Alternative Energy Gambles for 2008

Investing in renewable energy stocks seldom fails to be exciting - it can lead to crushing losses as well as mouthwatering gains. (Think ethanol stocks and thin film solar in 2007.) With this in mind, I usually emphasize that the majority of most investors' portfolios should be targeted towards larger, more profitable companies, especially those focused on energy efficiency rather than the more sexy renewable energy technologies.

This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies that aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulate greenhouse gas emissions. That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolio, so long as those stocks are not overly correlated to the portfolio as a whole.

Others just like to gamble. Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar (FSLR) is up by a factor of ten in 2007), it's a safe bet that this alternative energy has drawn more than our share of gamblers.

This article is for the gamblers (and a little bit for the cautious diversifiers). If you're a gambler, these are the gambles I would be taking. If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent of your portfolio).

In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.

Some Educated Hunches

Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good. I feel this is the wrong approach. Emotional investing is a sure-fire way to stack the odds against yourself. Even in risky assets, there are good bets and bad ones.

Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired. Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.

My favorite gambles therefore, are stocks I think have the potential to be tomorrow's feel-good fad, currently being ignored. I call this gambling because it has very little or nothing to do with the underlying fundamentals, and a lot more to do with wild emotional swings of the retail investor. While it is gambling, it has more in common with card-counting, than with slot machines.

Ten Gambles for 2008

I personally am more of a cautious diversifier than a gambler, but I do have some gambler in me. All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios. I don't see this as play money, but at the same time, I know that any of these gambles could turn against us unexpectedly, and I keep the positions accordingly small. In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)

#10 and #9: Cree, Inc. (CREE), and Lighting Science Group (LSGP.OB).

I've been invested in both of these for a long time, and last wrote about these LED stocks in June. I sold half the holdings of many of my managed accounts soon after that article when CREE was around $27-$30, about double the price at which I'd bought them. Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.

Yet the fundamental reasons to be bullish about LEDs are stronger than ever. This Christmas season was the season of LEDs in more ways than one. In my personal experience, I went to Target (TGT) on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.) I left empty handed, but I expect that Philips (PHG) (another holding), will report LED sales well above expectations this quarter.

Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014. Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge. It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration. Thus, the new law provides a practically guaranteed, large market.

I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Times Square on New Year's Eve. Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.

For hard-core speculators, one LED penny stock that you might look at is Cyberlux [CYBL.OB.] Cyberlux was brought to my attention by a reader the last time I wrote about LEDs. I looked into it again last week, but decided not to invest because of the large overhang of convertible debt. In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles. That does not mean that short term traders might not make a killing (or lose their shirts.) For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.) There's a lot of information there, although I don't know if its accurate.

#8 Maxwell Technologies (MXWL)

Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications. Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.

They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles. Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries. Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.

The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap. I find patent-infringement suits to be very unpredictable. Maxwell filed the initial complaint in October 2006, and NessCap countersued in December. A large negative earnings surprise last June and subsequent analyst downgrades further depressed the stock, possibly aggravated by tax-loss selling. I see a good chance of a quick rebound in 2008, especially if the courts start ruling in favor of Maxwell, or the two companies reach a settlement. While a negative ruling would hurt, it would be unlikely to destroy the company.

Maxwell's top-line revenue has been flat for over a year, so a large part of the recent price drop has likely been due to investor fatigue. Nevertheless, insiders have been buying the stock on the open market, which I find reassuring with regard to internal confidence at the company. Any significant uptick in sales volumes would likely bring with it a strong increase in the stock price.

Picks #1-7 will follow later in the week.

I decided to split this article into parts because the stocks I'm picking seem to be rising even as I write... I was clearly not the only person who has been thinking along these lines over Christmas... Here's what has already happened to picks #8,9, and 10 on December 26, as I was writing:.

Cree jumps on American Technology Research Comments (up 10.7%); Lighting Science up 25%; Maxwell Technologies up 6%.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, PHG, MXWL, and a short position in FSLR.

Comments

[TLD2]

OUCH!! You have a short position in FSLR? I hope it doesn't come back and bite you. (I think it probably will) After Jan 1, institutions are going to be buying and FSLR will probably test $325 maybe more. I'm long FSLR and have been since it was $25.07 per share. Good luck ... I hope you watch carefully... :)

[marymac]

Check out this article from department of energy website. All companies are using non food sources. Do you know anything about NBR (nova bioresources fuels), or GFET.PK (gulf ethanol). But see article below.

