Tiny, $1.20 Engineering Firm Cornered $100 Billion Market?

As I struggle out from below the mountain of incoming email teaser ads and get Stock Gumshoe back up to speed after a week of moving and unpacking here at Gumshoe HQ, there’s one thing I can do easily and quickly: share an older article. This one appeared in the Friday File for the Irregulars about a month ago and it’s still being heavily circulated under a few different (but similar) ads, so I’m sharing it here with the larger group for your edutainment. The article has not been updated or edited since being published on June 4.

Today for our Friday pleasure I thought I’d look into another really tiny and illiquid stock — partly because lots of folks have forwarded questions about it to me, and partly because it’s hard to write about $20 million market cap companies without driving the shares crazy when I mention them on the free site.

So let’s jump right in, shall we?

The folks at Green Chip Stocks have a clever attention-getter for their new ad that teases an LED company — here’s how the letter starts:

“Edisons Evil Plan

“American hero Thomas Edison intentionally engineered a fatal flaw into the incandescent light bulb…

“It costs the U.S. $18 billion a year…

“And it can net you 14 to 18 times your money before the end of the year”

And there’s a nice old conspiracy theory that goes like this:

“And it wasn’t until the light bulb was completely developed that Edison’s true plan was revealed.

“Just seven years after he displayed his first incandescent light bulb, he built more than 132,000 power plants — the result of his ambitious filing of over 1,000 patents.

“Edison knew that the light bulb business would be robust. But he also knew that if he provided the power for these light bulbs, he could wet his beak on both ends. And that’s why he designed the light bulb to be inefficient…

“It was actually quite an ingenious master plan; one that made Edison an extremely wealthy man.

“The light bulb that Edison invented — basically the same one we use today — loses up to 98% of the energy that actually goes into powering it.

“In other words, only 2% of the power that gets to the light bulb is actually used to create light. The rest is simply wasted.”

The pitch is basically that Thomas Edison intentionally made the incandescent light bulb to be an energy hog that turns far more energy into unwanted heat than into necessary light … so that he could make more money by selling electricity. I have no idea whether or not there’s any truth to that, but it makes for a fun pitch.

And yes, incandescent light bulbs are horridly inefficient, which is why they’re too hot to touch … and why the easy bake oven was such a runaway success. How will tomorrow’s children ever bake a nasty little cake in 45 minutes if they don’t get to use a 40-watt bulb?

But I digress — we all know that regular old bulbs are very wasteful, that’s why we’ve been trying to live with the glare of those little spiral tube fluorescent lights to save a bit of energy. But still, fluorescent bulbs, though far more efficient, aren’t the real promise for the future: LEDs are. Light emitting diodes are dramatically more efficient … and, of course, dramatically more expensive, a replacement LED “bulb” that fits into a standard Edison socket might cost $50-100 but could theoretically last four or five years of being used 24 hours a day.

So it’s no surprise that LEDs are touted by many as a big investing theme, and that big-name LED makers like Philips and Cree have been mentioned on CNBC probably dozens of times as plays on this story. And recent news keeps rolling through about LEDs, so the consensus is clearly there: this is the future, and there’s going to be money made … at least for now. Just in the last week, Rambus announced that they were getting into LEDs to advance the technology, and yesterday the Wall Street Journal ran a story predicting that the rosy profits for folks like Cree would thin out as everyone tries to get a piece of the business, capacity booms, and the technology gets commoditized. LEDs are based on semiconductor chips and often made by the same companies, and most tech investors are all too familiar with the boom and bust possibilities in the chip sector… and the problems when overcapacity hits and that special chip no longer seems quite so special, or inventory builds up to the point that they start giving them away.

But still, just because sometimes designs and ideas and new technology get commoditized is no reason to turn away from a potential winner, right? And the Green Chip dudes have a little itty bitty LED stock that they think has big wins coming from government contracts, and a list of real blue chip clients.

The underlying promise is that regulatory reform is going to bring huge profits for the industry as incandescent bulbs are pushed out of the picture, with the first big push for edison bulb-phaseouts in the US coming in 2012 if the laws don’t change.

