector rocketed higher by as much as 20-30% in one week. Strange behavior indeed during the early phase of an intermediate term correction. Two weeks later, these same stocks were down as much or more! What happened? Hedge fund liquidations, that’s what happened and apparently many of them held some hefty short positions. For instance, Fuel Cell (FCEL), Ballard Power Systems (BLDP), Capstone Turbine (CPST) and Evergreen Solar (ESLR) have all seriously lagged the clean energy indexes and ETFs for well over a year now. Obviously, they have been the target of short sellers until recently when someone decided to “cover” and liquidate causing a cascade of similar behavior among those with similar (short) positions. To the casual observer, it seemed that these stocks had just received a great deal of buying enthusiasm when in reality, it was a rally made up of short covering. Remember, these stocks were the great pre-2000 leaders in the renewable energy sector running as much as 2800% in less than two years. And they have subsequently been the great laggards – until now. Interestingly, the wash out in the hedge fund world in August may have been just what these lost leaders needed to put in a good base and begin trending meaningfully higher again. In fact, our “New Power” strategy now owns 3 of the 4 names listed above (I won’t tell you which) on the basis of recent relative strength, oversold status and large cap appeal. Outside of this two week spike in the sector prices, renewable energy stocks got back to the business of what looks like a normal correction within a larger uptrend. And as of this week (Sept 18 th) it appears that the correction is coming to an end. Time will tell and the real moment of truth will be upon us soon as prices move back up to retest the July highs. Regardless of the intermediate term picture, the long term environment for renewable energy (and the stocks) is getting more and more green.
Changes in the Pipeline
I have written in frustration about our Federal government’s failure to properly support and offer incentives to the fledgling renewable energy sector. I am not ashamed to say they are quite literally impeding growth, research and investment in this industry through the vested interests in traditional oil. From our Federal legislators, we get a lot of lip service, a lot of good intentions and in the end, less than 3% of our nation’s energy use comes from renewables. But, I do see the light. Individual states are taking it upon themselves to adopt Kyoto Protocol type standards that will drive change from the bottom up. The Federal government is probably too big and slow to do it meaningfully anyway so perhaps it’s for the better. For instance the Colorado Climate Action Panel in conjunction with the legislative leadership is mapping a plan to cut carbon emissions statewide by 37% over the next 13 years. They will do so through the creation of painful but absolutely necessary “carbon emissions taxes”, raising the cost of electricity appropriately, imposing heavier regulations on emissions from utilities and setting standards for new home building (All new homes must use 15% less energy by 2013). Many states are taking it upon themselves to do the same. In the next 3-4 years, we are going to see a mass psychological change where embracing renewable energy shifts from progressive do-gooders to the masses based on affordability. Life will hopefully become very expensive for those who choose to continue abusing our natural resources. Oil at $82 is music to me and I hope it goes to $100/ barrel. This is all good for the sector as it just means more demand for solar, wind, hydropower, bio-fuels, efficiency, technology, etc. Renewable energy is a new sector of the economy and it is thriving. Don’t miss the action.
Trends in Stocks
I have to admit that I have added breadth and depth to our New Power fund this year. In the last two years, almost all of the stocks in our portfolio were pure plays in renewable energy. But I am now seeing a great ground swell and excellent leadership in many companies that fall into the sustainable business category. Green grocers (Whole Foods, Celestial Seasonings), distributors of green products (like Gaiam) and water filtration companies (Calgon Carbon) are a few examples of non-energy based industry groups I find attractive – and own. So, not being one to forego an opportunity, I have expanded our New Power strategy to include as much as 40% in companies that drive sustainable living standards through their behavior or their business models.
Overall the trend in the sector is still favorable but I would describe the action in the past few months as thready and selective. It certainly has been in an investor’s interest to pay attention to leadership this year and stay active in allocating assets among those names. YTD, I have not touched more than 50% of our portfolio as these stocks and ETF’s continue to trend higher. To name a few, we own Sun Power (SPWR), Itron (ITRI), Echelon (ELON), GE (GE), Powershares Clean Energy ETF (PBW) and Powershares Water Resources (PHO). But nothing is forever and historically, the end of the year has not been a seasonally strong period for renewable energy stocks. With most ETFs and funds up 18-25% this year, you can bet there will be some profit taking before year end. While I am always looking for the next thing to buy, I am going to be more critical of taking new positions especially as we get close to the end of the year. Today, our New Power model is sitting comfortably on 27% cash and I’m just not finding as many good looking new investment options. One last word of caution. Be careful about bottom fishing among stocks that are either cheap on a price per share basis or trading at new 52 week lows. Low is good, but zero is always a possibility. Buy and own stocks,
ETFs or funds that are trending up – no exceptions.
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