Alternative Energy Storage: Cheap Outperforms Cool

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution. I hope old friends and new readers alike will find the change refreshing. I know I will. I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:

• Manufactured energy storage devices are just plain boring;
• Energy storage stocks have historically traded at "rust belt" valuations;
• As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
• As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.

Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just on Friday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In November of last year, I published an article titled "Alternative Energy Storage: Cheap Will Beat Cool" that discussed the difference between cool innovations and successful products. That article was the first time I segregated companies into a "cool group" and a "cheap group." It concluded with the suggestion that investors who wanted to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

I'm delighted to report that over the last five months, the market performance of the stocks I classified as cheap has absolutely crushed the market performance of the stocks I classified as cool.

The following table provides comparative price data for the short-list of battery companies I track and includes price data for two flywheel companies that I talk about frequently but omitted from my original table. It shows closing prices on November 14, 2008 and May 1, 2009, calculates the percentage of change over the last five months, and calculates current market capitalizations based on recent SEC reports.

		14-Nov	1-May	Percent	Market Cap
Cool Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82

Between the reference dates, a $1,000 index investment in each of the DJIA, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 3.5%. In comparison, a $1,000 investment in each of the cool companies would have resulted in an average portfolio appreciation of 6.7%. The real shocker is that a $1,000 investment in each of the cheap companies would have resulted in an average portfolio appreciation of 56.5%. I'm reluctant to boldly predict future trends, but I have no reason to believe that the cheap companies won't outperform both the broader market and the cool companies for the foreseeable future because they started from very low valuation levels and have a lot of catching up to do.

Blogging about emotionally charged alternative energy and energy storage issues is always a challenge because the critics are smart, opinionated and outspoken. As a result the comments to my articles are often more interesting than the articles themselves. Since I've received more than my share of fair criticism and learned some things along the way, I've decided to restructure my presentation tables. I'm not going to change the core data or the companies I track, only the manner of presentation.

The biggest impetus for the change is that both of my original groups include two types of entities: established companies with sustainable business models and emerging companies that haven't reached a point where their business models are sustainable. The downside is that it gives me four analytical classes instead of two. The upside is that it will simplify analysis and make the results more useful to investors. My restructured group classification and presentation tables follow.

		14-Nov	1-May	Percent	Market Cap
Cool Emerging Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Cool Sustainable Group
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Emerging Group
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82
Cheap Sustainable Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76

If I had used this four class analytical grouping from the beginning, the average portfolio performance for a $1,000 investment in each company would have been as follows:

Cool Emerging Group	7.9%
Cool Sustainable Group	5.7%
Cheap Emerging Group	23.3%
Cheap Sustainable Group	73.2%

All experienced investors know that equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last five months are an indication, the pendulum is starting to move back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.

		Shares	Price/	Price/	Price/	Book Value
Cool Emerging Group	Symbol	(000s)	Earnings	Book	Sales	Per Share
Ener1	HEV	113,474		6.47	97.60	$0.91
Valence Technology	VLNC	122,754			9.39	-$0.51
Altair Nanotechnologies	ALTI	95,153		2.53	18.87	$0.46
Beacon Power	BCON	112,578		3.56	1367.00	$0.24
Group Average				4.19	373.22
Cool Sustainable Group
Maxwell Technologies	MXWL	23,083		3.58	2.81	$2.86
Advanced Battery	ABAT	54,662	8.85	1.97	3.33	$1.40
Ultralife	ULBI	17,208	9.43	1.40	0.48	$5.10
China BAK	CBAK	57,680		0.73	0.47	$2.92
Hong Kong Highpower	HPJ	13,563	13.16	1.87	0.41	$1.20
Group Average			10.48	1.91	1.50
Cheap Emerging Group
Axion Power International	AXPW.OB	35,333		6.69	60.25	$0.22
ZBB Energy	ZBB	10,512		1.37	10.33	$0.88
Group Average				4.03	35.29
Cheap Sustainable Group
Enersys	ENS	47,975	9.24	1.24	0.38	$13.79
Exide Technologies	XIDE	75,478	7.49	0.87	0.11	$6.21
C&D Technologies	CHP	26,247		1.53	0.16	$1.43
Active Power	ACPW	60,458		1.71	0.83	$0.35
Group Average			8.37	1.34	0.37

As the cleantech revolution unfolds, the market will learn that every energy storage decision boils down to a cost-benefit analysis. It will also learn that the bulk of the incremental sales revenue will be funneled to companies that serve the average needs of the average user, rather than the extreme needs of the rare "power user." While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

Disclosure: Author is a former director and executive officer of Axion Power International and holds a large long position in its stock. He also holds small long positions in Exide, Enersys, Active Power and ZBB Energy.

