The credit crunch made me reassess my investing strategy last September. First, my expectation of the lack of availability of credit for companies without reliable cash flow led me to sell several early stage and troubled companies.
Second, my experience of attempting to re-orient my portfolio in a hurry convinced me that I simply own too many companies. For the purposes of diversifying company-specific risk, nearly all the benefits can be achieved with as few as 10 companies, if those companies have sufficiently different performance characteristics. In less ideal circumstances, 20-40 companies will usually be sufficient. I currently own shares or have written cash covered puts in/ on approximately 100 companies, ETFs, or closed-end funds. I have closed positions in at least 30 more since September.
One hundred companies is excessive for the purposes of achieving diversification. My long list of companies meant that I had to spend more time re-evaluating my positions before I could decide what to trade, while the market was falling 5% a day. It also leads to higher transaction costs. Hence, I have resolved to reduce my number of holdings to no more than 50 and concentrate my positions in the remainder before the end of 2009. I plan to keep my portfolio to no more than 50 holdings at a time permanently.
At the request of readers of my article about relatively conservative alternative energy stocks for 2009, here is a list of ten companies I like for various reasons, and which I believe have potential for more than 100% gains in 2009. All of these companies are ones I owned at some point in 2008, but which I have either already sold, or which will probably not survive this year's cull of my too-complex portfolio. I like each of them, but I also have doubts.
Unprofitable Companies Without Strong Balance Sheets
It's not a good time to be a pre-profitability development company. Most such companies' stock prices are currently quite deeply in the toilet, and they are unlikely to recover unless money for such ventures becomes more readily available.
When finance is difficult, companies that need to raise new money often have to do it by issuing a large number of new shares at prices below the current one. This means that current shareholders are diluted and find themselves holding a much smaller part of the company, with the new shareholders having paid less for their shares.
If these companies can raise new money on favorable terms, they all have the potential for spectacular gains. If they can't, it need not mean that they will never bring their technologies to market and reach profitability, but it does mean that current shareholders are unlikely to profit from it.
Beacon Power Corporation (BCON) has the compelling idea of using flywheels for frequency regulation. They recently raised $4.1M in a dilutive share offering, but I expect they will need to raise much more money before reaching profitability.
John Peterson, whom I featured as one my 10 best competitors, has been making the case for Axion Power International (OTC:AXPW) quite effectively since July. Read a few of his articles and you'll come away convinced they are working on one of the most practical battery technologies available. Unfortunately, the company has no revenues, and will need to raise more money within a year.
Valence Technology, Inc. (VLNC) is a developer of Lithium-phosphate batteries. They recently signed a deal to supply batteries for electric cars with a French firm, but they'll need more money to deliver. Will they get it on terms favorable to current shareholders?
Composite Technology Corp (OTC:CPTC) has long been a favorite of mine, but they, too, are bleeding cash and will need to raise more soon. Both the wind and transmission cable divisions might benefit from a doubling of renewable energy production, especially since wind is likely to play a key role. Nevertheless, there is no guarantee that this business won't go to larger companies, as opposed to a tiddler like CPTC, despite arguably technically superior products.
Environmental Power Corp. (EPG) is one of the very few pure-play waste-to-energy companies. Its focus on bio-methane means it can even produce a sustainable renewable fuel suitable for transportation with current technology. But they, too, will need to raise more money within a year.
Emcore Corp. (EMKR) produces ultra-high efficiency Gallium Arsenide solar cells used in Concentrating Solar Photovoltaic [CPV] power, as well as space applications. CPV was a major topic of discussion at both OIDA's Green Photonics Forum, and CSP and CPV Investment Finance Summit which I attended last fall.
I came away feeling that although CPV has historically been plagued by engineering challenges (see my OIDA Forum article,) it has reached a point that some CPV developers will be able to surmount those challenges at reasonable cost. If so, CPV is quite suitable for small utility scale solar installations of a few megawatts. These have the advantage that they can be distributed, and not require significant new transmission, which is the Achilles Heel of large scale solar and wind projects.
