Play Both Sides of the Historic “Peak Energy Curve”

The folks at the Oxford Club are launching a new service this week that they call Peak Energy Strategist, run by David Fessler, who I guess has been an energy analyst for them for a while … like many folks, he claims to have a special set of indicators that he uses, in this case likening them to the algorithms that keep satellites in space.

And believe me, I’m not going to try to imagine what his secret algorithms might be — he says that his indicator (he calls it the Peak Energy Indicator, PEI) is based on nine calculations, including these seven that he’s willing to share in the ad:

“Trend analysis
Obscurity level reached
Demand trigger
Game-changing discovery
Resource flow rate
Discovery/Cap Ratio
‘Window’ trigger”

And it seems clear to me that most of those could mean almost anything — ie, this isn’t a magic formula, but a way to quantify the happy feeling that you get from stock that you think should go up. It’s no surprise that some of the things you would look for in a possible investment would be a “demand trigger” or a “game-changing discovery” … and many of us do love investing in stocks with an “obscurity level,” but obviously there’s not a screen that can reliably flag those stocks for you… so I’m just going to assume that David Fessler, like most newsletter analysts, picks stocks that he likes by using a variety of factors.

Does he pick good stocks? Well, there isn’t any track record to speak of for this new newsletter yet, of course, but he has been writing about stocks for a while, and apparently working on energy picks for the Oxford Club (like the Fredonia Reactor, perhaps? Dunno for sure), and he has written articles predicting great things for geothermal stocks in recent months, though I’ve never written directly about one of his picks (that I know of). I’ll stipulate that he knows a lot about energy investing … let’s see if we can sniff out his teased picks, then you can decide for yourself how they look.

I’ve seen two different ads for this service over the last couple weeks, and in them he says that his general strategy is to play both sides of the “peak energy curve” — meaning that he thinks we should invest for the future, stuff like advanced batteries and geothermal energy, as well as for the “past” and present, stuff like oil, coal, and natural gas, since there won’t be a single switch thrown next year that gets rid of coal plants and replaces them wind turbines. Hard to argue with that basic philosophy, which I think is probably shared by most energy investors.

And in service to that strategy he has teased two different picks in his ads — the first one is a lithium play, and we know there ain’t many of those so let’s knock that one out quick …

“One company set to power 23 billion electric cars…

“The PEI is locking onto a highly unusual energy company. It’s hitting on all nine PEI factors… and will likely earn a spot in my first report.

“As you may have heard, President Obama is pumping $2.4 billion into electric vehicle production in an effort to put one million of them on the road by 2015.

“He’s also providing a $400 million “down payment” on infrastructure for electric cars… along with a $7,500 tax credit to the first consumers to get on board.

“As the demand for these green vehicles heats up, the lithium to power the batteries will send a few companies skyrocketing.

“And most people don’t know that one of the world’s largest lithium deposits is hidden under a South American desert… just east of the mountain range known as Cordillera de Domeyko.

“That’s where one mining company found enough lithium to power 23 billion electric cars.

“At current prices, the deposit is worth $1.3 trillion.

“That’s 130 times greater than the company’s market cap.”

OK, so that’s not a huge clue, but if you can do the math you know that 1.3 trillion is 130 times greater than … $10 billion. A pretty big company. And there are a handful of big lithium-related companies in the world, but only if you’ve lost a couple of fingers on that hand. By far the largest publicly traded lithium stock, and the one that dominates that “world’s largest lithium deposit” in the Atacama Desert in Chile is SQM (SQM), so that’s who we’re dealing with here. The market cap is currently about $9 billion, and SQM is far larger than the second-place company working on lithium production in this desert, that being Rockwood Holdings (ROC).

Both companies have been teased pretty heavily in the past, most recently Rockwood as part of that “battle for the 3rd element” teaser from Money Map, and both have significant other businesses, so lithium production is not their only driver. In the case of SQM their biggest business is fertilizer and various ag nutrients, and they also have a huge iodine business, but lithium is indeed a major focus — all of their markets took a tumble over the past year or two, and 2009 profits were down, but investors are clearly expecting some significant growth, from Lithium and from a recovery of global agriculture, as they stock trades with a PE of 27 (forward PE of 20 on estimat