Comments

[John Petersen]

There has been a lot of talk about Warren Buffet's purchase of a 10% stake in BYD last September at a post-money valuation of $2.3 billion. Using the link provided in today's article about BYD, I pulled its annual report and was able to calculate the following valuation metrics for the Buffet purchase:

Price/Earnings – 12.3
Price/Book – 1.18
Price/Sales – 0.6

2009 May 03 06:51 AM

[John Petersen]

Correction: it was last Friday's article on BYD. The link is:

seekingalpha.com/artic...

2009 May 03 07:29 AM

[Knowshitsurelock]

<<<"Disclosure: Author is a former director and executive officer of Axion Power International and holds a large long position in its stock. He also holds small long positions in Exide, Enersys, Active Power and ZBB Energy">>


Dear John, (pun entended) we had a few issues from the start.
Why I ignored all the above signs I'm not sure. Maybe I was just lonely or maybe it was those piercing blue eyes;could have been the hat. (It was probably the hat...your such a rebel).

It's hard for me to tell you this, but in the past few articles, I have been seriously thinking about ending my readership. I've decided that I've just been too dependent on your thinly veiled self promotion; of your so called cheap energy storage stocks.

It is a little sad for me knowing that I won't be able to rely on your biased information anymore, but I think I will be a better investor in the end. I'll always remember tripping on the tangerine seeds with you ( thanks for info on that one)

I'm returning your Darth Vader poster, but keeping your left ear.

Best to your frog Lenard, Loren

2009 May 03 09:01 AM

[John Petersen]

I'm sure we will all miss your cogent comment and analysis.

2009 May 03 09:19 AM

[Brad Smith]

John,
As one who attempts to identify relevant information at greenmarketintelligenc... I applaud your effort to inform readers about value propositions. After reading a few thousand articles and studies about alternative energy, clean tech, green tech, green jobs, green goods and services and related information pieces and research reports I learned that very few information producers drill down to discretely describe the monetization and value creation aspects that are vitally important to drive breakthroughs into the market place. I salute you for working on this aspect as you share information with your readers. It is obvious that you have developed a deep well of knowledge about alternative energy storage. I encourage you to apply this knowledge by focusing on articulating macro metrics that may be produced or impacted as alternative energy storage technologies are used in the market place. One of your recent articles cited a projection for electric powered vehicles. Refining this projection into metrics per million vehicles may help describe upside market value opportunity for the alternative energy storage category.
Elementary examples of metrics might include:
Metric for Carbon Credits created by 1 million electric vehicles
Metric for reductions in barrels of oil imported per 1 million vehicles
Metric for cost savings per 1-million electric power vehicle miles driven compared to gasoline power vehicle miles driven costs. From my perspective, articulating macro metrics that drive monetization and value creation is a missing but vital ingredient. My take away from reading Alternative Energy Storage: Cheap Outperforms Cool is that you have taken an important early step toward articulating how market turn over, monetization and value creation will evolve. Keep up the good work.
Regards, Brad Smith

2009 May 03 10:25 AM

[Alphameister]

I guess they are all "story stocks" in this new era, but some of the stories have more substantial backing than others. You've done a good job of making the distinctions and supporting them with sound analysis. Anyone who has acted on your advice has been very well rewarded. Readers might quibble about the description of Axion as "cheap" versus ABAT as "cool" given the statistics cited, and it seems to me you have identified ABAT as cheap in a prior post. It is also possible that one of the cool stocks might become a home run in a different time period, but that wouldn't alter the merits of your basic message that an investor is most reliably well served by seeking sustainable value within a growth industry.

