Background music: Just chillin by Polished Chrome
Earlier this week we went on a road trip to check off a Bucket List item that after living in Colorado for 20 years and a deep interest in 19th century western history: The Little Bighorn. While Custer’s defeat in Southern Montana is not the black hole conspiracy mystery such as the JFK assassination, it remains so full of unanswered questions. One of the many things remarkable about the Little Bighorn is the placement of markers on the spots where U.S. cavalrymen fell. The various Indian nations are still in the process of placing their own markers where their warriors fell as well. These markers give you a really good idea of happenings of those fateful hours.
Happenings from last week and looking to the week ahead:
Our client portfolios exceeded the return of the S&P 500 by a hefty 2.7% last week due largely to the sale of National Technical Systems which surged 38% on the news of its sale for $23 a share.
While its possible we may currently be in for a mild market pullback the underlying economic fundamentals still support our full equity exposure.
Bob Diehl of nospinforecast.com who developed the Aggregate Spread is giving us an all-clear signal in the search for an impending recession. His method looks 9 months into the future and is giving a green light up to at least April 2014.
In other macro economic news recessionalert.com is giving an all-clear signal as well. Dwaine Van Vuuren of recessionalert (RA) has developed a very intriguing stock market health model that incorporates economic data and stock market technical statistics. I expect I’ll be tinkering with his models shortly and investigating how well the synergy exists between his work and our own.
Green Investing Alert: Our proprietary quantitative ranking systems have identified a stock long enamored by the socially responsible / green investing community: Gaiam
Gaiam is a retailer that caters to the yoga/wellness market. What may be the catalyst going forward is the sale of their stake in Real Goods Solar which is allowing Gaiam to add a significant amount of cash to their balance sheet.
We have no positions in Gaiam at the time of this post.
Investing in Solar and other alternative energies has been a hazardous experience for investors for several reasons:
- Too much competition which results in price cutting and profit margin pressure which results in volatile earnings and significant stock volatility.
- Reliance on government subsidies in an era of budget restraints.
But these issues are the primary problems associated with investing in solar cell manufacturers.
What about investing in Solar Farms that have their infrastructure in place and long term selling agreements with credible utilities? This is an entirely different enterprise than just selling solar panels since this is really an issue of cash flow.
Warren Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations.
“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of Stanford University’s center for energy policy and finance in California. “The beauty of solar is once you make the capital investment, you’ve got free fuel and very low operating costs.”
With Treasury yields in the 2% to 3% range solar farms offer a viable alternative to bonds. In my opinion its only a matter of time before solar farms are offered in either a REIT or MLP structure to the public, where the cash flow generated is passed on to shareholders with special tax considerations. Best of all, the cash flow comes without the risks and headaches of solar panel manufacturing and sales.
Now we’re finally getting somewhere.
This may be premature but I’ve noticed that our portfolios have been outperforming for the past three days. That may not sound like much but I believe its an indication that the breadth of the market is improving and that the major indices are masking underlying strength.
When underlying market strength is weak, the major indexes that you can own via ETF’s or Index mutual funds tend to do relatively well. However, when underlying strength is weak there is a strong tendency for individual equities and small caps to outperform. This could be the case now, time will tell. It has been 10 months since we last outperformed so the tide may be turning.
We continue to hold Appliance Recycling Centers of America ARCI Green Plains Renewable Energy GPRE and have a small position in Perma Fix Environmental Solutions PESI.
Severe sell off in solar play First Solar FSLR a former high flying darling of the solar energy industry. FSLR came out with a statement that 2012 earnings will be roughly half of analysts expectations. We have no position in FSLR but I must say the price is getting interesting.
FSLR share price is $33.90
The balance sheet is solid: Book value is $46 which includes $8 in cash and the equivalent of approximately $7 in debt.
But the market cap is now below revenues, which indicates very good value.
Its probably too early to buy as the stock needs to stabilize and the source of the earnings weakness must be determined. Stating again for the umpteenth time: Europe is the primary source of Alt Energy revenues and Europe is cutting back severely through austerity programs to curb their debt. Alt Energy will be sacrificed in the meantime as for most countries its a discretionary expense.
Long ARCI, PESI and GPRE
Evergreen Solar bankrupt….Solyndra bankrupt….Was it possible to see the collapse in the Solar stocks coming? Yes it was and I’ve mentioned this frequently for better for the better part of three years. It all boils down to the fact that you don’t want to own investments that rely heavily on government subsidies for their survival. You especially don’t want to own those investments during periods of financial austerity. The solar stock industry relies heavily upon subsidies from the US, China and Europe, with all three in either recession/depression or on the brink this outcome was inevitable.
For as long as I’ve been practicing SRI (over 20 years) I’ve been uniform and adamant that investing proactively is contradictory to effective long term investing. Investing including Socially Responsible Investing is about handling risk intelligently and dispensing with the rose colored glasses. Eventually every investment will turn against you and how you decide to cope with this inevitable turn will largely dictate the degree of your long term success. Being emotionally married to an investment is a sure and quick way to the poorhouse, you’d have been much better off supporting the company as a consumer not an investor.
Is there a survivor and a longer term winner in the bunch? Probably First Solar
Investing in Solar or Alternative energy now is nothing more than a spectator sport for the time being.
Ok I must confess I don’t have a tie in for “Derek” other than being a great fan of Eric Clapton, so I’m thinking of Dominoes today with the effect of GDP to Corporate Earnings to Stock Valuations. So much for the Gloom and Deflation from this past Summer.
The U.S. economy is clearly accelerating regardless of the weakness in Europe so the recent rise in equity prices is justified IMO. In fact, I do believe that 1200 on the SPX will be surpassed and will become the next support level by this December. While I’m gratified for having nailed the recent market stop with our sales in ETF’s, that top may prove to be a momentary top along the road higher.
RMHI model portfolios have actually exceeded the peak from a month ago and are on their way to an above average year. Since the model is about being “above average” I’m not surprised just gratified. Taking a look at the fund performance list on www.socialfunds.com the top of the heap appears to be the Calvert Capital Accumulation fund which was up approximately 15% at the end of October. Our portfolios have moved almost in sync for the past 3 months and I hope this will rank RMHI as close to the top of the heap as 2007.
This morning Goldman Sachs raised estimates for real U.S. GDP:
2011 GDP goes from 2.0% to 2.7% and 2012 goes to an estimate of 3.6%.
With that kind of growth, where’s the love for bonds now? If investors want to recoup losses from past years they must adjust for the resurgence of growth in the U.S. and dispense with the “fear trade” of bonds over equities. Bond investors, especially those owning Treasuries will find that there is a very high price for the concept of “safety” and that the perception of safety is a myth to begin with when you find that your pursuit is enjoined with the masses. Safety can most often be found with high investor negativity when the urge to sell is at its peak, no when its the overwhelming trend.
On the Green Investment / Socially Responsible Investment ledger our models are identifying a class of equities that appear to have our favored combination of Value plus Momentum: In particular are Battery Manufacturers and China based waste to energy plays.
Be careful out there