Once-in-a-Lifetime Buy in Clean Energy
Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you believe, like we at Quantemonics do, that fossil fuel prices will continue to outpace general inflation rates in coming years, now may be “the” best time to acquire alternative and clean energy investments at incredibly low, out-of-favor valuations. As the cost of technologically advanced, clean power and energy generation continues to decline, we are on the verge of an important crossover in demand curves for renewable energy versus the traditional, consumable, combustible and finite resources of coal, oil and gas.
Please read our Part I blog that discusses all the moving parts coming together in 2013 to create our optimistic view of the sector going forward.
Alongside our favorite stocks mentioned in part I, we would like to review a few others we think worthy of consideration for your long-term investment dollars in the sector.
Capital equipment upswing coming
Applied Materials (NASDAQ: AMAT) is one of the largest semiconductor equipment makers on the planet that has a growing presence in solar capital equipment. Depending on management, Applied Materials may become a major global player in solar capital equipment in the next year or two. AMAT has been the largest U.S. semiconductor equipment manufacturer for decades, and sees tremendous opportunity in long-term solar demand coming downstream.
Applied Materials has a stellar balance sheet, a strong management team, and $3 billion in cash and liquid investments available for acquisitions in the solar or semiconductor sectors during 2013. Take a look at their January 2013 quarter 10-Q filing with the SEC for more research.
Applied Materials' semiconductor equipment business overall looks to be in wonderful shape in early 2013, and the stock price has been rising smartly with a handful of large, well-known institutional and hedge fund investors purchasing shares since the 2012 price low of $10. We have a Strong Buy rating on AMAT, from a risk-adjusted basis, especially if you can purchase it under $13 a share in a general stock market sell-off during March or April.
With several acquisitions of late, Applied Materials' solar linked business today represents under 10% of total revenues, with less than $500 million in sales projected for fiscal 2013. Quantemonics is confident today represents the type of “value” proposition in the solar sector, where AMAT will seriously look at small capital equipment makers for investment, partnership, and acquisition.
Charts courtesy of StockCharts.com
One potential investment candidate for Applied Materials or other forward thinkers is GT Advanced Technologies (NASDAQ: GTAT). GTAT is a significant solar, semiconductor equipment maker holding a second business exposure to sapphire growth systems and material for the light emitting diode (LED) industry. Plenty of exciting developments are coming in R&D, including the expected introduction this year by GTAT of a solar efficiency technology that may spark a new upgrade cycle in demand for their capital equipment by polysilicon panel makers.
An important hurdle for us to consider GT Advanced as an investment revolves around market share gains/losses vs. competitors. GT Advanced has endured plenty of canceled orders and a significant fall-off in demand in 2012, but overall, their problems appear to be more industry related than company specific. The company reported an order backlog of $1.2 billion at the end of 2012, representing about two years of projected revenues. As such, any upturn in the industry should propel both demand for its products and GTAT’s stock price demonstrably higher, well above the ultra-low expectations by Wall Street in early 2013.
Suffering with the entire industry the past 18 months, a Motley Fool blog recently posted by another author has a breakdown of the demand issues plaguing GT Advanced, which have driven its stock price down 85%, from $17 a share in the middle of 2011 to $3 presently. A second Motley Fool contributor puts in his two cents about GTAT’s difficult current situation.
GT Advanced just announced a massive restructuring charge (mostly non-cash) that has been in the works since late 2012. The company has cleared the deck of all obsolete inventory, taken charges to idle and close production, and written off goodwill from previous acquisitions. I like the quick action taken by management to combat weakening conditions. Not all companies show similar honesty and bite the bullet in front of investors like GT Advanced.
With a total stock market worth of roughly $350 million at $3.00 per share, the company smartly issued some low interest rate, long-term convertible debt last year to create $370 million in net working capital and a flexible tangible book value of $150 million at the end of December ($300 million if the debt is converted to equity).
The owner of leading patented innovations and technologies, GT Advanced is in great shape to grow in the near future, and even purchase minor competitors in 2013, in our opinion. It appears to us GTAT has several years of capital on hand to wait for an upturn in the industry, and its small size creates a bunch of takeover and merger potential with companies wanting to break into the solar capital equipment business.
As an example, we feel GTAT would be an ideal fit for Applied Materials or a foreign semiconductor equipment maker at this low price and valuation. (As a bonus for Applied Materials, GT Advanced’s LED business would complement AMAT’s growing LCD display business.)
GT Advanced’s LED related sapphire business is also struggling, but could easily be sold, or undergo a turnaround on its own merits, providing yet more value to present shareholders of GT Advanced Technologies. Quantemonics has a Buy rating on GTAT, especially as a pick for thick-skinned, long-term investors willing to wait for their money. You can dig deeper to analyze their business setup by reading the fiscal 2012 10-K filing with the SEC for starters.
Clean energy batteries and converters
Not only should investors be looking at traditional solar panel makers, installers, and capital equipment companies, but other businesses that are tied to the renewable clean energy growth story. Having applications in both solar and wind spaces, all such energy collected needs to be converted, stored and transmitted for use at home and business in the “form” our appliances, gadgets and autos demand.
