“Black Sky Days: Capture Quick, Explosive Gains From the $3.6 Trillion Push to ‘Save the Grid'”

by Travis Johnson, Stock Gumshoe | August 13, 2015 4:52 pm

What's being touted by David Fessler for Oxford Resource Explorer?

The relatively new “Black Sky Days” spiel from David Fessler[1] for the Oxford Club[2]’s Oxford Resource Explorer[3] is getting a fair amount of attention,and it’s a very long and involved pitch that is mostly about the fact that our electric grid is old, rickety and not well-protected… and that sells us on some ways to protect ourselves during the “black sky days” when power goes out nationwide, perhaps for as long as several months, and society and our economy collapse.

Most of the “action plan” and “blueprint” stuff they’re pitching I can’t comment on with any great gravitas — it’s fairly basic survival/emergency preparedness stuff like having a supply of fresh water[4], having some backup power either from solar[5] or batteries a fueled generator, having a supply of nonperishable food, etc… but the “money” part of it comes down to a couple things that he talks about in some detail.

First is the idea of “disaster insurance” — which is basically his way of saying you should own some gold[6]. Second is what I find generally more interesting, and which might provide an investing idea we can share with you, and that’s the “Capture Quick, Explosive Gains From the $3.6 Trillion Push to ‘Save the Grid'” bit that we borrowed for our headline here today — I was expecting it to be a push for either cybersecurity[7] (since some of the potential threats are cyber in nature), or a push for one of the big electrical equipment companies like GE or Eaton… but the push is really for a solar company and a defense contractor.

We’ll start with the gold “disaster insurance.” Like pretty much any big newsletter publisher, the Oxford Club folks have a “gold guide” that tells you what kinds of gold there are and what to buy (and how) — but we’ve talked about much of that ad infinitum over the years (though it was a much more popular topic when gold was going up). If it’s really the disaster/post-apocalyptic/barter economy you’re thinking about and you think precious metals will, thanks to their history as “money” for dozens of generations of human beings, be a key part of that economy as a substitute for dollars or other fiat currencies, then you need to actually have and hold physical, divisible precious metals… which, if you want to keep it simple, mostly means gold bullion coins[8].

Owning stock in a gold ETF like GLD or in a gold mining[9] company, or having gold stored in a vault in London or Hong Kong wouldn’t do you much good if the power’s out across the country and you’re trying to find a way to buy a few tanks of gasoline or some food for your family — presumably, in most of these scenarios, the world eventually comes back to normal and property rights have remained strong and those shares you have of GLD or those gold bars in Zurich are worth whatever gold is worth, and likely something more than zero, but that doesn’t do you much good if you’re planning what to do during these potential “Black Sky Days.”

And really, worrying about which coins probably means you’re spending too much time thinking about it — in any kind of disaster/world has collapsed scenario you’d presumably want coins that are widely known and whose quality and metal content will be trusted by large numbers of people, which pretty much means that Americans are safest with the American Eagle gold and silver[10] coins from the US mint, or, if you insist on getting a bit more esoteric or trying to buy the stuff 1% cheaper, the Canadian Maple Leaf, South African Krugerrand, and maybe Austrian Philharmonic or a few others. Dozens of countries mint gold and silver coins[11], but most of them are not all that well-known and most people won’t have ever seen one — if you feel like you’ll need to use these coins to buy food someday, might as well get the ones your food seller is more likely to recognize and have some trust in without biting or assaying it.

Lots of folks talk about “junk silver[12]” for this application as well, since that’s the smallest denomination you can easily find and use of “government authenticated” precious metals — the pre-1965 dimes, nickels[13], quarters and larger coins that were 90% silver, including the more collectible (and expensive, usually) older silver dollars[14] like the Morgan and Peace dollars, are pretty widely held. Some folks use them today to accumulate silver a bit more cheaply than buying pure bars or modern minted silver coins, others stockpile them just in case we see either this kind of doomsday scenario or some sort of hyperinflation. Or you could buy a bunch of 1/10 ounce gold coins[15], which are minted by a few of the major modern mints (including the US Mint)… but those are so tiny that it’s almost depressing, and the current value is still over $100 — to find a single precious metal coin that’s divisible enough let you spend $5 or $10 in current value (who knows what any of this would be worth following some kind of cataclysmic event, but you have to have some way of thinking about these values today) you’ve got to go with junk silver… you can check coinflation.com to get an idea of the current value by metal-weight of those coins today, it’s roughly $1.10 for a dime, $2.75 for a quarter, $12 for a dollar.

