(One of the event organizers at the World Money Show arranged an interview with Tobin Smith. Tobin is known for his regular appearances on Fox New Channel's program Bulls & Bears on Saturdays at 10:00 AM EST. He's also a contributor on the relatively new Fox Business Channel. Before last week, I only knew him as another talking head on an investing-news-entertainment television program, but I was truly impressed with his knowledge of the markets and analytical ability. Tobin's day job is as the founder and chairman at ChangeWave Research, part of InvestorPlace Media, but he's also written a new book called Billion Dollar Green: Profit from the Eco Revolution. We spoke briefly about a couple of trends that he sees and discusses in his book, as well as individual companies that will be significantly impacted.)
Mandates Drive Behavior
Toby emphasized the role of government mandates in dictating how green technologies will be adopted. One of these mandates is a ban of the traditional incandescent light bulbs that so many of us have used all our lives. It is widely known that incandescent bulbs produce a lot of heat and don't last particularly long. Many countries currently have restrictions in place and bans in Europe will begin in 2012. The United States is expected to follow in 2014. This has led to increased sales of the coiled CFL (compact fluorescent light) bulbs, particularly at leaders like Wal-Mart (NYSE:WMT). According to Mr. Smith, CFL (~75% light efficient) is the first step and LED (light-emitting diode) technology (~95% efficient), despite its present cost, is next. To capitalize on this trend, one of the ideas that Toby likes (and owns a small position in), is Durham, North Carolina-based CREE (NASDAQ:CREE). He is "thoroughly amazed that Philips hasn't bought them yet." Philips did decide to buy Color Kinetics in the summer of 2007, so perhaps the company feels that its LED portfolio is complete. Adding to his thesis is the feeling that Cree's LED intellectual property is deep and offers a lucrative license revenue stream. If the company stays independent, its China-based manufacturing capabilities acquired from Cotco should help it compete in production with larger LED rivals Philips (NYSE:PHG) and General Electric (NYSE:GE).
Government support for increasing the financing behind power purchase agreements (PPA) is something that Tobin says could be a major driver for green adoption. While the new democratic administration has its own solar plans, Toby thinks this alternative could have huge upside in terms of energy independence and making strides in updating the nation's infrastructure. He proposes the creation of a "Greenie Mae" - essentially an environmental version of Ginnie Mae that would issue twenty-year paper at some spread over treasuries to back the purchase of solar and smart utility equipment that could then be used to sell power back to electric utilities (this is the basics of a PPA). It's an interesting idea, but there are quite a few problems, some of which Toby freely recognizes. First, with all of the capital losses in the markets right now, few actually need the tax credits that this would provide. Second, declines in energy prices make this less viable - for now. Finally, the name "Greenie Mae" is just awful. He's working on a new one - how about ‘Sunnie Mae’ or ‘Green Energy Investment Cooperation’ (a.k.a. GEICO). The government could simply piggyback on the brand equity that Warren Buffett's auto insurer has built up by saturating television stations with images of cavemen in inappropriate situations.
All kidding aside, Tobin believes that there are plenty of great investment opportunities in smart electric infrastructure. Google's (NASDAQ:GOOG) recent announcement of PowerMeter validates this thesis from the software and services side. Itron (NASDAQ:ITRI) is one of Toby's favorites. He points out that its acquisitions have made the company the leader in advanced meter technology. Echelon Corporation (NASDAQ:ELON), which offers software and hardware for metering and electric control, is another of his favorites. Echelon's technology lets users look up and adjust energy usage remotely, and, for those who have power generation equipment like solar on site, measure how much electricity was sold back to utilities. Be wary about valuation with both of these stocks. Though it does have an $80M cash cushion (roughly a third of its market cap), Echelon has not had a profitable year since 2004. Likewise, Itron's 2007 acquisition of Actaris for $1.6B dramatically increased the combined company's leverage. At 70x trailing twelve months earnings, it looks pretty expensive. Its 13x TTM free cash flow may seem a bit cheaper, but given the valuations in this market, it’s certainly not a bargain.
Quite a few other speakers at the show recommended Quanta Services (NYSE:PWR) as the best way to play government infrastructure spending towards a smarter, more efficient grid. Tobin says that while Quanta is a primary beneficiary, it is more about the company's ability to navigate local regulatory authorities rather than a distinct technology advantage. To him, Quanta is more of a construction company than a pure play on the emerging smart grid and it's therefore likely that the stock will reflect valuation of its construction peer group.
Realities vs. Hype of Green Adoption
This is one of the most significant topics in Billion Dollar Green. Tobin Smith hopes that his book will be a guide for those who are trying to distinguish between hype and reality in green investing. For example, look at fuel cell technology. There are dozens of microcaps out there with no revenue that promise the next great breakthrough, but his favorite is a private company called Bloom Energy. For full disclosure, Mr. Smith is an angel/VC investor in this company and claims that the company has a $150M backlog and boasts Google among its biggest customers. Toby says that Google is using 200 of the company's fuel cells to power its data centers. I can't verify that claim, but I can say that CNN Money named Bloom Energy one its 15 companies that will change the world. Bloom has been in business for eight years and if the company does go public, it's likely that investors like Tobin will require quite a multiple to divest.
Tobin also thinks a company like FPL Group (FPL-OLD), with its leading position in wind energy generation, is far from hype. It seems like a high growth utility to me and there may be reason for concern about growth in Florida, by far its largest market. In terms of hype, Tobin's capitalized short opportunities in names like Energy Conversion Devices (NASDAQ:ENER) and LDK Solar (NYSE:LDK), but wouldn't stay short at these levels. "Energy Conversion Devices has a viable business with their thin film products, but the valuation was simply too high," he noted. Tobin and I both agreed that shorts are getting harder to find with the market correction. I suggested former high-flier Hoku Scientific (HOKU) and he jumped right on it as a potential short idea. He pointed out that the company has little to no revenue and got into polysilicon production near the peak of the market. He said that the few customers it does have are armed with buyout provisions in their contracts and that its hydrogen fuel cell technology is unproven.
I enjoyed my conversation with Tobin Smith and I hope that his book proves to be a success.