New Power Fund Update – June 2007

The New Power Fund
By Sam Jones
Exclusively for InvestorIdeas.com
June 08, 2007

We have a not so funny saying in my office that tends to generate a strange grimace among the staff. I reserve the right to change my mind, at any time, for any reason. I suppose for this update, I’ll need to exercise that right a bit.

In the last update, written April 23 rd, I suggested that making money in renewable energy stocks was relatively easy – then. Of course, I had no way of knowing that the sector would put in an intermediate term peak 48 hours later. I also highlighted three stocks, SunTech Power, Evergreen Solar and Capstone Turbine which appeared to offer tremendous upside potential, had embarked on new up trends and were leading the pack of renewable energy stocks. Well, today I own only one of them – Suntech (STP) and have pared that position back to 4% from 7%. Evergreen Solar (ESLR) and Capstone Turbine (CPST) were both sold, one for a small gain and the other for a small loss. There are a couple points to be made while I am invoking my rights (to change my mind).

The first is that the renewable energy space is not for the do-it-yourself, long term investor as far as I’m concerned. The industry as a whole is simply too dynamic, regulations are in flux as is the price of traditional power. Beyond all the unknowns we also have new supply of stock coming to market all the time now which has the effect of diluting the demand for current shares outstanding. A good example is Suntech, the Chinese manufacturer of highly efficient PV cells. In the last two weeks, two new competitors to Suntech just had their IPO on the NYSE. As we would expect the demand for shares of the once pure play Suntech are now being diluted thrice between it, LDK Solar (LDK) and China Sunenergy (CSUN). Actually I’m impressed that Suntech has held up as well as it has all things considered. But I digress. Investors of the long term variety are going to have a hard go in renewable energy stocks at least for the next several years. They would frankly be better served gaining exposure to the sector through an indexed ETF like the Powershares (PBW, PUV or PDZ), by investing in either of the pure play mutual funds (GAAEX or WFFGX) or handing your investment capital to someone like me who runs a renewable energy strategy using stocks for private investors.

The second point is really a reiteration of our primary investing methodology. Any investments that we make need to be monitored with pre-defined stops or at least an exit plan. In the last month, you know I had developed a little love affair with Evergreen Solar. In previous years, once the trend was established, Evergreen had provided a very nice stable return without the normal volatility of most new energy type stocks. I was excited about the prospects and gave the stock a full allocation in our fund. At the time of the last update, I suggested that ESLR needed to pullback almost 16% to provide a good entry point. Well it did that, triggered our sell stop and then gave up another 19% through yesterday. So much for the nice stable uptrend. I will continue to take those opportunities for purchases as they come and I will continue to sell when our stops are hit. At the end of the day, we might incur a series of small losses but we will be invested in the leading stocks for much larger, long term gains. Cut your losses short and let your winner run – pretty simple in theory but tough in reality.

Along those lines, the current market environment and the character of the trends in the renewable energy sector are now offering us an interesting opportunity to make some changes in our portfolio. Specifically, we have a number of overbought stocks that are showing signs of weakness while strength is beginning to emerge in the more oversold stocks trading a multi-year lows. This morning, I sold the last piece of our position in Florida Light and Power (FPL) following the sale of Entergy (ETR). Both stocks have generated some very nice gains for the portfolio (42% and 36% respectively) however both are pure utilities and are not immune to some very real selling pressure in this overbought sector. Proceeds from sales have been reallocated to three companies that are relatively oversold and showing good relative strength in the short term. Specifically, we bought GAIAM, Inc (GAIA) , Emcore Corporation (EMKR) and C& D Technologies (CHP). All three have constructive chart and volume patterns and none appear to be overpriced by fundamental or technical measures. In fact Emcore, a manufacturer of semiconductors for the solar industry has a P/E of only 5. The opportunity to take profits and rotate assets into stocks that have already seen a lot of selling pressure is compelling to me at present as we go into the summer doldrums and the market risk increasing exponentially with every new high. I’m still sitting on 26% cash and have no compelling reason to be 100% invested.

The final point to be made is regarding overall risk management. As you know the world of renewable energy investing is inherently volatile. However, there is also a distinct tide in these stocks that comes in and goes out. Since late 2006, the tide for renewable energy stocks has been coming in (favorable) but I am sensing a reversal in the near term. Now understand that I am a firm believer in the macro strategy of investing in renewable energy. It is the future and if you’re reading this, you’re already a believer. But once or twice a year, we need to put on our tactical foul weather gear and protect what we have made, whatever that number is. Trying to make a strong return in an unfavorable environment isn’t productive typically. The last time I saw this set up was April and May of last year. Subsequently the clean energy indexes lost almost 30% in a few short months. I am not forecasting the same event nor do I condone pure market timing. But I am expecting a correction of significance in the near term. We’ll want to stay invested as long as we can in stocks that offer favorable risk reward characteristics but not at the expense of losing our investment capital. Our own risk management measures kept our losses to less than half of the clean energy indices last year and I’m hoping we can do even better this round. YTD our model is sitting at a very conservative 9.5% net of all fees and I am preparing to get really defensive.

Good luck to all this month

Your green earth servant,
Sam Jones

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