So there’s my “special report” — there are dozens of ways to own gold and silver, from more levered (mining companies and explorers) to simple commodity exposure (GLD ETF and the like) or secure and stored physical metals, all of which will almost certainly rise in value if the prices of these metals rise… but if think the world will get so terrible that you have to spend it (and yet not so terrible that we’ve gone post-capitalist and people aren’t willing to exchange something life-sustaining for something shiny), then you probably want to have a pile of coins stored somewhere safe, not a bar in a vault whose manager you can’t phone or a share in a company whose stock you can’t trade.

Personally, I find the disaster preparedness of a month of canned food and a few hundred gallons of fresh water or a water purification system more compelling and rational (maybe throw in a case of whiskey and some guns and ammo or cigarettes if you think those will be better for barter than precious metals), but I do also hold some junk silver and gold and silver bullion coins. Frankly, if we have a power grid crisis from a natural disaster or attack but there’s a relatively clear recovery/restoration coming and most people don’t give up and lose confidence in society, then it might just be easiest to have some actual physical cash on hand so you don’t have to worry about bank records or bank runs. Don’t put it in your mattress or in the top drawer of your dresser or desk, that’s a little too cliched and easy for burglars.

And now we move on to the “Quick, Explosive Gains” part…

I don’t want to shortchange you if you really want to dig into the possible reasons for the electrical grid to collapse (they’re real, and the government is genuinely worried and putting together all kinds of contingency plans — as was discussed in the news quite a bit following both the historic Northeast blackout of 2003[16] and the California substation attack in 2013[17]) — but if you want to read more of Fessler’s scary promo to get his pitch on EMP impacts (either from solar flares or from manmade pulses), terrorist attacks, cyber-attacks or other possible problems for the grid you can see his full promo here[18]. This is pretty mainstream stuff, it’s well-known and has been covered by the mainstream press — even the Wall Street Journal published an opinion piece on it this year[19], largely because of the news-making nature of the Pentagon’s decision to “go back underground” and modernize and move more operations back to their cold-war Cheyenne Mountain facility because of that base’s ability to withstand an EMP attack.

The part that really relates to investment gains talks about two different teased “secret” companies, here’s how he introduces the idea:

“Now, you may be wondering… why should I invest if civilization could come crashing down?

“It’s a simple risk/reward assessment, really. If the grid goes down for 18 months, we’re all going to have a lot more problems than a stock loss.

“But if this company is able to fix the situation, you could not only score some quick gains and pad your pockets…

“But you could also come out of this dangerous period a lot wealthier….

“I’ve put a lot of doomsday scenarios out there today.

“But to tell you the truth, I’m actually hopeful that we can avoid a catastrophe.

“You see, there are ways to harden the grid and protect it from each MOE.

“It’s possible.

“But it’s going to take an enormous wave of investments to do so.

“And that’s exactly what I’m seeing right now. Believe it or not, the government recognizes the dire nature of this situation. And right now, it’s doing what government does best… throwing massive amounts of money at the problem.”

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The first stock idea is about contracting to harden military facilities against EMP attack, with the “special report” that he says can help you “Ride This Grid-Saver for 100% Gains.”

Here’s how he hints at the investment:

“For example, one company I’m looking at just received a $700 million contract to help the U.S. military harden its facilities against any attack.

“In short, it’s developed a patented new electrical technology that allows end users to literally flip a switch, disconnect from the grid and operate on a completely self-contained system….

“… of the 149 military bases located in the United States, only one is capable of fully disconnecting from the grid….

“… with 148 of 149 U.S. bases in need of an overhaul, the company is set to receive dozens of very profitable contracts.

“I think this company’s share price could easily double in the next 12 months.”

