Motley Fool: “10X Bigger than the Internet: 4 Alternative Energy Plays”

By Travis Johnson, Stock Gumshoe, March 2, 2008

This one has caused quite a stir among the vast and mighty Gumshoe readership, if my steady deluge of email is any indication. Everybody loves growth stocks, especially when nothing else seems to be growing, and everyone thinks alternative energy will be the next billionaire-maker — the Fool compares the current situation in alternative energy to the California gold rush, the Model T assembly line, and the Internet … good stuff, indeed (though those big financial earthquakes tend to create at least as many valleys as mountains, in my experience).

And here we have a teaser email, for the Motley Fool’s growth-oriented Rule Breakers newsletter service, that drops hints about their four favorite investments in this area — a nuclear play, a solar play, a diverse alternative energy investment, and a fossil fuel recycler.

The letter of course drops hints about the most successful picks this service has had in the past few years — Intuitive Surgical, Archipelago, and Akamai among them. Not bad. They don’t, of course, mention the flops like iRobot, Force Protection, or Encysive Pharmaceuticals, all of which were picked in recent years (I don’t know if or when they might have been sold).

That’s to be expected, of course — growth stock pickers always have some outsize losers, in many ways companies that fit this category, candidates for extreme growth (in the Fool’s opinion), are significantly riskier than more staid picks by value or income-oriented services — especially for stubborn buy-and-holders like the Motley Fool (I don’t mean that in a bad way, usually). Which doesn’t mean that, on average, the service can’t do very well — you rarely see income services have 500% winners over a couple years, as the Fool has had with ISRG (for example). The Fool reports that Rule Breakers, by their calculations, has outperformed the S&P by about 9%. (I don’t know how they calculate their performance, but I do at least congratulate them for publicizing relative performance figures for all of their newsletters clearly on their website).

But anyway — what you care about are some stock ideas, so let’s get to them.

“INVESTMENT #1: CLEAN COAL AND NUCLEAR… this company owns a huge chunk of substantially growing market, is protected by close ties to government agencies, and with 2 breakthrough technologies emerging, this stock has massive upside!”

According to the teaser, this is primarily a bet on pebble bed reactors (PBR), a new type of nuclear reactor that is purportedly safer and cheaper than the standard reactors currently in use. There is only one of these reactors, a prototype, currently in use, and this company is planning to build the first really functional, on-line reactor. They’re also planning to build 30 more in the next 12 years.

Some specifics:

“increased revenue almost 25% annually for the past five years, with net income growing 11% during that same period”

IPO in 1994

PE of about 11, lower than it’s recent valuation.

currently valued at “a measly 2 times book value.”

Feed all those goodies into the mighty Stock Gumshoe Thinkolator, and we’re told that this company is …

Huaneng Power (HNP)

HNP is indeed out front on Pebble Bed Reactors, though they’re a big utility so I don’t know that this particular business is going to set their future course. They’re also a massive coal consumer, which is still where most electricity in China comes from (China, like the US, has massive coal reserves).

The company is cheap on current numbers, with a trailing PE of 10 and forward PE of 12 and a decent dividend of better than 4% (based on last year’s payout of $1.45, there’s no guarantee that we’ll see the same payout this year).

On the negative side, analysts are reminding us to take note of the fact that HNP and the other big power producers are facing significant inflation in fuel costs, particularly coal costs, but are seeing power prices, which are heavily regulated, climb much more slowly, even as the utilities try to rebuild from the epic snowstorms much of China faced this winter. The Chinese government is apparently capping electricity prices to try to help curb inflation (which is much worse in China right now than it is in the U.S.), which is squeezing margins at the producer level. That’s likely a big part of the reason for the current relative bargain valuation (the shares have come down quite a bit since last Fall when they peaked at about $57, you can pick up shares today for $32 if you’re so inclined).

So, cheap valuation … but maybe for a good reason. Maybe worth a look for those nuclear plans, but do keep in mind that China’s likely to be much more concerned about supplying electricity to its people than it is about maintaining profit margins for power plant owners, so future profitability might come with some political risk. I don’t know a lot about how HNP compares to its competitors (the other public power producers I know of are mostly listed in Hong Kong but might be tradeable on the pink sheets — they are Huadian Power International, Datang International Power Generation, China Resources Power Holdings, and China Power International Development).

Three more to go … sheesh, this will be a long one even for me.

“INVESTMENT #2: SOLAR… a pure play on the soaring demand for solar power. This company has great margins, a sustainable competitive advantage, and a lit fuse with a wide-open sky waiting!”

We get a few clues on this one, too:

“It’s one of the world’s top 10 manufacturers of photovoltaic cells.”

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“It landed an exclusive contract to supply a solar energy system for Beijing’s Bird’s Nest Stadium, the 100,000-seat centerpiece of the 2008 Olympics.”