Here are the clues they throw out for us about this pick:

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“… one company has stepped up with a solution that’ll solve the efficiency problem — all the while netting investors like you a boatload of cash in the process.

“I’ll also tell you about this company’s strategic deal with Wal-Mart (that’s right, the world’s largest retailer), and their government contract that’s literally guaranteed to help them dominate a very lucrative piece of a market that’ll be worth an estimated $14.5 billion by 2015…

“And most important, I’m going to show you why their run to dominance will be well under way as early as next week….

“While LEDs are truly the future of lighting, most buildings today were not designed with LEDs in mind. And it’s not like you can just install random LED lights in conventional overhead lighting fixtures or display cases…

“But thanks to the flexibility of this company’s LED technology, these lights can go anywhere, at any time, in any climate. And the best part is that these retrofits end up costing their customers only a fraction of what it would cost to start from scratch with the more common LEDs on the market today.

“This is why they have one of the most impressive customer lists in the industry.

“Take a look at just a small sampling of their client base…

“Whole Foods Markets… The Bellagio in Las Vegas… Publix… W Hotels… Albertsons… Atlantis Hotel… Bath & Body Works… Marriott… Dillards… Disney Theme Parks… McDonalds… Clinton Presidential Library… Starbucks… The National Archives…

“They even have a deal with Wal-Mart to install their specialized LED technology in both Wal-Mart and Sam’s Club. And this firm still trades for less than $1.25.”

Well, the “less than $1.25” always sets off a few alarm bells, but I’ve been known to dabble in a penny stock or few.

And there’s a kicker, it’s not just these blue chip clients that they’re teasing, it’s the US government … and especially, the military.

“The largest consumer of energy in the entire world is the U.S. military — costing taxpayers more than $20 billion a year. And with every $10 increase in the price of oil, the Defense Department incurs more than $1.3 billion in additional energy costs.

“So it’s no surprise that with these energy costs only getting higher and higher, the Pentagon and the U.S. Defense Department are now forcing the military to drastically cut energy consumption…

“And this is how you’re going to get rich…

“You see, the U.S. Navy spends an absolute fortune in lighting costs due to its reliance on conventional light bulbs. We’re talking in excess of $1 billion every single year.

“But that’s all going to change, thanks to a new program developed by the Defense Advanced Research Projects Agency (DARPA) — the same organization that gave us the Internet!

“It’s called the High Efficiency Distributed Lighting program (HEDLight). Its goal is to completely alter the design for lighting systems on U.S. military platforms so that they are stronger, longer-lasting, more easily maintained and more energy-efficient.

“HEDLight expects Navy ships to save 87% of the electricity used on existing lighting systems.

“This is huge!

“And guess which company’s already in bed with DARPA on this project?

“That’s right — the same company that’s lighting Wal-Mart stores and Albertsons supermarkets has the market cornered on a potential…

“$416 million in lighting retrofit contracts from the U.S. Navy

“The company’s first installation — on an Arleigh Burke class destroyer — will save an estimated 87% of the Navy’s lighting bill for the ship.“

So which microscopically mini-sized company is it that’s got this LED mojo working, at least according to the Green Chippers?

Looks to be: Energy Focus (EFOI), which just bought the even smaller lighting company and has slowly been moving to reposition itself as a retrofitting company (they’ve been around for many years, but primarily have done fiberoptic installations in new construction), in part to capitalize on green funding and stimulus funding that’s targeted at efficiency-increasing projects.

And yes, they have had their equipment used in retrofitting Navy ships, to at least a small degree so far — they really did outfit an Arleigh Burke class Destroyer with new berth lights and globe lights for work areas … though the replacements for the berth lights are only 14% efficient, the globe lights really are 87% more efficient, at least according to this press release. These replacement bulbs are an output of DARPA’s HEDlight program, as teased, and they have also done limited retrofits or replacements of lighting in specific areas for all the teased names, though in some cases those have been very small test installations (so far, at least).