I think the contract he’s talking about is the $700 million contract specifically for Cheyenne Mountain[20], upgrading and modernizing that base, and the company who got the contract was defense giant Raytheon (RTN) — which is a decent bet to be involved in most any major military project that involved electric systems, though certainly most of the big defense and electrical equipment companies have similar capabilities for the majority of this kind of work (at least as I understand it). They have also been involved in getting at least one Marine base close to “off the grid.”[21] (Here’s a WSJ article about that push to get more bases off the grid[22], if you’re curious.)

Raytheon is a big company, with a market cap of $30+ billion, and this is not the only business they’re in — they are primarily but not exclusively a defense contractor, and they have four divisions of roughly equal size (in terms of sales). I assume the microgrid/power control business is part of their integrated defense systems division, which is slightly larger and slightly higher margin than the other divisions, but even a substantial boost to their electrical systems/military grid business could, of course, easily be counteracted by defense department budget cuts that hit them in other, much larger areas. The company seems relatively fairly valued to me — it’s not growing this year as they seem to be in a bit of a soft patch, not sure specifically why that is (whether it’s defense spending broadly or a specific program cut or problem), so they’re expected to have their earnings be down a few percent this year from last year, and to recover that dip next year. No exciting growth on the horizon that I see in the analyst expectations, but they are a solid, blue-chip kind of company similar in many ways to the other major defense contractors. They may be a bit less specifically levered to high-profile projects (like the latest fighter jet or aircraft carrier) that usually come attached with extra headline risk from political battles for Lockheed Martin (LMT)[23] or Northrop Grumman (NOC)[24] — but they do have their finger in a lot of pies, they are involved with missile defense, precision weapons, cyber-defense and electronic weaponry of lots of different types.

So right now, RTN trades at a PE of about 15 — they’re not currently growing or expected to grow that much, so the trailing PE and the forward PE are about the same… if they’re going to double in the next 12 months, then that means either the whole market is going to boom forward and large cap stocks are going to trade at dramatically richer valuations (which seems like a bit of a stretch to me, given the fact that the market as a whole is a little bit expensive and most of the big defense contractors trade at pretty similar valuations), or Raytheon itself is going to post a hugely surprising earnings growth number at some point in the next year. This is a huge company, with contracts that take years to win and years to fulfill in many cases, and that kind of huge beat or change to the story seems like an even bigger stretch — analysts have been pretty close with their earnings estimates for Raytheon, and those estimates haven’t really been rising this year.

So, interesting idea — Raytheon is probably the first place I’d look for a defense contractor, with the possible exception of Boeing (BA)[25] or one of the small guys like Huntington Ingalls (HII), but if there’s going to be a massive spend on upgrading our power grid I’d probably first look to the big electrical equipment and power plant guys like General Electric (GE)[26], Eaton (ETN) or ABB (ABB) — Eaton’s the one that keeps popping up for me as maybe an opportunity, but that’s because it’s been beaten up in the rout of the industrial stocks (for good reason, to some degree) and it’s starting to look more appealing as a cheap and/or turnaround stock, not because it’s a hot ticket.

And the solar one? Here’s how it’s pitched:

“… there’s another company I want to share with you as well…

“It’s cashing in on the potential $3.6 trillion push in a completely different way than the first company….

“Today, the solar industry is exploding….

“The number of solar installations jumped 30% in 2014 alone. And they’ve nearly tripled since 2011.

“It’s becoming more affordable by the day. And prices are falling all over the world….

“Between 1975 and 2015, the price has fallen from $101.05 per watt to just $0.61 per watt.

“And I believe one particular company will see substantial stock gains as a result.”

Which company, you ask? Here are our clues…

“… it’s one of the largest solar panel makers in the world…..

“It also builds entire solar power plants. In fact, since 2009, the company has built 520 megawatts of utility-scale solar projects. These plants are not just here in the U.S., but also all over the world… in Japan[27], Germany, Spain, Peru[28] and Bulgaria….

“It also specializes in making off-grid solar systems. These are designed to power entire communities or just a single home….

“Earnings have soared 552% in the past year, and I expect another 43.5% jump by the end of 2015.

