“Power Plays — Cash in on the Wind-Energy Revolution” Motley Fool

By Travis Johnson, Stock Gumshoe, October 15, 2008

Ah, another book-length teaser from the Motley Fool … just the thing to dig in my Gumshoe teeth after a few days of odd posts about the Gumshoe contest and Social Security payouts. Back to stocks!

Today our teaser is for the Fool’s Hidden Gems service, which according to Hulbert has been their worst-performing service over the last twelve months (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. Over time, my impression is that this has been a very strong service — at one point they did reach the coveted top spot for a brief while, and they have beaten the market over five years.

And they’ve brought a few interesting companies to our attention in the past, though certainly they haven’t all been winners (In the last year or so they’ve tried to hook us with Dawson Geophysical, LoopNet, Buffalo Wild Wings and a few others).

So what are they “teasing” today?

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

“An unprecedented economic crisis is coming — and $10 TRILLION is going to change hands. It’s NOT what you think — but it will create one of the most lucrative investment opportunities since the Industrial Revolution.

“GE, Goldman Sachs, JPMorgan, British Petroleum, and even Bill Gates are positioning themselves to cash in. And YOU can join them — IF you take advantage of the 3 timely opportunities detailed 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, 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, British Petroleum, Blackstone, JP Morgan … phew! All those, according to the Fool, either spoke or wrote glowingly of wind energy, or invested in it.

I won’t argue with them on that one — they also lift a few bon mots from the T. Boone Pickens spiel and from the Pickens Plan advertisements … Pickens, in case you haven’t heard, is advocating a switch to wind for electricity generation, and to natural gas for transportation.

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This is not the first time we’ve looked at a wind energy teaser, and I more or less agree that wind is a critical part of our energy future, though I have no idea how big it can get. Past teasers have told us about a Manitoba windmill farm, and about some of the big European wind turbine makers like Vestas.

And wind is one of the “easy” renewable sources, as long as you’re not worried about bird health — it’s relatively cheap and efficient if you place the turbines in reliably windy areas, and it doesn’t require quite as much subsidy as solar panels to be worthwhile. It’s not as easy a call as geothermal or hydropower in terms of efficiency, but there are a lot more places where you can throw up windmills.

So if we stipulate that we are interested in wind, what do the folks at the Motley Fool’s Hidden Gems have for us today?

Naturally, they throw out a few clues … and some tempting tidbits that get the appetite building, though the company name is 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 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 …

“Imagine if it were as easy as investing in a rock-solid, all-American company that follows Warren Buffett’s patented methodology of growing shareholder value to a T…

“Well, it can be — if you get invested in the remarkable, little-known company I’m about to introduce you to…

“Tack on the fact that it’s a major player in the North Dakota wind-energy market and that it pays a whopping 4% dividend and what have you got?”

“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.”

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 …

Otter Tail (OTTR)

You may have heard of these guys before — they’ve even gotten the Jim Cramer treatment when he was yelling about wind energy a few month back. It has been a favorite of the Motley Fool’s for quite some time, and it has been proposed by several folks as one of the many little “mini Berkshire Hathaway” stocks. 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.

So what is it? Well, it’s not just a wind company. Otter Tail is an electrical utility in the upper Midwest that has used it’s cash flow to create a diversified holding company that owns all kinds of businesses, from plastics to manufacturing to transportation and all kinds of other stuff. One of those companies is DMI Industries, a heavy steel manufacturing company which builds wind turbines. DMI did indeed up its production plans earlier this year to help meet demand, as teased in the ad (you can see the press release here if you like). The revenues from DMI make up far less than a quarter of total sales, though it is the fastest growing subsidiary … and the core electrical utility is also investing in wind energy, as was teased — using, one would assume, the towers built by their subsidiary.

And to some extent you can make the Berkshire Hathaway comparisons look feasible — OTTR is tiny, with roughly a $700 million dollar market cap (it was well over a billion just weeks ago), but they do have a 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. As for Berkshire, Otter Tail is decentralized and focused on predictable businesses — they buy simple, understandable companies that will be immediately accretive to the bottom line, and they let the companies make their own management decisions.

The non-utility businesses have also been gradually building, to the extent that last year they actually made up a bit over half of the earnings pie.

Otter Tail now pays a good dividend — for a while the quarterly payout was negligible compared to other utilities, back when the share price was hitting $40, but now that the stock has fallen to close to $20, a price it hasn’t seen in six or seven years, the yield stands out as a pretty nice 5%.

Now … is wind energy going to suffer at all with oil and natural gas dropping dramatically in price? Is our current oil market just a short-term reflection of a slowing economy, or does this portend a long-term trend, a return to cheap energy?

I’d guess the former, but it’s only a guess. I don’t believe that we’ll be escaping from the petroleum economy within the next 20 years, or that emerging economies will leapfrog oil and gasoline for their booming transportation needs, though it may be that everything slows down for a while, but it also seems to me that political and environmental demands will continue to increase alternative energy development and utilization. Particularly if you’re investing for six months instead of for six years, this is a call you’ll have to make to set your own comfort level. Meanwhile, Congress did pass an extension of wind energy tax goodies that should help, and wind remains the fastest growing part of the electricity business — though it’s growing from a very, very small base, I think wind currently is responsible for about 1% of US electricity generation.

Should you buy Otter Tail? I dunno. If you want just wind power there are some more focused investments you can make, including the big European companies that dominate the industry, and you can also buy one of the wind power ETFs (First Trust has one with the ticker FAN, PowerShares’ version is listed at PWND, both are heavily weighted in Europe). But OTTR is certainly an interesting beaten-down company that plans to get some growth from wind.

I can tell you that I lost track of the company for a couple years when it seemed expensive, and I hadn’t realized that the shares had fallen this far, so I’m pleasantly surprised … and a little tempted. They recently raised about $150 million, which is a big chunk for them, and will be using that money to invest in wind energy. If that works out, maybe Otter Tail will make your portfolio wag a little in the long run.


full disclosure: I own shares of Google, and have a small position in General Electric call options. I don’t own any other company or investment mentioned above.


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Jon
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Jon
December 19, 2009 6:34 pm

Looks like it is a good company. TMF just sent out another teaser for it and the stock price ran up on friday a little bit. It is up 5% or so since thursday, 12-17-09.

For the last few months the stock price has been relatively flat. Seems like a good buy range would be 22.50-23.50. With how things are going right now. Depends on how long you want to wait.

Some of the things I was noticing about this company is currently it is on a down cycle on its revenue generation with a slight uptick for Q3 2009. Like many companies it is having a hard time downsizing. They did announce layoffs which is a tough thing to do for any growing company. It shows they have a strong profit mentality.

I would say the bargain price would have obviously been at the $15 low. However this stock apparently has a ton of room to grow $45 upside. Obviously this is counting chickens but the company hasn’t changed much other than buying additional windfarms for 200M. So if anything they are still looking to grow and they are building their asset column and doing so with business that is renewable revenue.

Seems like a pretty good bet especially with the healthy 5% div

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