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A Terrible Year, Now What?
I’m going to go ahead and call this a terrible year for renewable energy, clean technology investors. The first 22 days of 2008 was straight down and before investors were even aware of the situation, they had lost roughly 24%. Beyond a brief recovery into May, the sector went from bad to worse right into the lows in late November showing a 77% loss in 2008 alone. Our New Power Fund is down 48% YTD which is still shocking for me. Remember too that oil and energy prices where hovering around $140/ barrel in mid June and still the clean, renewable, profitable, growing at 34% year over year, sector fell like our president’s approval rating. I can’t justify the losses beyond speculating. I suspect plenty of hedge funds got invested in clean tech in 2007 given the gains made then and their inherent tendency to chase winners higher. In 2008, as investors asked for their money back, hedge funds were forced to sell anything and everything just to meet redemptions thus forcing prices unnaturally lower. For whatever the real reason, we should all remember this year as a stark example of the very tenuous connection between logic and stock prices. I am not giving up. 4 years ago, I made a commitment to renewable energy and green wave investments and I’m sticking to it even after giving up most of my gains. So, let me spend the remainder of this year end update identifying current risks and making a plan for 2009.
Headwinds and Tailwinds
Oil at $33/ barrel isn’t helping much as you might guess. But I don’t see oil and gas prices staying here for long. Supply and demand statistics simply don’t support these depressed prices and I suspect we’ll see something closer to $80/ barrel again before the end of 2009. Resources are in no more abundance today than they were at the beginning of the decade and yet demand is still moving higher despite the global recession. Investment in renewable energy is clearly a function of the alternatives just as buying a hybrid car with gas at $1.50 isn’t quite as compelling as when gas was above $4.00. Beyond impossibly low oil prices, we have a market place that is still afraid to speculate in smaller growth oriented companies like those found in the renewable energy sector. And finally, commodities are out of favor and won’t come back into the spotlight until inflation rears its ugly head again.
However, we do have a couple significant tailwinds. The first is obviously the fact that prices in many of the brand name clean energy and clean tech stocks are now dirt cheap by any measure you choose. Could prices go even lower? Absolutely. But at some point, we just run out of sellers and I’d think we’re pretty darn close to that point. I know several value managers that are picking up renewable energy stocks on the assumption that they are grossly underpriced. Second, it appears very likely that under the new Obama administration which is clearly stacked with pro – clean energy leadership, we are going to see policy, regulation, public works projects and other incentives aimed at the sustainability of power use and growth of domestic clean energy production. President elect Obama is quite a bit smarter than any president we have seen in the last several decades. He understands the risks we face from Middle East petro-dictators, the real costs of climate change, the loss of jobs and threats to our national economy. One would be quite foolish to stand in the way of this administration and suggest the future will repeat the past. Once investor confidence returns to the financial markets even slightly, renewables will be back on the radar and may even fight the winds of recession and falling commodity prices. New cap and trade policies combined with lower costs and efficiencies found in clean tech will drive this industry higher with any simple cost/benefit analysis. It is not a matter of if, but of when. Sooner than you think is the answer.
What Now?
Outside of my tireless cheerleading, we have the hard fact that people do not like to lose money. Most of the spotlight solar and wind production companies have been crushed and are only a single month from the deepest lows of the year. Today, I am seeing a reasonably good rebound but nothing more than what some in the industry call a dead cat bounce (sick humor). Given the decline and the losses from the beginning of the year, there is a segment of the population that will take any rebound, like this, as an opportunity to get out at higher prices. The pain of loss was just too great and this crowd has signed off on renewable energy investing for good. They still want out. If I put my technical hat on, we do typically need to see more of a base form at, or around the lows of this year from which prices can move sustainably higher. Today, I just don’t see enough of a base. Sadly, I would love to recommend purchases of SunPower and Vestas and First Solar but alas, I cannot in good faith until I see where and when the cat finally lands. To be clear, I like to invest in new up trends and avoid bottom fishing. There will be plenty of money to be made with a lot less brain damage with a few more months of bottoming action.
As you know from my previous updates, I think the electric (and water) utilities that have already run ahead of regulations in terms of sourcing their power from alternatives are a good bet in the meantime. Today, in our New Power Fund (www.newpowerfund.com) we own the following clean utility stocks – CIG, CEG, ETR, FPL, WTR and ORA . As a sideline play for the brave at heart, you might also consider Enernoc, Inc (ENOC) and Comverge, Inc (COMV) both of whom offer smart grid technologies to utilities to help with base load distribution and demand response. Both are tech companies that have completed full basing patterns and begun new up trends unlike most of the sector. Comverge is trading a little over $5 now after being as high as $38 in 2007. EnerNoc is at $6, but was as high as $49 last year.
Best Guess
Don’t hold me to this because I’m speculating. The most reasonable price pattern for the US stock market and the renewable energy sector given upcoming earnings reports and year end Mickey mouse is as follows: I expect prices to push slightly and erratically higher into the first week of January and then fail ahead of earnings announcements. I believe that prices in the broad US market do not need to go a lot lower than we have already seen, ultimately around the 740 level on the S&P 500 however I will not be surprised to see that number again briefly by March of 2009. In a perfect world, such a successful retest followed by massive buying pressure, volume and good leadership would be offer a very compelling reason to back up the truck and buy a lot of stock. From that point, our “Hot, Flat and Crowded” (Friedman’s new book and a must read) world should reward renewable energy investors possibly for many years with incredible returns. Between now and then, I am sticking with my hedges (short small caps), staying with the stocks that show good leadership, pay dividends and are resistant to selling pressure (mostly utilities and few tech companies) and waiting for a better set up to get really aggressive. Best of luck to all in 2009 and happy holidays.
Sam Jones
New Power Fund, Senior portfolio manager
All Season Financial Advisors, Inc, President
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