I'm particularly enamored with private CPV company Cool Earth Solar, although I would be hesitant to pick one company to succeed in a very crowded field.
Emcore, however, is one of only a few suppliers of high-efficiency PV cells used by CPV companies such as Cool Earth. Another is Spectrolab, a division of Boeing (BA). If I'm right about CPV coming of age in 2009, Emcore may benefit greatly. If so, the stock, which had been battered by the delay and cancellation of orders in their backlog, as well as a resulting shareholder class action, may currently be a bargain.
Unprofitable Companies, Somewhat Stronger Balance Sheets
In September, UQM Technologies (UQM), I mentioned I was holding on to UQM despite the credit crunch because of their relatively strong balance sheet. The company manufactures electric drives, and could benefit from U.S. automakers' move to hybrid and electric vehicles. However, my more recent determination to trim my portfolio, and the uncertain future of the U.S. car industry made me decide to let the company go, despite the fact that an auto bailout which forced the big three to produce many more hybrid and electric vehicles could prove a bonanza for UQM.
Cosan, Ltd. (CZZ) is a Brazilian producer of sugarcane based ethanol, which is both cheaper and more sustainable than the North American corn based variety. Either a return to high oil prices, or a reduction in America's ethanol import duty could greatly help the stock, but I decided to sell it because even sugar based ethanol is not a green enough solution that I feel a strong need to be investing in it.
Raser Technologies, Inc. (RZ) has an innovative business model for developing geothermal power plants. Using United Technologies' modular PureCycle turbines, they can start development of a geothermal site with only a 10MW plant, and then expand rapidly if the geothermal resource warrants it. The combination of this modularity and low exploration time means that Raser can explore geothermal prospects previously considered nonviable, and that they can work on a large portfolio at once. As an inexpensive, baseload renewable resource, new geothermal projects are highly valued by utilities used to the reliable power generated by their fossil fueled plants.
The strength of Raser's model is currently being demonstrated with the rapid commissioning of their first project, consisting of 50 PureCycle units in Utah. Having recently raised $20M in new equity capital, Raser should not need to raise new funds in 2009. This should be long enough for them to start earning significant revenues, and hence positioning them to possibly reach profitability using only debt rather than equity capital.
Raser has all the markings of a great growth story, but if the stock price zooms up as I think it might, I'll probably sell to concentrate more on value and income propositions.
Profitable Companies, For Now
Zoltek (ZOLT) manufacturers carbon fiber used for wind turbine blades. They have had a few setbacks recently, such as the loss of a long-running contract dispute. Worse, some wind turbine manufacturers are suspending or halting production at some factories, as are other users of carbon fiber such as aerospace. Some analysts predict Zoltek will see sales falter in 2009. On the other hand, if the stimulus package includes measures to quickly double renewable energy production, Zoltek may gain a reprieve, and buyers at current low levels my reap large profits.
An even greater "buying opportunity" may have been created when Zoltek announced they had halted production at their plants in Hungary because of restricted natural gas supply on Jan 7, and then reopened the plants January 9th. I'd expect a stock price bounce when the market reopens on Monday, but probably not enough to bring it back to $9.30, where it closed on Tuesday.
Given the harsh market conditions, there is no certainty that Zoltek will be able to maintain profitability in 2009. If it does, it may be currently a bargain. If not, expect the price to fall further.
I've generally been including prices in my stock lists or model portfolios to make it easier for readers to go back and judge performance. Here, I do the same, but I also want to note that although all of these have a chance of spectacular returns, I think the portfolio as a whole will fall, unless financial market conditions improve rapidly.
That's what usually happens when you treat the stock market like Vegas.
Model Portfolio - Ten Green Energy Gambles for 2009.
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DISCLOSURE: Tom Konrad has positions in BCON, EMKR, RZ, and ZOLT.