“Energy Armageddon Coming to America” and some updates on old favorites

by gumshoe | August 26, 2011 2:27 pm

Friday File look at a Peak Energy Strategist teaser

We’ll be skipping almost all publishing next week, including the Friday File[1], as Stock Gumshoe closes down for a few days for vacation and redesign prep on the new and improved StockGumshoe.com — so I’ll try to make this one good enough to last a couple weeks for you!

The new site, in case you’re wondering, is still being tweaked, poked and prodded behind the scenes — but what we’re hoping to deliver is a much cleaner and more readable site that includes better features for the Irregulars like yourself, including a single login and single site that will let you stay in one place and easily search and access our extra paid content (like these Friday Files) while you’re browsing anything else at Stock Gumshoe, and a better scheme to let you browse by topic and more easily find older articles or content or top-rated newsletters. We’ll also have a way for you to more easily share your thoughts or ask questions of the group, so stay tuned — we’re hoping to be ready to launch in a couple weeks, but these things almost always end up taking longer than expected. Thanks again for those of you who responded to our survey as we prepared the redesign, your input really helped!

I’ve got an interesting teaser to delve into for you here today, but first I thought I should give a couple quick updates on stocks we cover often here. I had some transactions in my personal portfolio this week, so if you’re interested you can see those — sells of Xerox (XRX)[2], Corning (GLW)[3] and O2Micro (OIIM)[4]; buys of Apple (AAPL)[5], Canyon Services Group (FRC Toronto, CYSVF pink sheets)[6], and Golar LNG (GLNG)[7], the stock I most recently profiled as an Idea of the Month[8] (they had a weak quarterly report after that profile, so the stock is down a bit).

For what it’s worth (not much, actually), the Idea of the Month tally has just ticked positive recently on a relative basis — if you assume a buy and hold for every stock I’ve ever featured this way, you’re now beating the S&P by about 100 basis points over our few years of existence (ie, you’re up 6.5% on average, the S&P is up 5.5%). That’s encouraging in some ways, though it doesn’t reflect what I’m doing or what any of you are probably doing — this is not managed as a portfolio, I update my opinions about all those stocks from time to time, and at least once a year, but whether you were making buy or sell decisions based on fluctuating fundamentals or listening to my changed opinions, or even if you were doing something as simple and mechanical as using a trailing stop loss, your results would be substantially different (not necessarily better, though using a stop loss on some of the absolute stinkers I’ve picked could have helped). Still, we were trailing the market for about six months using this same measure, so it’s nice to see us tick back to “slightly above average.”

And of my other favorite companies, we saw some interesting long-term news out of Lonrho[9] (LONR London, LNAFF pink sheets) — they made a deal to build a new oil[10] services port in Ghana[11] to host all the oil companies who are rushing to the big offshore discoveries there, including the Jubilee Field. This is going to move a bit slowly, it will take a year or so for initial studies to be done, but if they are able to get it built I’ll be pleased, their other major oil services[12] port, Luba Freeport in the Gulf of Guinea, is one of their major profit drivers now and adding another one, while initially expensive to build out, should only help the vision of building a large African conglomerate. This may hurt profits in the next couple years if they build it without partners or have to raise money by selling stock, but it fits in nicely with my view of Lonrho as a great steady grower that leverages the strength of Africa and demand for African natural resources over the next decade or two.

You might also have noticed Akamai (AKAM)[13], which I loved at $20 two years ago and got very nervous about in the $50s and $60s, is now … back to $20. Analysts have gotten increasingly cautious about AKAM after a weak quarter reported at the end of July, and with fear of commoditization in the Content Delivery Network (CDN) space finally taking some real hold and their promises that higher-margin “value added services” would be a larger portion of revenue not having come through to the extent that investors were hoping, it’s hard to be optimistic. I think you’re better off buying Akamai than their competitors right now (like Limelight Networks, LLNW, or Level 3, LVLT), but that’s because they’re the strongest “pure play” in their space and are better positioned to hunker down and maintain profitability, not because the space is getting healthier yet. The forecast is still for decreasing revenue growth (not decreasing revenue, but revenue growing at lower rates), and for increasing price competition — that means the biggest and (I’d argue) best player should be the survivor, but it doesn’t mean they’ll necessarily make you rich over the next year.

