Pure play? or Diversified? When it comes to alternative energy companies, the list is long and there is certainly reason today to believe that it is about to get a whole lot longer. Already on the Seeking Alpha home page today, we have seen multiple submissions by socially responsible and sustainability focused firms heralding the opportunities that are now present thanks to the new President.
We share the optimism in the alternative energy space, however, we see that there are clear differences in how to approach this strategy. First, while there may be a lot more spending by the government on alternative energy resources, lets be clear how the project and approval process works in Washington. Let’s just say it isn’t necessarily an efficient arbiter of the optimal solution set. Far more likely, we will see intense lobbying, back room hand shakes, and the politics of the usual sort to choose the most “appropriate” investments and expenditures. So it will be very hard for investors to identify the pure play firms that will benefit from an Obama Presidency. The leadership in Congress will control who gets funded and who does not, so the free market will not be there guiding this process. From an investment perspective, this is akin to having your Atlantic City blackjack dealer decide ahead of time which cards you’ll need for a winning hand. Not really the way we at Ockham like to invest.
So what’s the alternative for each investor? Looking at an the Ockham Research portfolio of some major corporations that have significant alternative energy products and service offerings, there are some names that look very interesting from a value perspective. While every stock in this space has been kicked in the teeth (with the broader market) in the last six months, generally, an administration open to signing Congressionally led green technology expenditures could be a welcomed way to buy up their R&D budget shortfalls in the economic slowdown.
First, on the solar side, we have written several times recently on Applied Materials (AMAT). AMAT is a great example of a diversified alternative energy company.
Applied Materials is one of the leaders in harnessing solar power, but they also have a substantial portion of their business tied to semiconductor technology. As we wrote (Applied Materials-Leading By Example), AMAT has converted their parking deck into a massive solar panel, which powers their entire corporate headquarters. A large company such as AMAT, might be one of the firms hiring lobbyists to compete for government funds in Washington. A large and established firm such as this may not be quite as risky as investing in a newer alternative energy start-up, but there is still a considerable amount of upside potential.
Another alternative energy company that we have written about recently is Rentech (RTK) which is attempting to produce clean synthetic fuels made from coal and natural gas. When we wrote a blog about them in August, they had made a breakthrough in producing transportation-grade synthetic fuels. Rentech has been around for a few years, but is smaller and more of a speculative pick that AMAT. This would be an example of a pure play in green energy. Be careful, though, this stock swings wildly and is currently under $1.
Lastly, we want to highlight a piece from our blog that is an example of unintended consequences of the government intervening in the free market. That example came in the form of Pilgram’s Pride (PPC) one of the largest producers of chicken in the country. The post (Pilrgim’s Pride Exposes Misguided Policy Shame) detailed how ethanol subsidies contributed to making corn far more expensive, and corn being a major input in raising chicken resulted in a major squeeze of PPC’s bottom line. Pilgrim’s Pride had to cut 1100 jobs at that time, as a result of a policy that realistically did very little to advance the alternative energy movement. Ethanol in Washington has taken on a life of its own, and more of a instrument of pork barrel spending for Midwestern congressman than it is an attempt to satisfy an economy hungry for clean energy. Pilgrim’s Pride now trades for about $1 and of course not all of the blame can be placed on ethanol or a simplistic view of government subsidies, but clearly it is a partial reason for the company’s struggles.
We do not have the answers and we really just wanted to present the case that throwing government money at an initiative is not a panacea. Now that Senator Obama is President Elect Obama, we at least know that alternative energy will be a major focus of his administration. He is hoping for a “Manhattan Project” type effort to usher in a new era of clean energy, what exactly that means is yet to be determined.