“The Greatest Transfer of Wealth in the History of Mankind”

by Travis Johnson, Stock Gumshoe | March 16, 2009 10:54 am

Today our teaser is for the Fool’s Hidden Gems[1] service, which according to Hulbert has been their worst-performing service over the last three years with an annual loss of about 20% (Hulbert doesn’t track Global Gains, which has been decimated with the crash of the BRIC countries) — perhaps not surprising, since they focus on small cap stocks. They did at one point reach the top spot in the Hulbert rankings for at least one twelve month period, if memory serves, and they do claim in their marketing to have beaten the S&P by about 7% during their lifetime.

This is an ad we’ve looked at before, but since it’s going out pretty aggressively now with a “limited time” discount offer I thought I’d have another look — in part because although the environment has changed dramatically since I first saw this ad, the core of ad has changed almost not at all.

Plus, we’ve got the main teaser stock that they touted, which I’ve written about before, but there’s also a second teaser in there … so I’ll dig that one up for you today, too.

So what are they “teasing” today?

They call it the “Greatest transfer of wealth in the history of mankind.” Subtle, eh?

“President Obama recently moved to throw $787 billion of your hard-earned cash at a raging economic inferno — but that’s nothing compared to the $10 TRILLION that will go up in flames as the next economic crisis bears down on us.

“We’re on a collision course with financial disaster. Yet, as usual, a handful of the world’s most savvy investors — including Microsoft founder Bill Gates[2] — are quietly positioning themselves to secure massive profits. You can join them — if you take advantage of the 3 opportunities revealed just ahead…”

No, they don’t mean the transfer of wealth from our brokerage accounts into the ether. What they’re talking about is alternative energy[3], and specifically wind energy.

And they drop every name in the book to help bolster their argument that wind is the future — The Economist, Bill Gates, the Wall Street Journal, Fortune, Barack Obama, Time, John McCain[4], British Petroleum, Blackstone, JP Morgan … phew! All those, according to the Fool, either spoke or wrote glowingly of wind energy, or invested in it.

Naturally, they throw out a few clues … and some tempting tidbits that get the appetite building, though the company names are kept juuuuuuust out of reach …

“… I want to show you how — starting today — you can begin building your own wealth by getting invested in an under-the-radar company that is uniquely positioned to cash in on what the world’s foremost wind-energy experts have dubbed…

“The Saudi Arabia of Wind”

“Everyone knows that Saudi Arabia is the world’s oil[5] capital.

“But did you know that according to the Department of Energy, North Dakota alone has enough wind capacity to generate over a quarter of our nation’s electricity needs?”

Then we start to get a little bit more specific …

“I realize investors toss around the label “the NEXT Berkshire Hathaway” way too often nowadays, so I’ll level with you…

“I can’t guarantee you that this century-old business from America’s heartland will see the same outrageous success as Buffett’s legendary company…

“But I can guarantee you that it’s run in the exact same forward-thinking, shareholder-friendly way that Warren Buffett[6] runs Berkshire Hathaway.

“So it’s no surprise that shares of this electric utility (a traditionally low-return business) have more than doubled over the past decade. With dividends[7] reinvested, you’d be up over 150%….

“This amazing little company already has the largest wind tower construction capacities in all of North America. But get this…

“The president of its tower construction division recently announced that demand is so strong that it is expanding one of its factories by 40% and another by 100%.

“And by locating these two factories in epicenters of wind-energy growth — Fargo, North Dakota, and Tulsa, Oklahoma — this company has placed itself directly in the slipstream of these highly profitable markets.”

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A few other clues for the mighty Thinkolator:

“Management recently announced plans to buy a significant stake in two thriving wind farms.”

“… And don’t forget, it strategically invests the capital it generates in the same forward-thinking, shareholder-friendly way that turned Berkshire Hathaway into a legendary company and Warren Buffett into the world’s richest man.”

“No wonder Bill Gates recently snapped up 9% of this breakout company!”

OK, so there’s lots of flotsam to read through in order to find those clues … but we’ve got them. What do they tell us? Well, when properly fed into the Thinkolator — watch your fingers! — we learn that this company is still …

Otter Tail (OTTR[8])

Yes, this is a repeat of a teaser that I wrote about back in October. But I looked through the clues they offered, and despite the dramatic change in Otter Tail’s wind business, and the strangled performance of wind-related companies everywhere, the ad hasn’t changed much at all. It was perhaps built more generally on the promise of alternative energy then, and they now throw in a couple mentions of President Obama (since he wasn’t yet president when this ad first circulated), but the basics are the same.