The question then becomes, what makes Energy Focus so special? I have a hard time telling you — so far they’ve proven to be flexible in refocusing the company to ride the LED wave, but the company is in a very competitive space and is also in the process of significantly changing its focus — a year ago they were largely a vendor of fiberoptics and pool and spa lighting solutions for new construction, but with the acquisition of StonesRiver, which has been focused on retrofits of public buildings, they’re considering divesting some of their legacy businesses (like pool and spa lighting) and focusing much more on the dramatically larger lighting market in existing buildings (ie, replacement lights and bulbs, not just new construction fixtures), and also focusing much more on LEDs, an area in which they claim some intellectual property that they can leverage with stuff like LED tubes that can replace fluorescent bulbs in standard fixtures.

I have no idea whether or not they have any intellectual property that will hold up as a significant value, or how their designs and products match up to the many, many competitors (most of the big lighting companies, and many small ones, also sell replacement bulbs for standard fixtures that use LEDs, though I’m sure some retrofits require more than just buying some new bulbs.

They did a road show for a fundraising just last fall, and you can see the presentation they made at the time — they project dramatically increasing revenues and margins over the next few years, starting with a nickel in earnings in 2010 and growing to better than 50 cents per share in earnings by 2013. So far this year, for the first quarter, they are coming through with substantially higher sales — $8.3 million, vs. $2.5 million a year ago, but the costs are still substantially higher than the revenues so they posted 17 cents per share in losses (a smaller per-share loss than a year ago, though in part that’s because there are half again as many shares outstanding now). It looks as though most of the increase was probably from the StonesRiver acquisition, since they say in the quarterly filing that they don’t include comparables for that company for last year since it wasn’t public (the acquisition happened on December 31).

Overall, they’ve got an accumulated deficit of about $60 million, so they won’t be paying much in taxes anytime soon. You can see the presentation from their road show here, and the first quarter’s filing here. The press release pitch of the quarterly earnings is here.

I’ll admit to being a little bit intrigued by this company, if only because of their very ambitious revenue projections and because the company they acquired, StonesRiver, was actually the largest part of their revenue for this first quarter, and the only segment of their business (that’s now their “services” business, as opposed to the “products” business) that was profitable. Still, the company itself estimates that there are at least 100 competitors, mostly small private companies, also going after retrofitting contracts for higher efficiency lighting projects, and it’s hard to tell whether or not they’ll be able to stand out and become profitable.

I can’t say that I’m raring to rush out and buy the shares after my three-day window expires, but we’ll see how I feel next week. The company does say they’ve got a backlog of about $19 million in work so far for this year, which is about half of what they were projecting for 2010 revenue, and the projections of positive earnings for this year depend both on that improved revenue and on their cost cutting initiatives and integration of the new unit, so although there may well be some optimism in those projections they are on track to get at least close to those numbers.

The stock closed today at .97, down substantially from where they’ve been for most of this year (the shares have wavered around $1.20 for most of the time following the StonesRiver acquisition, and the rights offering last Fall was made at 75 cents), it spiked up a few times over the last week or so, which could easily have been due to some newsletter attention. And of course, since most newsletters that I write about have much tighter conflict of interest policies than these folks do, I should note for you that Angel Publishing, which puts out Green Chip Stocks Premium, does apparently let their employees trade around these recommendations (the disclaimer says, ” The publisher, editors and consultants of Angel Publishing may actively trade in the investments discussed in this newsletter. They may have substantial positions in the securities recommended and may increase or decrease such positions without notice.”)

Updated disclosure: I still have no investment in this stock.



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July 2, 2010 1:57 pm

I bought a few in Lighting Science group a couple of years ago because it sounded like an interesting business (LED Lighting) I think my cost basis is about $5 shate and now it is about $2.20. This is not an obvious winner but who knows what the future holds

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July 4, 2010 10:37 am


There is a lot of hype on a tease called "Gold sand" in internet recently. http://www.stansberryresearch.com/pro/1006DILGOLV

Could you please give it a try to crack the story to find out which company it is in the story.

many thanks