The last couple of weeks remind me of the adage that history never repeats itself, but it frequently rhymes. As I watched the awesome market volatility my mind drifted back to October 1987 when I cleared SEC comments on a client’s registration statement a week before Black Monday. As a result of the market break, the planned IPO didn’t happen, the client and its underwriter both went broke and I didn’t get paid. It was an expensive education that’s paid for itself many times over.
The market is always fickle, often brutal and sometimes downright vindictive. But it’s times of maximum ugliness, volatility and fear that give rise to the greatest opportunities. Barron Rothschild is credited with saying, "buy when there's blood in the streets, even if the blood is your own." A similar line of reasoning from Warren Buffet says investors "should try to be fearful when others are greedy and greedy when others are fearful."
While I usually avoid specific stock picks and focus on groups of companies that are likely to outperform or underperform the broader market, sometimes prices get far enough out of line with reality that I have to prepare a short list of specific companies that I think energy storage investors should seriously consider.
Exide Technologies (XIDE) is an easy double if not a triple over the next 12 months. The stock trades at 11.7 times trailing twelve-month earnings of $30.3 million. What the market fails to recognize is that Exide has finished a major restructuring that savaged its historic earnings and is not expected to impact future earnings. If you adjust Exide's historical net income to eliminate restructuring costs, you'll find it earned $69,098 in FY 2011 and $68,782 in FY 2010. On a go-forward basis, Exide is trading at 5 times earnings and 12% of revenue. With $3 billion in annual revenue and a heavy focus on the replacement battery market, Exide is well positioned to thrive even if the economy slows.
Enersys (ENS) is not as undervalued as Exide, but its current price represents 8.1 times earnings and 48% of revenue. The stock is down 42% from its June 30th close in spite of a strong quarter and favorable outlook. The stock is 50% down from its 52-week high while the broader markets are down about 15%. It all adds up to opportunity for investors who want to position themselves in an established company with solid fundamentals, a good chance for short-term appreciation and a likely double over the next year.
A123 Systems (AONE) doesn't have the immediate upside potential of Exide and Enersys, but the stock is trading at a 33% discount to the $6 per share A123 received in a public offering earlier this year. I was a critic when A123's stock was trading in the $20s, but now that the stock is trading at $4 it's a different story. My opinion on electric cars hasn't changed because the application is a foolish waste batteries and can never be economic. I have a different outlook, however, when it comes to electric two-wheeled vehicles, electric drive for buses and commercial vehicles and grid-based storage to smooth minute-to-minute variations in the power output of wind turbines and solar panels. A123 makes a fine battery and there are several substantial markets for products from its new plant. Given its solid financial foundation, fine products and modest premium over book value, I think A123 is the best bet by far in the lithium-ion battery space.
Axion Power International (OTC:AXPW) is the most speculative stock on the list, but it also has the most potential. Axion has a very ugly price chart, but the last 18 months of trading have been dominated by huge supply and demand imbalances.
For calendar 2009, Axion's reported trading volume was 7 million shares and in December of that year it sold 45 million new shares (over 6 years of trading at historic volumes) in a private placement and agreed to promptly register the shares for resale. When the resale registration went effective in April 2010, the price plunged as investors who bought with short time horizons started selling. During calendar year 2010, reported volume ramped to 22 million shares and the price languished. The price started to recover in February and March of this year, which kicked off another round of selling from the 2009 investors. Total volume for 2012 now stands at 53 million shares.
After adjusting for the OTCBB double-count, the total number of shares that have moved from willing sellers to new buyers since April 2010 is just a hair over 36 million. Since Axion's stock is not volatile enough to attract day-traders, the only rational conclusion is that most of the shares sold in the 2009 private placement have been resold into the market. The one nice thing about investors who buy with short time horizons is that they eventually become small stockholders and then they become irrelevant when they run out of stock to sell.
I've been to this rodeo before and I've learned that the only stockholders that really matter are the buyers because they'll be around until their investment goals are met or they get tired of waiting. Based on trading patterns over the last 18 months I believe the 36 million shares of buying came from thousands of retail investors who have been educated by my blog, view Axion as a speculative investment and are willing to give the company time to mature and flower.
Based on the available information, I think Axion is within weeks or even days of an inflection point where the price will begin a transition from undervalued to overvalued. I don't think many of the retail investors who bought over the last 18 months are likely to sell for 25%, 50% or even 100% gains. Instead I think most will wait for multi-bag returns on their investment.
Then the question becomes "How far and how fast is up?" I can't even venture a guess.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.