They tell us that demand for wind projects is skyrocketing, that T. Boone Pickens[9] is a huge booster with his Pickens Plan and his own huge West Texas windfarm, and that all of those big institutional investors (Blackstone, JP Morgan, etc.) are funding or investing in wind farm developments.

But they don’t mention just how much the wind power business has gotten clobbered. Today the wind power industry is facing tremendous, well, headwinds, at least in the short term. Just a month or so after I initially wrote about this ad, Pickens tapped the brakes on his giant wind farm project and mentioned that most wind projects would probably be put on hold … here’s a quote from the Arizona Republic article about that:

“Until natural-gas prices rise, Pickens said his wind farm and most others in the country will not go forward because electricity from gas plants will be more economical. Still, he was confident prices would rise.”

Pickens is certainly still a booster of both wind energy and his “Pickens Plan” that urges a move to natural gas[10] for our transportation fleet, and he’s still got a ton of GE wind turbines on order for 2011 and thinks this sector will recover, but that’s a nice little summary of the problem facing wind energy companies right now: Natural gas is cheap, and credit is unavailable.

Wind energy is probably the most inexpensive form of “clean” energy that’s widely available, at least on an operating basis, but it’s still far more expensive than the “pretty clean” natural gas plants now that natural gas prices have fallen so far (and far more expensive than most coal[11] generation plants). And, as you might imagine, it’s pretty expensive to build a wind farm, even in that “Saudi Arabia of wind” on where the Rocky Mountain foothills turn into the, well, windswept plains. Buying the turbines, erecting massive towers, setting up the electrical infrastructure and transmission lines. All of that requires capital, and that means it requires access to credit for the utilities[12] and others who might build these farms.

It’s not just Pickens who’s slowing down now, of course — the biggest operator of wind farms in the US, FPL (also owns the big Florida utility), has also scaled down their aggressive expansion plans. And Otter Tail has suffered as a result of all this — their wind-tower business is called DMI Industries, and they did indeed boost capacity as we saw in the teaser … but this year, they’ve been forced to cut back some of that capacity. Here’s a quote from a January press release[13]:

“‘Where we had been building up our capacities to meet projected increases in 2009 volumes, we now expect overall production levels for DMI this year to be slightly lower than in 2008,’ said [DMI president Stefan] Nilsson. Through last fall the outlook for the wind energy industry was that of continued, significant growth for the year ahead. Now, although estimates vary, 2009 projections for installed megawatts are 25 to 35 percent lower than those for 2008.”

Now, let me be clear: I like Otter Tail. I own shares personally, and it’s one of the stocks that I’ve profiled for the Irregulars as an “idea of the month”[14] (and actually, it’s currently the strongest performing idea — which isn’t saying much, most of my ideas have performed worse than the S&P 500, some significantly worse … but OTTR has done a bit better. Still down, but better than the S&P).

Why do I like them? In part, because it’s a way to hedge your bets a little bit. DMI Industries, their wind tower business, has indeed taken a hit … and it is the strongest growth driver for the company (or at least, it was). But this is a conglomerate built around a regulated electric utility, and their diversity of businesses should provide some margin of safety. They pay a decent dividend (about 6% now) thanks to the steady income from their (mostly coal fired) utility operations, and they own businesses in areas as diverse as trucking, food products, water[15] toy manufacture and sales, health care, etc., so while they’re certainly not going to escape the economic consequences of a recession — in part because, like many utilities, some of their industrial and commercial customers might cut back — my guess is that they will manage to batten down the hatches and keep the lights on, and return to very solid performance when the economy takes a turn for the better.

This stock has been a favorite of the Motley Fool[16]’s for quite some time, and it has been proposed by several folks as one of the many “mini Berkshire Hathaway” stocks that are worth a look. And yes, Cascade (Bill Gates’ investment fund) does own about 9% of Otter Tail, most of it probably bought at prices significantly higher than what you’d pay today.