2009 May 03 10:47 AM

[Lies and Damned Lies]

Care to educate the rest of us on why you're ending your readership?
What are the signs that you ignored? Care to elaborate on why you believe that John's cheap energy stocks are, in fact, not cheap?
Why is the information biased?

John lists his sources, all of which are credible. Most of them being studies done by the DOE or some government sponsored research institute.
The tables and figures John publishes don't smell like they've been cooked either.

Yes John served on the board of Axion, and Axion might be a small enough company that promoting it constantly on Seeking Alpha might make a difference in its stock price.

But I believe that his experience with Axion gives him a profound insight into an industry that I would've otherwise dismissed. I've taken John's advice and have had returns in excess of 60% - and I am very grateful for his continued contribution to seeking alpha.

2009 May 03 10:48 AM

[hillbillyharry]

John:

In simplistic terms-cool and cheap-both are sub-sectors, and should be treated as such.

There are batteries for automobiles,and there are batteries for shipboard power, and heavy artillery pieces; varying temperatures like 30 below zero and automobiles requiring different types of batteries.

Choose your sub-sector and choose the appropriate battery manufacturer. Each category does not compete directly with the other-they are mutually exclisive to me.

Enjoy reading your analysis-but still yet, cool is cool and cheap is cheap.

Much abliged
Hillbillyharry

2009 May 03 10:53 AM

[John Petersen]

Brad, I'm flattered that you think me capable of such an analysis, but really think it's beyond me. More importantly, the more time I spend focusing on the trees the more important they become in the minds of users. It ends up distorting perceptions. We're at a crazy time in energy storage. The global battery market has historically been in the $30 billion a year range and the bulk of that went for starting, lighting and ignition. We're looking at growth over the next decade to $100 billion or more per year and most of that growth won't be in places that people think of right off the top of their heads. If I want to show investors where the profit potential lies, I need to stay at a higher analytical level and focus on companies and their potential rather than broader markets.

Alphameister, I've come to love ABAT over the last few months and if I could possibly find a way to draft a Li-ion producer for my cheap sustainable list ABAT would be the one. They're a great company and I plan on writing a separate piece on them as soon as the financial statements are filed for the Wuxi Angel acquisition. Their concentration on the E2W market in China is fabulous, their gross margins are great and management throws around G&A nickels like they're manhole covers. While I'm generally reserved about Chinese companies because I don't understand the business or cultural environment, I think ABAT is a winner and very attractively priced.

Lies, and damned lies, you had me going for a minute there because I thought you were talking to me instead of Dr. Know.

I've been having more fun blogging than I would have ever imagined and as long as I have readers like you who are interested in the subject matter I plan to keep it up.

2009 May 03 11:05 AM

[GimliJan]

John,
Please keep it up! I am a very new investor who is learning from articles by you, Cliff Watchel and some others on this site and the informed readers that comment, positively and negatively. Your new format is even easy for a "newbie" to understand. I don't have any positions in the energy storage sector yet, but I am watching several of the companies you have written about.
Keep up the good work!
Gimli

2009 May 03 11:40 AM

[searcher]

"I'm sure we will all miss your cogent comment and analysis." Sweet.

2009 May 03 11:50 AM

[John Petersen]

hillbillyharry, unfortunately cool and cheap are not really subsectors because most potential applications will have customers with a range of requirements. The market construct that I've been able to come up with so far is a standard bell shaped curve for each application class. In backup power, for instance, low demand users may only need your basic lead-acid battery, medium demand users may require a low-speed flywheel solution and high demand users may well require high-speed flywheels or even Li-ion batteries. I had lunch a couple months back with the president of Enersys Europe and he explained that customers frequently come to them believing that their needs are far greater than they actually are. So more often than not the customer who came looking for a Li-ion solution ends up buying a spiral wound thin pure plate lead or a more conventional system. Overall, I find it much easier to consider battery consumers as fitting the same general model as a class of high school students. There will be a few bright stars who really need the cool, there will be a group in the middle who really need the cheap, and there will be a group at the other end who can't afford either.

2009 May 03 12:19 PM

[33Nick]

Wait a second, I will miss your in-depth technical article. Maybe you can do both? ;)

2009 May 03 03:19 PM

[John Petersen]

33Nick, it's hard to keep a geek like me away from the technical side for too long. But I do think it's about time I lightened it up a bit and said something useful for a broader base of potential investors who are looking at storage for the first time.

