GALP Energized by 2011's Biggest Losers

Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sometimes investments are low priced because they ought to be low priced.  Rarely however does an entire sector get battered and stay on the mat too long.  Usually there is at least some reversion to the mean.  In 2011, several energy related industries got outright slaughtered with losses of 30% or more.  Some are already poised for comebacks and some will take time but have huge upsides.  Here’s a look at a few that qualify as Growth At Low Price investments today.

The naysayers will hammer me for these two ETFs, so let’s put them right out in the sun.  The Market Vectors Solar Energy ETF (NYSEMKT: KWT) and Guggenheim Solar ETF (NYSEMKT: TAN) were both down just over 63% in 2011.  These were both tremendous short positions in 2011 as the solar industry began a monumental margin contraction and consolidation that crushed share prices.

The carnage has created an interesting play.  If KWT and TAN can regain their highs of 2011, that would imply an investment upside of about 200%.  That’s quite a heady return just for getting back to a land you have already been in.  In fact, both ETFs have traded higher than their 2011 highs further back when cash flowed like water from Lake Michigan to the Chicago River. 

What’s the argument for a big turnaround in solar?  

In short, demand is continuing to grow at a very fast pace while costs continue to plunge. Consolidation in the industry will eventually allow the strong to come out of this price per share annihilation even stronger. Several of the non-Chinese companies held in both ETFs are also strong take-over candidates, ala, what Total S.A. did with SunPower in making a 46% premium tender to take a majority interest. 

Read this article from a fellow Fool for more details of the goings on in solar.

The WilderHill Powershares Clean Energy (NYSEMKT: PBW) also go hammered due to a large correlation with the solar ETFs.  PBW however contains a more diverse group of clean energy companies, including companies in geothermal, wind, battery and biomass.  For the investor who does not want a pure solar play, but understands that alternative energies are on the cusp of wider adoption, this one trades with good volume and offers a potential return in excess of 100% if it reaches its 2011 high again.

Next on the energy front we have two ETFs related to nuclear power: the Market Vectors Uranium+Nuclear ETF (NYSEMKT: NLR) and the Global X Uranium (NYSEMKT: URA).  Both were down substantially in 2011 largely due to the effects of the meltdown in Japan.  

With Germany declaring that they would begin retiring their nuclear fleet and others paring back future nuclear power plant plans, the outlook for uranium took a huge psychological hit.  Mining company stocks got absolutely crushed implying a phasing out of nuclear power globally.

The reality is that China continues to build nuclear power plants at a fast pace, the United States has several under construction and on the drawing boards, and other nations simply do not have much alternative to nuclear if they are to power their nations, i.e. France.  Over the longer term, especially considering the advent of newer, safer and cleaner burning power plant designs, demand for uranium and nuclear technology will continue.  In the short run however, supply has been squeezed.  That compression could lead to quite the pop for both of these ETFs.  

The essential difference between the funds is that URA is a pretty pure play mining ETF, while NLR offers exposure to some top utilities, technology and engineering companies.  The Market Vectors fund is probably for most investors as it pays a nice dividend while also offering good appreciation potential.  For the opportunistic investor the Global X fund offers some home run potential.

Finally, walking into traditional fossil fuel territory for those not so adventurous as to dive into alternative energies, we have the Market Vectors Coal ETF (NYSEMKT: KOL).  This fund was down 30% in 2011 and contains some absolutely top notch companies in its stable.  A return to its 2011 high implies a gain of about 42%.  Pretty good for something so “meh” on the excitement scale.

The Market Vectors Coal is comprised not only of top domestic mining companies, such as Peabody and Alpha Natural Resources, but also has several Chinese companies for geographic diversification within a high growth economy.  The fund also includes top equipment company Joy Global as its current top holding.  

All of the funds listed are poised to do well in an economic recovery.  If you believe that monetary expansion will lead to inflation, then each has another catalyst.  If I am right that the financial world is not ending, then any of these funds can take a place in your portfolio.  I would have more than one.

Kirk Spano is the founder and owner of Bluemound Asset Management, LLC a Wisconsin Registered Investment Advisor.  Bluemound clients currently hold long positions in TAN, URA and NLR.  Bluemound and Kirk Spano do not plan any transactions in the next 3 trading days.  Opinions subject to change at any time without notice.  Follow Kirk Spano on Twitter @GALPInvesting and visit for other Growth At Low Prices investing ideas.

blog comments powered by Disqus