And to some limited extent you can even make the Berkshire Hathaway comparisons look feasible — OTTR is tiny, with roughly a $700 million dollar market cap (it was well over a billion as recently as last Fall, when the shares were abruptly cut in half), but they do have a fairly diverse set of companies under their umbrella, all arranged around a core cash-producing business. In this case it’s an electrical utility while for Berkshire Hathaway it’s a group of insurance companies, but there are some similarities. Like Berkshire, Otter Tail is decentralized and focused on predictable businesses — they buy simple, understandable companies that they think will be immediately accretive to the bottom line, and they let the companies make their own management decisions.

Of course, most of those businesses are probably going to stink in the current environment, but still … one hopes they won’t all stink in the same way, at the same time.

I promised a look at the other company touted in this ad, too — they teased us about three wind power picks, but only really supplied clues for two. So what’s the second one?

Well, this one is Chinese — and certainly China[17] is making a concerted effort to develop alternative energy capacity and technologies, though like us they rely overwhelmingly on coal for their electricity generation. It’s a pick from Seth Jayson[18], who they give credit to for making some good cautionary statements in a Fortune article back in December of 2007 (that article is here, FYI[19] — in my opinion he had some good thoughts, and some that probably look a little foolish in retrospect, just like most prediction articles, but I would have probably mostly agreed with him at the time — and he certainly was more prescient than many).

So what’s his company?

“Revenues soared 52% year over year, and net income skyrocketed 68%!

“Returns on equity sits at an impressive 27%

“Its top line has a 45% compound annual growth rate (CAGR) over the past 3 years

“What’s fueling this incredible growth?

“Well, for one thing, as part of its “5-Year Plan” for economic development, the Chinese government recently earmarked $65 billion for investment in the country’s medium voltage electricity network.

“And China’s Ministry of Machinery has very strict regulations that require all the medium voltage transformers in public buildings to be made of cast resin.

“And I’ll bet you can guess who is the dominant player in China’s cast-resin transformer market…”

This one is, Thinkolator sez, Jinpan International[20] (JST)

This is a maker of cast resin transformers — and certainly the most dominant Chinese one that’s also a US-listed company. Not that I’d know a cast resin transformer if I woke up next to one, but I guess they’re important.

And it has been a pick of the Hidden Gems service at least since December, according to their published disclaimers, and they mention it in their free articles fairly frequently. It is a teensy company, market cap of about $100 million, not too much debt, trades at just about book value, and pays a small dividend. So perhaps it’s worth your time to dig in a bit deeper if you’re interested, but I know almost nothing about the firm.

And that third company they teased? That could be almost anything — this is all I saw by way of clues:

“You’ll also get a 3rd “bonus” pick — revealing an entirely different way to profit from our move to reduce our dependence on foreign oil.

“This little-known company is a long-time favorite of the Hidden Gems team… it should benefit tremendously from the highly popular “Pickens Plan”… and best of all, the recent market panic has it selling at fire-sale prices.”

I’ll throw out a wild guess for you — one possibility, since they’re noting that this is related to natural gas and is a “long time favorite” of Hidden Gems, is Dawson Geophysical — I wrote about this Hidden Gems teaser pick almost exactly a year ago, you can see that article here if you’re at all curious[21] (and of course, this is a wild guess — no way to make anything else with this surfeit of clues).

Should you buy Otter Tail or Jinpan, or anything else in the alternative energy, “Pickens Plan,” or wind power space? Well, that’s a whole ‘nother question of course — and quite a personal one. If you want just wind power there are some more focused investments you can make, most of which are also down quite a bit in the current environment … including FPL, or the big European companies like Vestas and Gamesa[22] that dominate the industry, or you can also buy one of the wind power ETFs (First Trust has one with the ticker FAN[23], PowerShares’ version is listed at PWND[24], both are heavily weighted in Europe). But OTTR is an interesting company that plans to get some growth from wind.

I shared some of my thoughts on Otter Tail, and there was an active discussion, when I first wrote about the teaser in October. You can see that article here[25].

Have you ever subscribed to Hidden Gems? So far, our reviewers have classified it as the very definition of “middling” — high marks for being a good read and having good customer service, not so much for performance. Think that 2-1/2 star rating (out of five) should be moved up or down? Share your thoughts now, or just read the reviews we’ve already got, by clicking here[26].

full disclosure: As noted above, I personally own shares of Otter Tail.

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