Alternative energy stocks, especially the ones operating in the solar industry, have been trading at the bottom of their five-year trading range in the last year. After a rough 80% fall in 2011 and early-2012, many leaders, including Sunpower Corp. (SPWR) and First Solar (FSLR), are beginning to recover, and have mounted powerful three- to five-fold rallies off of the bottom levels from last summer. The Guggenheim Solar ETF ($TAN) that was down over 95% from its highs in 2008 is trading near ten-month highs, and looks set to break-out from its bottom-base as both the economy recovers and the stock market mounts new highs.
Headwinds remain in the form of a sluggish economy in Europe and excessive capacity in the solar industry. However, the overall climate looks favorable, and it is possible that demand in the U.S., India and China may pick up the slack due to depressed European markets. While well-capitalized solar and alternative energy companies with deep pockets, like SPWR and FSLR, will do well in either scenario, the time could be ripe for picking smaller, riskier plays, as they may rally the most under a bullish scenario for the group.
In this article, via an analysis based on the latest available Q4/2012 institutional 13-F filings, we identify guru fund activity in five leading solar and other alternative energy stocks. Guru fund managers, taken together or in consensus, are bullish on the alternative energy group, adding a net $39.7 million in Q4 to their $478.5 million prior quarter holdings in the group (for more general information on these guru funds, please look at the end of the article).
Among their top picks in the group is Solazyme, Inc. (SZYM), an industrial biotech company that is engaged in the production of renewable oils from low-cost sugar feedstocks for use as fuels and chemicals, nutrition and for skin and personal care. Three guru funds accumulated shares in Q4/2012, buying a net 1.21 million shares, and at the end of the quarter, four guru funds held 1.95 million or 3.2% of outstanding shares. The stock also sports the highest GuruRank, a proprietary and relative ranking system that numerically represents on a scale of 1 to 5 the attractiveness of the stock to guru fund managers based on their holdings, change in holdings, percent of outstanding shares and number of Gurus in the stock, as compared to the rest of the 5,200+ stocks in our database.
SZYM is set to report its quarter earnings on Wednesday, May 8th, and analysts are expecting revenues and losses to be in the same range as the prior two quarters. However, looking ahead, revenues are projected to rocket up from the recent $40 million annual range to $284 million for FY 2014, and the company is projected to get close to break-even from current 35c-40c losses every quarter. While ethanol producers have had difficulty turning their companies into viable profitable entities, the opportunity for SZYM due to its focus on converting plant-based sugars into tailored oils is huge. For one, the end-markets are huge, including not just alternative fuels but also the wider market of using it for nutrition and personal care products. Also, operating margins are expected to be much higher, possibly in the 25% range as the company scales up its operations.
At its current market-cap of $550 million, or just two times next year's sales, SZYM may be an attractive candidate for a not-so-risk-averse investor and in a well-diversified portfolio. The company possibly has years of double- and triple-digit growth ahead of it, and can still be purchased at prices near all-time lows as it starts on a steep revenue ramp next year. It appears that guru fund investors too are excited about this little alternative energy and biotech company, and of the twelve analysts that cover the company, eleven rate it at buy/strong buy and only one rates it underperform, putting a median price target on the company of $15, well above current prices in the $9 range.
Beside SZYM, guru funds are bullish also on the following alternative energy companies (see table above):
- Sunpower Corp. , that is an integrated solar products and services company that designs, manufactures and delivers solar electric systems for residential, commercial and utility-scale power plant customers worldwide, in which guru funds together added a net $10.0 million in Q4 to their $37.9 million prior quarter position in the company.
- Rentech Inc. (RTK), which is engaged in the commercialization of its proprietary Rentech-SilvaGas biomass gasification process that converts multiple biomass feedstocks into synthesis gas (syngas) for the production of renewable fuels and power, in which guru funds together added a net $4.1 million in Q4 to their $18.5 million prior quarter position in the company.
- Covanta Holding Corp. (CVA), which develops and operates infrastructure for the conversion of waste-to-energy and independent power production worldwide, in which guru funds added a net $4.1 million in Q4 to their $182.6 million prior quarter position in the company. At the end of Q4, guru funds hold 7.1% of outstanding shares, with veteran value investor Martin J. Whitman's mutual fund company Third Avenue holding 7.88 million of the 9.40 million shares held by guru funds.
Also, guru funds hold a large $82.6 million position in leading solar energy company First Solar Inc., which manufactures and sells solar modules using a thin-film semiconductor technology for residential and commercial markets in the U.S., Europe and Asia, cutting a minor $1.6 million in Q4 from their $84.2 million prior quarter position in the company.
The alternative energy group, especially the smaller companies, may be primed to break-out from its lows in the coming months. We believe that knowledge of how the best minds in the investment community, in the form of guru fund managers, are collectively positioning themselves in this environment, can inform our investment decision-making, often clueing us into profitable opportunities.
In recent articles on guru fund picks in small-cap biotech and precious metals groups, we have discussed how based on an analysis of their picks in prior quarters, one can position themselves ahead of big moves. We have observed this correlation in other industries as well during the past six to eight quarters during which we have been analyzing leading fund manager consensus picks' data, and additional examples of how gurus have successfully predicted stock moves for many popular stocks, across all industries, including in the case of Apple Inc. (AAPL), are outlined on our website.
General Methodology and Background Information: The latest available institutional 13-F filings of 79 legendary or guru hedge fund and mutual fund managers, such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, analyzed to determine their capital allocation from among different industry groupings, and to determine their favorite picks and pans in each group. The hedge fund and mutual fund managers included in this select group include only high profile names who by virtue of their long-term market-beating returns have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 79 guru funds that justify their inclusion in this elite group were detailed in our previous articles that can be accessed from our author page
These legendary or guru fund managers number about 0.5% of all investment fund managers and yet they control about six percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our "opinions" and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.