2009 May 03 03:44 PM

[Dirk McCoy]

John, I'm glad to hear you'll still be around here to tip us off to the next great breakthrough (or scam). I absolutely agree that established (cheap) companies always have a leg up, because they have the customers. Should eestore technology or air storage technology actually live up to their lofty representations (and if they don't, you should file a class-action) then there's nothing that would keep one of your cheap companies from licensing the technology to move it to widespread adoption. I'll count on you for the smart view on that.

2009 May 03 04:02 PM

[Mayascribe]

Glad you are evolving, pal! You and your commentors have been a complete joy to read since last July. Yet, the ongoing frenzied debate, for this follower, grew tiresome in a kind of pleonastic way over the past couple of months.

This article lends proof to the pudding that your cheap vs. cool, or lith-ion vs. lead acid thesis has panned out magnificently (and I believe will continue to do so)!

The above charts are the easiest you've yet created for a lay follower to figure where to park their investment dollars for the long term in the Energy Storage Sector.

####

Thanks for the offer to read my "again-in-progress" manuscript, when done. Over the too many years I've been trying to get this book done, I've had at least a hundred people read parts or all of it, several whom are world renowed archeolgists who have thought enough of my work to stay with me when they were in town, or invite me into their homes for dinner and discussion, or, when researching in the field, invite me to sit down with them and enjoy a drink. It's humbling to have once been a cheesesteak flipper to now have as friends the top tops in their field from Harvard, Upenn, Yale, and many other elite institutions I can count as friends.

I park you in their company.

2009 May 03 04:51 PM

[hall999999]

Your thesis that cheap beats cool sounds reasonable to me but aside from the VHS-Beta analogy some of your evidence seems less than definitive. You reference your November article as proof that this thesis is correct. To begin with, it's funny that the AAPL vs. MSFT comparison begins in September 1989 since that is pretty much the last time that you could say an investment in Microsoft held until the present would have significantly outperformed an investment in Apple. Pick any point in time from October 1990 forward as your starting point and Apple does about the same or better than Microsoft. I bring this up to show that when you draw a conclusion you should use more than a single data point or else make it clear that the conclusion is very limited.
Furthermore, I think the point of that November article was that in the long run cheap beats cool. You can hardly look at the last six months and say, "see how right I was in November?". You were right that some of the lead acid companies were incredibly cheap so it was inevitible that at some point they would outperform the li-ion companies but six months can't be considered proof of a long term trend. Look back twelve months instead of six and you get a different picture of who outperformed who. And what will the next six months look like? Enersys had a 172% jump. Don't you think the stock might pull back from that and Enersys will underperform for the next six months?
I like the way you've broken the companies into four groups. It gives a more precise understanding of what we're looking at and helps alleviate the "why are you comparing ABAT to AXPW.OB" quibbles. Make sure you continue to keep the distinction clear between "cheap stock" and "cheap technology".
Finally, I'll be looking forward to your article on ABAT. Outside of the Yahoo message board it's hard to find analysis of the company that goes beyond, "They make li-ion batteries. You know, like CBAK."

2009 May 03 05:00 PM

[John Petersen]

Dirk, we need them all my friend. With the growth everybody is expecting for the storage market, the problem won't be too much competition. It will be not enough competitors.

Mayascribe, I love technology and I love watching companies and markets develop even more. Most every lesson I've learned has come the hard way, but I don't make the same mistakes twice and I can tell when companies are taking paths that are likely to cause them pain. The next few weeks should be fun as I talk about some of the mistakes I've seen in the past, particularly as they relate to small companies and big debt.

2009 May 03 05:00 PM

[Mayascribe]

Just had to end my previous comment with a pleonasm!

2009 May 03 05:00 PM

[John Petersen]

hall999999, the event that served as the inspiration for this article was a brokerage statement for my non-Axion holdings that has me up by about 235%. I wasn't brilliant but I was opportunistic and bought everything I own at or near the lows. I expect markets to pull back and advance because that's what markets do, but the overall valuation metrics on the cheap companies are still far more attractive than they are on the cool companies.

2009 May 03 05:05 PM