Q1 2007 net income was $26.1 million (for 35% sequential growth)

There are more clues for this one, too, but you’ve probably seen the email so I won’t bore you. This one is …

Suntech Power (STP)

This was the first of the Chinese solar plays, arguably the one that lit the fuse for a spectacular stock run that brought us a host of successful companies and a multitude of pretenders. As one of the biggest low cost producers in the world, it’s also an industry bellwether — so when their last earnings report was disappointing, the whole sector fell significantly. STP has fallen dramatically from it’s solar-craziness highs of last year near $90, and you can now pick up shares at about $37. That has brought the forward PE down dramatically to about 13, but I’d look at those numbers carefully — STP dropped guidance for the year, and maybe the analysts just think they’re sandbagging it or haven’t taken those new numbers into account yet. Who do you believe?

If you like solar, there are obviously lots of plays you can make — STP is certainly well established and seems to be a decent pick among many others. Among the China solar plays Trina Solar is probably the closest comparison, and of course there are the other biggies in silicon photovoltaics like SunPower (which has the most efficient panels), Evergreen Solar (thinner panels), or the moonshot First Solar (non-silicon photovoltaics). I couldn’t tell you which is the best among all of those, or among the long lists of other solar stocks we’ve looked at before and the many more small ones that have started up in recent years, but I can tell you that the Rule Breakers folks like Suntech Power.


The other two don’t come with a full set of clues, so there’s a bit more guesswork involved. Thankfully for you, there’s also less of the Gumshoe’s ruminating to slog through. I’ll give you my best guesses on those for the clues provided.

“INVESTMENT #3: RECYCLING FOSSIL FUELS… this company makes coal dust look good. Revenue is up just 14%, and earnings just jumped 69%!”

With those limited clues, this one pretty well has to be Headwaters (HW). Their most productive business of late has been turning fly ash into cement for the ravenous building industry, and thus recycling a fossil fuel to some degree. They’re also involved in a small way in ethanol, and in a large way in coal-to-liquids technology. The big deal with Headwaters in past years has been the renewable fuels credit which made their coal-to-liquids technology profitable, and the constant threat of that credit being taken away led to them having some pretty volatile years. I assume that’s also the reason for the shares’ decline from about $40 in 2006 to the current $12, but perhaps analysts see a nice turnaround despite slowness in the construction sector — they’re pegging this at a foward PE of only nine (trailing PE is more like 40, so that implies that there’s some kind of growth catalyst hitting this year).

Haven’t looked at this one in detail, though I know that several readers have mentioned it recently. If anyone has an opinion, feel free to share it, but I’m fairly sure that this pick is Headwaters — I know it has been a Rule Breakers pick in the past, though at what price or when I don’t know.

“INVESTMENT #4: WIND, HYDROELECTRIC, AND FUEL CELLS… this investment spreads our bets around in a unique way. Giving your portfolio a strong dose of only the most profitable technologies!”

To get this kind of diversification, you’re pretty much either talking about General Electric or about an ETF. Given this newsletter’s focus, I’d bet that it’s an ETF that buys widely in alternative energy — in this case, probably the best bet is Powershares Wilderhill Clean Energy (PBW), largely because it focuses on the small cap growth part of this sector more than the others do, and because I know Rule Breakers has recommended it in the past. If you’re interested in this sector and ETFs, there are a few others — here’s a decent SeekingAlpha article on them.

So … there you have it. Four possible ideas for alternative energy, all of which are recommended by the Motley Fool’s Rule Breakers service. Of those, my first impulse would be to go with Suntech Power just because it’s so much cheaper than it used to be, but I find it very difficult to get any conviction about the solar power industry, and in particular about photovoltaics, because of the incredibly rapid growth in capacity and in the number of new companies investing in the area. I’m not sure what the long term profit picture will look like, even with dramatic increases in demand, but maybe I’m just being a nervous nellie.

I am impressed, though, with how cheap some of these companies are relative to their historical valuations (though “historical” in most of these cases means their valuations during the initial alternative energy bull run of the last couple years — and the low valuations are because the shares have fallen dramatically over the past year … not everyone loves that kind of investment). Even the ETF had a 25 or 30% drop just last month, erasing six months of gains, so this isn’t a sector for the weak at heart.

Then again, where is a weak hear to turn these days? Here’s hoping this week sets all of our tickers to a nice, steady flutter.

full disclosure: as of this writing I own shares in Intuitive Surgical, and LEAP options on Akamai. My only real alternative energy investment is MEMC Electronic Materials, which sells silicon wafers to STP and others. I do not have any interest in any other company mentioned, and will not trade in any company mentioned for at least three days.



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March 3, 2008 10:23 am

WAY TO USE THE THINKOLATER! #3 had me stumped, but glad you got it. Will look at it today.

March 3, 2008 10:42 am
Al Einstein
March 3, 2008 12:14 pm

E=mc2 would you like to calculate the exponential to some power of 10 comparing fuel cost inflation, relatively (yes pun intended!) comparing coal to uranium? If you could convert the mass of one lump of coal to energy you could heat the planet!

OK I love our gummer shoe, he is awesome, and my hero!