10 Green Energy Gambles for '09

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.

Flywheel Stocks and Battery Stocks

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 (AXPW.OB) 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?

Transmission Stocks

Composite Technology Corp (CPTC.OB) 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.

Waste-to-Energy Stocks

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.

Solar Stocks

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

Clean Transportation Stocks

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.

Ethanol Stocks

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.

Geothermal Stocks

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

Wind Stocks

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.

Final Thoughts

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.

Ticker	Price (1/9/9 close)
BCON	$0.46
AXPW.OB	$1.20
VLNC	$1.77
CPTC.OB	$0.30
EPG	$0.86
EMKR	$1.43
UQM	$1.72
CZZ	$4.18
RZ	$3.62
ZOLT	$7.47

DISCLOSURE: Tom Konrad has positions in BCON, EMKR, RZ, and ZOLT.

Comments

[grammie:]

Hi, interesting article, I think you have mis-represented the financial position of Axion a little bit though, as I understand the last financial statement from Axion they have enough money to take them through till at least 2011. They have received not only a grant but also a manufacturing contract for conventional lead acid batteries. Disclosure I have a long position in Axion stock having being convinced by John Peterson.

Jan 12 03:37 AM

[Francis123:]

wonderfull!


i know it !!!

Jan 12 08:39 AM

[jp17622:]

Tom - could you provide your thoughts on Beacon's cash position and need to raise more capital if they get the 50mm DOE Loan Gaurantee, of which they are extremly optimistic about getting this quarter?

Thanks

Justin

Jan 12 08:51 AM

[Toeser:]

I have owned CPTC for around 4 years - more for their high efficiency electric cable then wind generation products. In spite of superior products, they just seem unable to get any real traction. Over the years, I have found that size counts more than innovation or quality, at times. I would note Microsoft as an example.

Jan 12 09:00 AM

[John Petersen:]

My goal as a Seeking Alpha author is to add some clarity to the energy storage sector, which is full of risk, opportunity and confusion. I firmly believe the job of selling Axion belongs to management and not me. Nevertheless, I do own the stock and think it's an important player.

To put some flesh on Axion's financial position, they had $8 million in cash at September 30th, which works out to about a year's burn at past rates. On a go forward basis, there is a $1.5 million grant, a firm order for about $6 million in lead-acid batteries and hopes that lead-acid sales will ramp up significantly this summer. My murky crystal ball would predict another raise later this year or early next to finance expansion, but Axion should have substantial revenue before it needs money.

Jan 12 10:24 AM

[Stockguy456:]

Great article but what about the fuel cell makers, and inverter makers?

Also OPTT has a great product and a good balance sheet as well!

Jan 12 10:57 AM

[John Lounsbury:]

Thanks for the list and comments. I agree with your decision to sel CZZ. Ethanol may offer some trading opportunities, but, long term, doesn't make economic sense to me, even the cheapr sugar cane ethanol from Brazil.

Jan 12 01:50 PM

[frflyer:]

I've been following Environmental Power. What they do with waste to energy kills two birds with one stone. It extracts methane that would eventually end up in the atmosphere, and creates power at the same time. The application of their technology on farms and ranches is impressive. Their website describes one project on a large dairy farm in Wisconsin. They claim that the manure from 900 cows and other farm waste powers 600 homes.
Their Huckabee Ridge project is supplying gas to PG&E through commercial NG pipelines.

Methane can be burned, but it can also be used in some fuel cells, which make it an even cleaner option.
By that, I mean stationary fuel cells, not in cars. Fuel Cell Energy, for instance, makes utility scale fuel cells that will use methane or natural gas.
I wonder what the national overall potential is for just farm waste. An added benefit of this is a decrease in runoff from manure into streams and rivers.

In regard to Emcore, I thought I had read that the following company was using Emcore's triple junction solar cells. Now I can't find that statement, but thought I would include the following since it looks so promising.

And interesting new company from Israel is Zenith Solar. They are developing a commercial version of a new kind of concentrating solar that is both PV and solar thermal.
www.zenithsolar.com/in...

from their website
"In conventional CPV systems, the excess heat generated in the solar cell needs to be removed to avoid damaging the cell and to maintain high efficiency of electricity conversion. ZenithSolar utilizes the heat generated at the solar cell receiver to provide usable hot water heating, improving overall solar power conversion efficiency to 75% ."

"The Zenith Solar`s `Optics in Plastic` is the key to manufacturing efficiency and superior product quality achievement. A 2800 ton injection molding press uses advanced custom thermoplastic composition developed by our scientists for reliable, stable and long life operation. Our solar dish are injection molded with multiple gate radius heated runners to ensure even material flow and minimal warpage with rapid fill."

"An ordinary photovoltaic cell, which is 10 by 10 centimeters, normally produces one watt of electricity. We managed to extract more than a thousand times more - 1,500 watts. In this way, the cost of a cell is 1,500 less, becoming almost nothing."