I earlier said I’d be tempted by AKAM in the low-$20s, but with the more disappointing quarter and the weak forecast we might be able to get it cheaper if you like the space long-term, this is a contrarian play and at this point I’m not planning to buy it, but if I were I’d be looking for new 52-week lows first in the $17 range (particularly if the market gets weak again) — that would be a PE of about 12 on current year earnings (half projected, half booked already), and they should grow slightly better than the overall market even if they are decelerating. I expect it’s worth speculating on when it’s cheaper than the market, but sentiment is so bad that there seems to be little rush.

So those are some of the updated thoughts that hit my brainpan today. Now let’s look at a teaser for a new idea, shall we? The pitch is from David Fessler[14] in a teaser for the newish Peak Energy Strategist[15] newsletter from the Oxford Club[16] (about $400/year) — here’s how he gets us started:

“Department of Energy warns…

“Energy Armageddon Coming to America

“Here’s how an overlooked $2 trillion energy disaster could soon leave millions of Americans in the dark…

“It could happen at any moment…

“The Department of Energy… the American Society of Civil Engineers… the U.S. Government Accountability Office… the Electric Power Research Institute…

“They all agree…

“America’s electric grid is on the brink of disaster.”

Sounds scary, eh? Even if up here in the Northeast we’re not as worried about the aging of the power grid today as we are about whether our poles and wires can withstand Hurricane Irene. And this story about our pathetic infrastructure in the US is an old one, and one that has led to many teaser ads over the years about the companies who will profit from restoring that infrastructure, whether it’s the failure prone regional power grids or the ancient water[17] mains or the inadequate air traffic control system or aging toll roads. This isn’t anything brand new — one downside of being an established and developed country is that we’re facing infrastructure problems because our base infrastructure was set in place 100 or more years ago, and one of the disadvantages of being a democracy of is that we tend to be bad at long-term planning and proactive current sacrifice or expense that will benefit future generations (and this is largely a government and municipal problem, but not entirely — and private companies, of course, are often bad at long-term planning and investing if it means their current quarter will look bad to shareholders). The surge of money to restore this infrastructure hasn’t usually appeared as teasers would indicate it should, but that doesn’t mean there aren’t real business opportunities.

So what, specifically, is Fessler talking about in this ad?

“Without a properly functioning grid, the entire economy – and your livelihood – would collapse.

“NASA reports nationwide blackouts could soon suck $2 trillion out of the economy in just one year.

“I realize that as you read this, you may find it hard to believe. Over the next few minutes, I’ll explain why all these events are not only possible… but if the data is to be believed, it could unfold within the next 60 days….

“The Department of Energy estimates it would cost $1.5 trillion dollars to update our grid. But only $8 billion is earmarked in the U.S. budget for new updates. At this rate, it would take us nearly 200 years to upgrade. “

And then we get quite a bit of jabber about the well-publicized problems with the power grid — particularly in the Northeast, where we had that huge blackout a few years back, but also in pockets elsewhere in the country, places where demand is so high and power congestion so dramatic that it doesn’t take much to bring the whole system down.

Finally, we get the age-old pitch: The problem is going to send your electricity bills skyrocketing (and already has in some places), but investing in this hotshot idea is going to offset those high bills — here’s how he puts it:

“Some people in Tennessee, North Carolina and Utah have seen their electric bills more than double in just one month.

“Don’t be surprised if and when these higher bills end up in your mailbox in the next few months.

“In a moment, I’ll show you how to offset these soaring prices so that you’ll essentially get your electricity for ‘free.’

“For a number of folks, it’s giving them the chance to ‘pay off’ their bills completely.

“It could be just in time too. Because something else is sending electricity prices higher than ever.”

And yes, there’s a reason why “free” and “pay off” are in quotes — he just means that you’ll be making so much money on your investment that it will be “like” you get your electricity for “free.”

So how do we profit from this dire situation? In Fessler’s words:

“I’ll also show you a way to potentially make a fortune as this situation unfolds. So when your neighbor’s electric bill climbs sky high, you won’t have to worry about a thing. You’ll have more than enough to cover the difference… and then some.

“Because even though the grid faces major challenges ahead, there is an unbelievable opportunity emerging from all of this.

“The Single, Greatest Solution for Our Energy Future

“It’s undoubtedly one of the biggest breakthroughs in American history. And for those willing to take action now, the payoff could be life changing.

“Some of the biggest names are already investing in it. I’m talking about guys like Warren Buffett[18] and T. Boone Pickens[19], who are quietly pouring hundreds of millions of dollars into a handful of companies that make a special technology.

