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.
While we may be unabashed in our enthusiasm for Socially Responsible Investing (SRI) that does not mean we look at Green stocks with rose colored glasses. In truth we devote more time and attention, plus number crunching to make sure the holding is justified and meets our financial criteria.
Case in point is Gaiam Corp. (GAIA)
Company description: “Gaiam, Inc., a lifestyle media company, provides a selection of information, media, products, and services to customers focusing on personal development, wellness, ecological lifestyles, and responsible media. The company engages in content creation, product development and sourcing, customer service, and distribution. It operates in three segments: Direct to Consumer, Business, and Solar segment. The Direct to Consumer segment provides an opportunity to launch and support new media releases; a sounding board for new product testing; promotional opportunities; a growing subscription base; and customer feedback and the lifestyles of health and sustainability industry?s focus and future. This segment offers content through direct response television, catalogs, e-commerce, and subscription community services. The Business segment provides content to businesses, retailers, international licenses, corporate accounts, and media outlets. The Solar segment offers turnkey services, including the design, procurement, installation, grid connection, monitoring, maintenance, and referrals for third-party financing of solar energy systems. This segment also sells renewable energy products and sustainable living resources; and offers residential and small commercial solar energy integration services. Gaiam, Inc. sells its products in the United States, Canada, Mexico, Japan, and the United Kingdom. The company was founded in 1988 and is headquartered in Louisville, Colorado.”
Current Price $6.61
Intrinsic/Discounted Cash Flow Value $10.67
Price to Book: 1.0
Book Value $6.45
Cash per share : $2.07
LT Debt $0
Market Cap $156 million
Piotroski score: 7 out of 9 (which is good)
Altman score 5.7 (little chance of bankruptcy)
GAIA is a small cap retail stock focused on the lifestyle/yoga market/alternative energy in Colorado. The stock has pulled back along with the market albeit at a faster pace for the past two months and in our opinion is nearing a very attractive valuation as it begins to touch Book Value along with minimal expectations.
The company has met or exceeded analyst expectations for the past year and current and 2011 estimates have been firm. However this stock is thinly traded and there is only one analyst following the stock.
Back in late 2007 and 2008 when the consumer was empowered the stock traded in the high $20’s and topped at $30. The company posted a loss of (.08) for 2008 The stock does seem to be volatile long term and has a bust / boom personality as it trades in sympathy with the economy. We don’t envision that the US consumer is completely on its back:
“socially acceptable deleveraging needn’t entail the pesky inconvienence of forgoing consumption.”
Revenue growth does appear to be making an improvement with sales improving 14.8% year to year.
A comparison to competitor Lululemon Athletica (LULU) shows the contrast between the much loved LULU and the loathed GAIA. Eco-cache has a cost in terms of potential return:
Current Price $38
Intrinsic/Discounted Cash Flow Value $12.5
Price to Book: 10.4
Book Value $3.79
Cash per share : $2.45
LT Debt $0
Market Cap $2.7 billion
Piotroski score 7
Altman Z 44 (excellent)
To be a successful investor frequently means to cut against the grain of popularity and think in terms of buying a business cheaply. LULU is an excellent example of the price you pay for “Glamour” to own what is currently in fashion and popular. No doubt there are many unhappy GAIA shareholders at present but we believe there will be a Reversion to Mean Valuation which in our definition would be appreciation above DCF valuation ($10+), a level GAIA sustained during the economic expansion of 2003 to 2007. In addition, GAIA is a candidate for tax loss selling within the next 3 to 5 months which could be the catalyst to drive the price lower.
In sum, GAIA represents good value at present however the company’s volatility requires an even greater discount to intrinsic value/DCF than the current price offers, but we’re near those values. A move in price below $6 might just be the opportunity for longer term investors comfortable with the risk of a consumer cyclical company with a very Green edge.