Today we have a very informative article from Sam Jones, president of All Season Financial Advisors.
Sam Jones has a BA in Economics/Finance from Colby College in Maine and a Master's in Information Technology from the University of Denver, Daniels School of Business.
As president of the firm, Mr. Jones is responsible for the entire suite of investment options available to clients of All Season Financial Advisors, including portfolio design and management, selection of outside managers, due diligence and oversight of all product offerings.
His article today focuses on the broad state of renewable energy markets. Take it away Sam. . .
— Nick Hodge
The Other Shoe
There are plenty of times when investors have that eerie feeling about "the other shoe" needing to fall (a catch phrase meaning that the likely or inevitable consequence of an earlier occurrence has, at last, taken place.). I admit to having that same feeling about the renewable energy stocks in general since the first dramatic low was established in mid March this year.
I said in many of my regular updates that after such a massive rout of selling, it was unlikely that this group of stocks would simply rise sustainably from the ashes without a serious and scary test of the lows.
Well, it looks like the other shoe has indeed fallen (and is falling) now. Investors in the renewable energy sector have a clear task ahead but it won't be easy.
The Renewable Energy Sector: At Support and Ready to Run
Once again, the few indices and mutual funds that effectively represent the renewable energy sector have worked their way back to the very same levels we saw in late March (or even slightly lower).
Powershares Wilderhill Energy (AMEX: PBW), the Powershares ETF that serves as my own benchmark, now sits down on the year by -31% after falling as low as -38% in late June. Pretty ugly, really, but that is the state of affairs so let's digest the situation.
When a sector as volatile as clean tech and renewable energy retests a previous low, we need to remain alert to a potential new rally, heavy emphasis on the word potential. This does not mean we load up recklessly but we remain ready to act once we get some confirmation that this level is going to hold at least according to the likes of PBW.
I see a similar picture when reviewing the major clean tech mutual funds like
Winslow Green Growth fund (WGGFX),
Guinness Atkinson Alternative Energy fund (GAAEX) and
New Alternatives fund (NALFX)
While all are in clear downtrends, I see all trading at their own support levels and showing reasonably good evidence those prices may indeed attempt another rebound from here.
Take a look at the chart of PBW which has worked its way down to a pretty obvious support level on a 2 year level. The longer term support line is marked in red.
Now if you are the type of investor that doesn't have the time or inclination to buy individual stocks and you still want early exposure to THE GREATEST CYCLE OF INNOVATION THE WORLD HAS EVER SEEN (oops I tipped my hand a bit), then you will be attuned to this developing opportunity in the broad sector ETFs and highly correlated mutual funds.
While it appears the other shoe is indeed falling, it can fall further and investors in this camp must remain committed to a wait and see strategy at this point to confirm that a good low is in the works. Investors in individual stocks have a few more options regardless of whether our benchmarks find support at these levels or not.
Follow the Renewable Energy Leaders
It often takes a strong uptrend and a strong downtrend in any specific sector to discover the really strong companies - those that are less cyclical and more driven by good fundamental strength.
While 2007 served as a clearly defined strong period for renewable energy, 2008 is not surprisingly a weak period so far, and our list of keepers is becoming more obvious.
This is my list based on my assessments of my own universe of options. I will warn any and all of these names should only be considered for new purchases after healthy corrections develop and one can use any number of longer term 50-70-90 day moving averages to identify potential entry points.
I would also warn against building a heavily invested portfolio of just a few winners lest we fall victim to dropping the proverbial basket of precious eggs. Anyway, here are a few of my favorite renewable energy stocks that have had positive returns in both 2007 and thus far in 2008 with favorable long term price patterns relative to the sector indices:
First Solar (NASDAQ: FSLR)
Xide Technology (NASDAQ: XIDE)
Companhia Energetica de Minas Gerais (NYSE: CIG)
Metalico Inc. (AMEX: MEA)
Badger Meter (NYSE: BMI)
Enersys (NYSE: ENS)
American Superconductor (NASDAQ: AMSC)
Brave investors in any of these stocks during 2007 would have had to tolerate no less than 10% losses in any given name and as much as 26% losses thus far in 2008 just to stay with the trend. Those may be intolerable for some but those are the emotional costs of owning any of these names.
And the returns have been superior to put it modestly. So the message is pretty clear; Leadership in the renewable energy sector is becoming more apparent and we need to stay "plugged in" to those names while accepting whatever volatility comes our way during these long up trends.
For the rest of your money, there are short term trends to play but not a lot else to get excited about.
Therapy
While the clean energy sector is working to raise your blood pressure at support, I'll do my best to offer these words of encouragement.
Renewable energy and clean tech is a very quickly developing mega trend and new innovative cycle. It will last for decades and is far from over as some would suggest (Mostly the old guard from the Oil and Gas worlds who are looking at a possible end to their reign).
Our job as investors is to stay with the trend. Fortunes will be made in this sector like all of the new mega trends of the past so keep the faith, your diligence and patience will be rewarded many times over.
Think about the changes happening now. We are turning waste into power, developing organic food and environmentally friendly products. We are harnessing the sun, wind, waves to power our homes, creating designs with lighter weight materials and improved efficiency reducing our load on natural resources.
Bringing it all together with technology, transmission, and service completes the package. This is big and comprehensive. So fear not because these types of companies are the future as obviously as they are the right solution to a more sustainable life.
In less than a year, I'm confident that we'll look back at this time and marvel at the incredible opportunity as investors.
Sam Jones
President, All Season Financial Advisors, Inc.
Registered Investment Advisors
Senior Portfolio Manager - New Power Fund
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