“Surprisingly, this technology has existed for over 100 years… It’s used by millions of consumers around the globe every day.

“But for the first time ever, it’s making its way to the electric grid. And institutions like GE, Siemens and GM are rushing to get in on a piece of the action. They’ve invested over $6 billion this year alone.”

Huh? Just wait, we’ll get there — hint, he’s talkin’ about batteries …

“You see, for over a century, utility companies have constantly walked a fine line to produce just enough electricity to match demand.

“Too little supply and it’s lights out for customers. Too much supply and you could fry the equipment that keeps the electric grid running.

“Very recently though, a handful of companies unlocked the solution to this energy dilemma.

“Their newly adapted technology allows utility companies to virtually produce as much electricity as they want… when they want… and anything left over can simply be stored for later use.

“I’m talking about grid energy storage.

“…lithium[20] based storage solutions to be exact….

“Lithium energy storage drastically improves the overall performance of the electric grid. By storing up extra energy and using it as needed, lithium storage solutions instantly make the grid more stable and more reliable.”

The basic idea is that instead of having to have electricity flowing into the grid at the same pace as demand is pulling it off the grid, you have storage — this is a key advancement that’s needed particularly for alternative energy[21], since wind doesn’t blow all the time and the sun doesn’t shine at night, but it is also talked up as a way to “stabilize” the grid and make it easier to handle the problems that grid engineers face on a daily basis in delivering consistent electricity to everyone.

And the specific idea, of course, is that there’s one company to make you rich from this — here’s the spiel about the particular pick Fessler highlights:

“The Company Saving the U.S. from the Brink of Disaster

“As billions of more dollars pour into this vital energy market, one company is poised to grab the lion’s share of this money.

“And here’s the best part for investors…

“It’s not a big company… yet.

“The market cap is only $625 million.

“But out of all the competition, this small cap is best positioned to corner the multi-billion dollar lithium storage market… and make a huge move on Wall Street.

“That’s because it just became the world’s largest supplier of lithium energy storage solutions for North America’s electric grid.

“As I speak, its technologies are being rushed to places like Southern California, New York, Michigan, even the United Kingdom and Chile[22]. And that’s just to name a few.

“Washington recently gave the company $349 million in grants and loans. Private entities have added another $350 million. Even energy tycoon, T. Boone Pickens, invested a little over $4 million dollars into this firm just a few months ago.”

Sounds pretty exciting, right? We get a few more hints thrown in …

“… just last year the company doubled its annual manufacturing capacity ….

“In May, the firm was also awarded an essential patent that’s all but certain to give it an even greater edge in the energy storage market…

“… bigger energy storage firms are outsourcing this company’s new technology for their own projects….”

Thinkolator sez: This is A123 Systems (AONE), which you may remember from its frothy IPO[23] during the last battery[24] bubble in late 2009 (if we may be so bold as to call it that — perhaps “mini bubble” is better), they IPO’d in the low teens, well above expectations, and still shot up quickly to $25+ over that first week or two — but it’s been mostly downhill since then for the stock price, it briefly troughed around $3 last week and is now in the $4.50-$5 range.

They have gotten quite a few government grants and influential investors — including T. Boone PIckens earlier this year, and General Electric is a major owner of shares. The company is built around their proprietary Nanophosphate technology for lithium batteries, initially pitched largely as a solution for electric cars but they also have large divisions selling to commercial and power grid customers — their power grid storage solutions are described here[25]. It looks like the challenges of being a small company building up new capacity and finding customers have hit them pretty hard, they’ve missed analyst estimates for several quarters in a row, including the most recent one announced in early August[26].

Analysts are all over the map on A123 — and there are 14 analysts tracked by Yahoo[27] Finance, a surprisingly large number for a pretty small company (market cap is right around $600 million now). They expect revenue to hit $200 million this year and to double next year, but even at over $400 million in revenue they’re expected to be posting an annual loss of $1 per share. They apparently need volume to climb even faster, without cutting prices. I don’t know that there’s a reason to be worried about the most recent quarter, since they’ve clearly invested heavily in expanding production and they see revenues rolling in more quickly in the second half of the year, but you do have to do some squinting to see a clear path to profitability in the foreseeable future. There is a pretty big short position, around 20% of the float, but they are also so beaten down now that they trade at a tiny multiple to book value (just 1.4X book) and they do have a technology that’s getting customers.