“And according to its 2015 first quarter report, revenues were up 84.6% year over year, which blew away consensus estimates.”

This one, sez the Mighty, Mighty Thinkolator, is Canadian Solar (CSIQ)[29] — Canadian Solar started out several years ago as yet another low-cost solar panel manufacturer in China[30], though they also now have substantial production capacity in Canada[31] and they’ve spent the last couple years diversifying into the “solutions” business… meaning designing and building plants around the world, I guess, not just exporting cheap panels. They’ve been able to maintain a much higher level of profitability than some of the other large panel manufacturers like Trina (TSL) or Yingli (YGE), so the financials look fairly appealing at the moment with CSIQ trading at just about 10X next year’s expected earnings… even though they’re not really expected to grow earnings this year or next year as the solar business continues to be in a shakeout that I don’t really understand on any kind of detailed level.

Solar stocks in general, as you’ve probably noticed, are mostly down quite a bit from their highs — whether because of fears of China, where most of the manufacture, or company-specific financial problems that have others scared (like the Hanergy scam in China, which is reminding folks about past solar busts), or chatter about subsidy cuts or reduced demand in Europe or the US, or simply the continuing impact of the solar panel glut brought on by overcapacity. Gluts can be great for changing the economics of a new technology, spreading solar power to more places and making it cheaper, but not so great for the manufacturers (one reason why CSIQ has been edging away from just being a manufacturer, I imagine). There was a quick summary from the Seeking Alpha[32] editors about solar weakness yesterday here if you’d like a little background.

So yes, Canadian Solar did grow revenues by 86.5% last quarter, they recently acquired Sharp’s solar unit, Recurrent[33], that has built more than 520 MW of large, even utility-size solar projects, and they do “specialize” to at least some degree in off-grid projects and have built projects all around the world. Most of their growth is coming from North and South America in recent quarters, which is probably some reassurance for folks who are worried about European and Asian growth at the moment — and I was, honestly, kind of surprised at how solid and reasonable their financials looked, I think I was probably expecting either a disaster like Suntech or Yingli or momentum valuations like SolarCity (SCTY).

And that’s about all I can tell you about Canadian Solar, I’ve been remiss and haven’t really looked at the solar industry in much detail at all in the last couple years (which has actually worked out OK — the solar index, as represented by the TAN ETF, is pretty close to where it was two years ago… though CSIQ has been one of the stronger components of that index and has beaten the ETF handily thanks to a huge surge late in 2013).

And yes, I did just want to leave you with one bit from the ad that I couldn’t ignore:

“Now, before I go any further, I’d like to be clear about one thing…

“My goal today is NOT to scare you.”

Right… because the huge “Black Sky Days” headline superimposed on a blacked-out silhouette of the Manhattan skyline isn’t over-the-top scary at all… nor is the blood-red quote that it “could bring our civilization to a cold, dark halt.”

So technically I suppose the “goal” is to get you to subscribe to the Oxford Resource Explorer, and to expose you to the wisdom therein… but scaring people works, that’s why newsletter promoters do it. Fear might not work quite as well as greed all the time, but folks seem extra receptive to it these days, and it sure gets a reaction — and if advertising copywriters go into their workday thinking just one thing, it’s, “how do I get the attention of our possible customers for long enough that our sales pitch can sink in?”

So… did it work? Scared enough about the possible collapse of the grid to buy Canadian Solar or Raytheon — or, better yet from their perspective, to subscribe to the newsletter? Planning to dust off that survival kit that you put together after the 9/11 attacks, refresh the water jugs and get some newer canned food? Maybe throw a few handfuls of Mercury dimes in there? Let us know what you think with a comment below.

P.S. In case you’re wondering, the last time we looked at an Oxford Resource Explorer pitch it was from that newsletter’s other editor, Sean Brodrick[34], oil[35]-for-90-returns/">touting Sasol (SSL)[36] for its ability to make “real gasoline without oil” at dramatically lower cost. That was poorly timed, heading right into the collapse of oil and energy stocks last Summer, so it’s probably no surprise that SSL is down close to 50%, and their huge project in Louisiana is pretty much on hold.

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