You are here: DOE Home > News > Press Releases > January - March 2007


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February 28, 2007

DOE Selects Six Cellulosic Ethanol Plants for Up to $385 Million in Federal Funding
Funding to help bring cellulosic ethanol to market and help revolutionize the industry
WASHINGTON, DC – U.S. Department of Energy (DOE) Secretary Samuel W. Bodman today announced that DOE will invest up to $385 million for six biorefinery projects over the next four years. When fully operational, the biorefineries are expected to produce more than 130 million gallons of cellulosic ethanol per year. This production will help further President Bush’s goal of making cellulosic ethanol cost-competitive with gasoline by 2012 and, along with increased automobile fuel efficiency, reduce America’s gasoline consumption by 20 percent in ten years.

“These biorefineries will play a critical role in helping to bring cellulosic ethanol to market, and teaching us how we can produce it in a more cost effective manner,” Secretary Bodman said. “Ultimately, success in producing inexpensive cellulosic ethanol could be a key to eliminating our nation’s addiction to oil. By relying on American ingenuity and on American farmers for fuel, we will enhance our nation’s energy and economic security.”

Today’s announcement is one part of the Bush Administration’s comprehensive plan to support commercialization of scientific breakthroughs on biofuels. Specifically, these projects directly support the goals of President Bush’s Twenty in Ten Initiative, which aims to increase the use of renewable and alternative fuels in the transportation sector to the equivalent of 35 billion gallons of ethanol a year by 2017. Funding for these projects is an integral part of the President’s Biofuels Initiative that will lead to the wide-scale use of non-food based biomass, such as agricultural waste, trees, forest residues, and perennial grasses in the production of transportation fuels, electricity, and other products. The solicitation, announced a year ago, was initially for three biorefineries and $160 million. However, in an effort to expedite the goals of President Bush’s Advanced Energy Initiative and help achieve the goals of his Twenty in Ten Initiative, within authority of the Energy Policy Act of 2005 (EPAct 2005), Section 932, Secretary Bodman raised the funding ceiling.

“We had a number of very good proposals, but these six were considered ‘meritorious’ by a merit review panel made up of bioenergy experts. So I thought it would be best to front-end some more funding now, so that we could all reap the benefits of the President’s vision sooner,” Secretary Bodman said.

Combined with the industry cost share, more than $1.2 billion will be invested in these six biorefineries. Negotiations between the selected companies and DOE will begin immediately to determine final project plans and funding levels. Funding will begin this fiscal year and run through FY 2010. EPAct authorized DOE to solicit and fund proposals for the commercial demonstration of advanced biorefineries that use cellulosic feedstocks to produce ethanol and co-produce bioproducts and electricity.

The following six projects were selected:

Abengoa Bioenergy Biomass of Kansas, LLC of Chesterfield, Missouri, up to $76 million.
The proposed plant will be located in the state of Kansas. The plant will produce 11.4 million gallons of ethanol annually and enough energy to power the facility, with any excess energy being used to power the adjacent corn dry grind mill. The plant will use 700 tons per day of corn stover, wheat straw, milo stubble, switchgrass, and other feedstocks.
Abengoa Bioenergy Biomass investors/participants include: Abengoa Bioenergy R&D, Inc.; Abengoa Engineering and Construction, LLC; Antares Corp.; and Taylor Engineering.
ALICO, Inc. of LaBelle, Florida, up to $33 million.
The proposed plant will be in LaBelle (Hendry County), Florida. The plant will produce 13.9 million gallons of ethanol a year and 6,255 kilowatts of electric power, as well as 8.8 tons of hydrogen and 50 tons of ammonia per day. For feedstock, the plant will use 770 tons per day of yard, wood, and vegetative wastes and eventually energycane.
ALICO, Inc. investors/participants include: Bioengineering Resources, Inc. of Fayetteville, Arkansas; Washington Group International of Boise, Idaho; GeoSyntec Consultants of Boca Raton, Florida; BG Katz Companies/JAKS, LLC of Parkland, Florida; and Emmaus Foundation, Inc.
BlueFire Ethanol, Inc. of Irvine, California, up to $40 million.
The proposed plant will be in Southern California. The plant will be sited on an existing landfill and produce about 19 million gallons of ethanol a year. As feedstock, the plant would use 700 tons per day of sorted green waste and wood waste from landfills.
BlueFire Ethanol, Inc. investors/participants include: Waste Management, Inc.; JGC Corporation; MECS Inc.; NAES; and PetroDiamond.
Broin Companies of Sioux Falls, South Dakota, up to $80 million.
The plant is in Emmetsburg (Palo Alto County), Iowa, and after expansion, it will produce 125 million gallons of ethanol per year, of which roughly 25percent will be cellulosic ethanol. For feedstock in the production of cellulosic ethanol, the plant expects to use 842 tons per day of corn fiber, cobs, and stalks.
Broin Companies participants include: E. I. du Pont de Nemours and Company; Novozymes North America, Inc.; and DOE’s National Renewable Energy Laboratory.
Iogen Biorefinery Partners, LLC, of Arlington, Virginia, up to $80 million.
The proposed plant will be built in Shelley, Idaho, near Idaho Falls, and will produce 18 million gallons of ethanol annually. The plant will use 700 tons per day of agricultural residues including wheat straw, barley straw, corn stover, switchgrass, and rice straw as feedstocks.
Iogen Biorefinery Partners, LLC investors/partners include: Iogen Energy Corporation; Iogen Corporation; Goldman Sachs; and The Royal Dutch/Shell Group.
Range Fuels (formerly Kergy Inc.) of Broomfield, Colorado, up to $76 million.
The proposed plant will be constructed in Soperton (Treutlen County), Georgia. The plant will produce about 40 million gallons of ethanol per year and 9 million gallons per year of methanol. As feedstock, the plant will use 1,200 tons per day of wood residues and wood based energy crops.
Range Fuels investors/participants include: Merrick and Company; PRAJ Industries Ltd.; Western Research Institute; Georgia Forestry Commission; Yeomans Wood and Timber; Truetlen County Development Authority; BioConversion Technology; Khosla Ventures; CH2MHill; Gillis Ag and Timber.
Cellulosic ethanol is an alternative fuel made from a wide variety of non-food plant materials (or feedstocks), including agricultural wastes such as corn stover and cereal straws, industrial plant waste like saw dust and paper pulp, and energy crops grown specifically for fuel production like switchgrass. By using a variety of regional feedstocks for refining cellulosic ethanol, the fuel can be produced in nearly every region of the country. Though it requires a more complex refining process, cellulosic ethanol contains more net energy and results in lower greenhouse emissions than traditional corn-based ethanol. E-85, an ethanol-fuel blend that is 85-percent ethanol, is already available in more than 1,000 fueling stations nationwide and can power millions of flexible fuel vehicles already on the roads.

For more information on President’s Bush’s Twenty in Ten Initiative, visit: www.whitehouse.gov/stateoftheunion/2007/... .

Abengoa One pager
Alico One pager
Blue Fire One pager
Broin One pager
Iogen One pager
Range Fuels one pager

Media contact(s):
Craig Stevens, [phone]


News

Department of Energy Finalizes Regulations to Increase Energy Efficiency in New Federal Buildings by 30%


Statement from U.S. Department Of Energy Acting Principal Deputy Assistant Secretary For Fossil Energy James Slutz


U.S. and China Increase Biofuels Cooperation Ahead of the Third U.S. – China Strategic Economic Dialogue


Statement from Secretary of Energy Samuel W. Bodman Regarding EIA’s Updated Annual Energy Outlook





Related Links

Biorefinery Grant Announcement










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[calvino]

CYBL has refused to dilute its shares further and filed a suit against Millenium partners for damages, alleging fraud and shortselling by Millenium. There is more to the story then you report. Millenium has also offered to settle the suit for 75,000 in damages. CYBL is pursuing its claim to try to be made whole for the fraudulent short selling of its shares by the holder of the convertibles. In either case, the dilution is over, and its shares have gained about 200% since it stopped.

It would have been better if you left Cyberlux alone , than torpedoing it in Seeking Alpha. That is less than helpful. There is more to this company then meets the eye. They are alloted 8 million in the current military budget and they have a contract with Boeing for the border security initiative. They have also been endorsed by the US Air MObility Lab for all service branches. They have also made sales to US zNational guard emergency response teams, 17 of them. They also have blue sky technology in Organic LED, that has had proof of concept in the lab. SAme stuff that PANL does.

The link to the Cyberlux group has not updated its press releases in three months!


The suit link.

www.sec.gov/Archives/edgar/data/1138169/...

[jonreagan]

Relative to a previous comment--if institutions were intent on buying a momentum stock like FSLR, they would probably being doing it this week, to achieve some nice markup in their portfolios for the year ending. There wouldn't be any point in waiting until after January 1st.