The best news recently is undoubtedly that they finally made a deal to supply GM with battery packs, prospectively destined for 2013 model electric cars — there’s a note about this here[28], and another from SeekingAlpha here if you’re interested in more detail[29], but that’s the reason the shares are in the $4+ range instead of still lingering at the $3 they hit after the disappointing earnings. On the other hand, there’s also plenty of dissenting opinion out there, as you’d expect from a stock that has fallen by 80% over a couple years and is still far from profitability — here’s one from SeekingAlpha who thinks it’s still priced for perfection.[30]

I have a soft spot in my heart (or head, some might say) for “story” stocks that have taken hard falls but still are trying to address huge potential markets, so I confess to being a little bit intrigued by AONE these days — if electric cars take off and GM’s production climbs dramatically, AONE may be able to leverage their newly expanded capacity to get close to profitability, but when we look at it compared to so many of the established players in automotive batteries, which is still the heart of most of these businesses, it’s hard to take them seriously — Johnson Controls (JCI)[31], Enersys (ENS) and Exide (XIDE), some of the largest companies in the battery space (JCI is also in several other businesses) are all very profitable and arguably priced as value stocks right now, and the Chinese lithium battery companies like Warren Buffett’s fave BYD (BYDDF) are also cheap and hungry to compete for business … so that makes it a little tougher to stretch for what is still really a startup in some ways. (And yes, most of those companies have been eviscerated along with AONE over the last few months, they’re not for the faint of heart.)

But I don’t have to just leave you there — Fessler hints at a bonus pick as well:

“Keeping Businesses in Business around the Country

“It involves the chance to “double-up” your gains on this energy revolution over the coming months.

“It’s another company making huge advances in the energy storage market.

“Unlike its tiny counterpart though, this company is worth an estimated $2 billion.

“Its storage solutions can be found in over 100 countries around the world. And the company serves over 10,000 customers.

“But it’s about to get a huge boost…

“As the number of power outages skyrocket in the U.S., private companies are taking it upon themselves to make sure their networks don’t go down.

“So they’re paying this company MILLIONS to keep their networks up and running smoothly.

“Time Warner[32] just signed a major deal with it to guarantee their networks will stay running as these power outages get worse. Sears Holdings discreetly signed a multi-year contract with the company. Even the U.S. Navy signed a $7 million deal with this company to test drive their storage technologies.

“And company executives see the writing on the wall.

“That’s why they’ve gobbled up nearly 250,000 shares worth an estimated $1.21 million over the past 6 months alone.”

Well, the insider buying[33] doesn’t match up but otherwise this sounds an awful lot like Enersys (ENS), which is the leading company in the industrial battery space, did have a market cap around $2 billion a few months ago (it’s closer to $1 billion now, the stock took a big hit in July), and does sell into at least 100 countries and have a bit energy storage/reliability contract with Time Warner Cable as well as plenty of deals with the Navy (they do batteries for subs, among other things) and they sell DieHard batteries through Sears. Not 100% certain this is the match, but Enersys is actually the battery stock that gives me the most confidence right now — I don’t own any of them and I’m not intending to buy any right at the moment, but my kneejerk reaction based on a quick look at a sampling of these firms leads me to put ENS at the top of my “Hmmm, maybe” list.

Oh, and I just noticed that Fessler himself has also written a free article about energy storage for SeekingAlpha that mentions both AONE and ENS[34] — though not nearly as optimistically as his teaser ad tells the tale, of course. This is one of those areas that I agree should be a huge business, but it’s not very reassuring that so many companies have a hard time making a profit at it — I expect I’ll probably be on the sidelines in this sector unless and until it starts to make a lot more sense to me.

Have a great weekend, everyone! No Friday File next week as Stock Gumshoe is down to a skeleton crew for the week before Labor Day, but as long as Irene doesn’t wash away Gumshoe HQ we’ll be making some progress on the new StockGumshoe.com in the interim … and we’ll be back refreshed and ready to share the next crop of money-lust ideas for you in early September.

Full disclosure: As noted above, I own shares of Apple, Canyon Services Group, and Golar LNG for my personal account. I also own shares of Lonrho, and of Warren Buffett’s Berkshire Hathaway, but am not invested in any other stock mentioned above. I have limit orders in for Berkshire Hathaway and Apple shares that might trigger in the next few days if the share prices of those stocks drop, but will not otherwise trade (or change those orders) in any stock mentioned above for at least three days.

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