"No one has ever produced so much electricity from a solar cell at this strength."

www.haaretz.com/hasen/...

"Compared with traditional flat photovoltaic panels made of silicon, this so-called concentrated solar power technology has proved in tests to be up to five times more efficient. That puts it on the verge of being competitive with oil and natural gas, even without government subsidies.
Photovoltaic material accounts for 80% of the cost of standard systems," says David Faiman, chief scientific officer at Zenith, and a 30-year solar-energy veteran who was part of the development team. "Our technology succeeds in reducing this to less than 10%, while at the same time obtaining very high efficiency."

www.businessweek.com/g...

Zoltec is a compelling story just because of the increased use of carbon fiber in so many products, boats, airplanes, sporting goods, possibly car bodies and frames etc. On the other hand, it's also much more expensive than fiberglass, which is why only the gold plater yachts and expensive racing boats use much of it.

Jan 12 02:34 PM

[Chris B:]

I'm really intrigued by Razer's modular binary geothermal model. In theory, they can extract baseload energy from relatively low temp areas and build or expand plants quickly and cheaply, which makes them a clear winner for a world looking to reduce fossil fuel dependency. I truly want to believe.

However I just can't get over the fact that on their website, they claim to build 100mpg Chevy Suburban conversion kits with their proprietary electric motor (the design is a closely held secret - suspiciously). Apparently all the electric motor companies in the world have overlooked this marvelous technology and those stubborn automakers like Honda and Toyota aren't interested in building 100mpg full size SUV's. No earnings are reported from this division, and it appears to exist only to draw the link in investor's heads: "Wow, geothermal powered cars!". What next, an antimatter warp drive?

I truly want to believe, but in the case of microcap companies with spectacular claims, experience shows that investors must be skeptics. If they are overstating their technology, what else are they overstating?

Jan 12 03:05 PM

[Murph3637:]

Thanks for a very informative article

Jan 12 06:06 PM

[David G.:]

I disagree. CPTC cable side of the business has been exploding year over year. It has simply been brought down due the problems on the wind turbine side.

Obama wants a new national electric grid. There will be major focus on CPTC's cable once that happens in the stimulus bill.


On Jan 12 09:00 AM Toeser wrote:

> I have owned CPTC for around 4 years - more for their high efficiency
> electric cable then wind generation products. In spite of superior
> products, they just seem unable to get any real traction. Over the
> years, I have found that size counts more than innovation or quality,
> at times. I would note Microsoft as an example.

Jan 12 08:37 PM

[David G.:]

Well you'll notice Razer's "commissioned" geothermal plant isn't even producing power to where it it is supposed to. It is in its testing phase. Let's wait for it to produce anything close to 10 MW.


On Jan 12 03:05 PM Chris B wrote:

> I'm really intrigued by Razer's modular binary geothermal model.
> In theory, they can extract baseload energy from relatively low temp
> areas and build or expand plants quickly and cheaply, which makes
> them a clear winner for a world looking to reduce fossil fuel dependency.
> I truly want to believe.
>
> However I just can't get over the fact that on their website, they
> claim to build 100mpg Chevy Suburban conversion kits with their proprietary
> electric motor (the design is a closely held secret - suspiciously).
> Apparently all the electric motor companies in the world have overlooked
> this marvelous technology and those stubborn automakers like Honda
> and Toyota aren't interested in building 100mpg full size SUV's.
> No earnings are reported from this division, and it appears to exist
> only to draw the link in investor's heads: "Wow, geothermal powered
> cars!". What next, an antimatter warp drive?
>
> I truly want to believe, but in the case of microcap companies with
> spectacular claims, experience shows that investors must be skeptics.
> If they are overstating their technology, what else are they overstating?

Jan 12 08:45 PM

[User 336177:]

Tom,
Good job today, you were only Down 4.67% for the day on the portfolio you put forward this morning. At that rate these stock will be worth nothing in about 20 trading days. I don't like any of them because they have not proven a sustainable business model. Even though, I think less than 10% of ones portfolio could be in this area. Good luck.

Jan 12 11:24 PM

[bsharvy:]

CVA and WFi.TO (WFIFF.PK) are profitable Green Energy companies.
EPG has a very bad balance sheet, but a very interesting product. Their Huckabee plant had "meltdown" (at least cow poop has a short half-life) this year, and management generally seems a little flaky. Also, their next plant is in California, which is on the verge of bankruptcy.

Jan 13 04:26 AM

[longtermstocks:]

Nice article thanks

Jan 19 11:39 PM

[mr clark:]

my 10 would be ASTI, XIDE, LDK, ELON, ENOC, COMV, TRN, ACPW, APWR, AVR

Jan 23 10:36 PM

[bobthenoob:]

Thanks for the article. I sold half of my EPG last year, though I still believe in this companyl.

Feb 24 01:26 AM