Power-One (NASDAQ: PWER.DL) is a leading battery and power inverter/converter manufacturer for solar panel makers, the wind turbine industry, and others. Sunlight and wind must be converted from their direct electrical current (DC) nature to the alternating current (AC) we use out of the sockets in our homes and businesses. Power inverters, storage products and networking devices are the company’s main inventions.
A majority of the solar panel manufacturers and installers on the planet use Power-One’s DC/DC and DC/AC conversion items, and they have a strategic alliance with Panasonic to sell and develop energy storage systems. Despite the company’s low stock price, falling from $12 in 2011 to $4 today, the actual operating business is holding up well with roughly $1 billion in annual revenues projected during 2012-14.
For investors, you can today purchase Power-One shares near their theoretical, going out-of-business “liquidation” value. The company is so cheap that if you closed the doors and paid off all liabilities, you would still have a net $400 million-$500 million in mostly liquid assets, vs. a total stock market capitalization of $500 million at $4.20 per share. Basically, you are getting PWER’s future earnings and cash flow for next to ZERO right now. Please evaluate their fiscal 2012 10-K numbers for yourself.
While not much is expected in terms of profitability after a huge multi-year bust in the solar industry from ANY of the companies in the sector in 2013, Power-One is estimated by Wall Street presently to earn a decent profit in 2013 and beyond. In a nutshell, there seems to be little long-term, real-world risk owning shares and plenty of upside. Don’t rule out a takeover offer by Panasonic or even General Electric, among about 20 other potential suitors, if solar industry demand begins to grow sharply again. We have a Strong Buy rating on PWER.
Advanced Energy (NASDAQ: AEIS) has a diverse product line-up and customer list, with solar related inverters/converters and integrated monitoring, testing and measuring equipment comprising about half of Advanced Energy’s business sales in 2012. The company is also a service provider for their products, generating repeat business with repairs, upgrades, and maintenance plans for photovoltaic devices installed all over the world. The other half of sales are for power converters and controls linked to thin film technologies sold to the semiconductor industry, with many applications and customers. You can access the press release regarding fiscal 2012 results here.
Advanced Energy is projected to have a small uptick in profits and revenues during 2013 by Wall Street, and the stock price has had a good run from $11 in November. From a stock performance angle, AEIS has been one of the hottest stocks in clean energy the trailing 12-month period, with a 50% gain.
From a stock valuation perspective, if business operations can hit Wall Street estimates, Advanced Energy has a low PEG (price to earnings growth) number, with a super-strong balance sheet holding plenty of liquid assets. From a margin of safety standpoint for investors, the business has a tangible book value of about $300 million with few liabilities, against a stock market worth under $700 million at $18 per share. Please review the AEIS September 2012 quarter 10-Q for more in-depth research and company analysis. Quantemonics has a Buy rating on AEIS.
Our final clean energy idea is First Trust ISE Global Wind Energy (NYSEMKT: FAN). This ETF is perhaps the only diversified pure play available to the average U.S. investor in the wind power generation industry. Honestly, the majority of manufacturers of wind energy devices are either (1) small pieces of huge conglomerates like General Electric or Siemens, or (2) companies based in Asia and Europe. The best direct ownership trade is to own a basket of foreign companies like what FAN offers, if you desire wind over solar. You can review FAN's present holdings and annual expenses at the First Trust website here.
The charts of the two main clean energy sectors the last several years are remarkably similar, as changing government incentives and a weak growth global economy have played out against a rising fossil fuel price backdrop. All told, FAN has outperformed solar stocks as a group the last 12 months, but absent the cratered Chinese solar stocks (being negatively affected by new U.S. tariffs imposed in May 2012), solar and wind equities are nearly on par. Quantemonics has a Buy rating on FAN, especially as a diversification tool in larger ETF-centered accounts.
FULL DISCLOSURE: Quantemonics holds Applied Materials (AMAT), GT Advanced Technologies (GTAT), Power-One (PWER), and Advanced Energy (AEIS) shares long in our mirror portfolios on Covestor http://covestor.com/quantemonics-investing and unrelated personal accounts. We do not currently hold positions in any other stock mentioned in this article. Quantemonics Investing, LLC is paid as a general publication information and data provider. All contents of the Quantemonics Investing service and blogs on the Motley Fool website are provided for information and education purposes only. You agree that the service is not to be interpreted as investment advice, as an endorsement of any security or investment, or as an offer or solicitation to buy or sell any security. Quantemonics, www.quantemonicsinvesting.com and the owners and officers of Quantemonics Investing, LLC do not provide specific and personalized investment advice, and are not registered as investment advisors or a broker/dealer. The trading of securities or investments may not be suitable for all users of the service. It should not be assumed that future results will be profitable or will equal past performance, and all readers should understand each security investment involves a degree of risk. Investors should not assume that profits or gains will be realized by any security or investment mentioned by the service or related blogs. Readers accept any and all potential liability, loss, expense and cost when making trades or investments in their own account. We recommend readers consult with a registered financial adviser before making any investment decision. Investors should not hold more than 5% of their portfolio capital in any single equity position, as a general rule of diversification. No compensation of any kind has been paid to Quantemonics Investing, LLC or related parties for company participation in our data service. The facts and information presented have been obtained from original or recognized statistical sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. All opinions expressed on the service are subject to change without notice.
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