Mauldin Real Estate

Note: This article was provided to subscribers of Envoy Global Research on June 12, 2008.

Introduction

This post is devoted to some thoughts on companies in the solar industry, particularly the Chinese polysilicon-based solar module manufacturers. The basic issue I address here is the risk for a serious cash crunch at some of these module manufacturers given their working capital deficits and their capital expenditure requirements.

Fuel Systems Solutions (FSYS) has had a tremendous rise since my piece back in April. The shares have nearly quadrupled in less than three months and are due for a correction, They have simply gone up too far in too short of a time frame.

The shares are pricey: Trading at 38 times 2008 earnings estimates and nearly four times book value of $9.70, the stock is vulnerable to some hefty selling if FSYS fails to execute its business plan flawlessly, as this equity is priced to perfection and beyond.

Director of Zacks Equity Research Dirk van Dijk, CFA has long considered the affects of sky-high energy prices for an extended period of time on the overall global economy. Today we have him spell out a couple scenarios that may be plausible in the months and years ahead.

What do you foresee if oil prices remain at high levels?

There are investment opportunities in changing our economic lifeblood from oil to ingenuity, preempting the need for oil in urban transport. 

Unexpected innovations (positive Black Swans) such as personal computers, the Internet, lasers, penicillin, often require preparation to allow investment.  The objective of this paper is to alert investors so those interested can exploit current opportunities and organize their charter to for direct investments in the Personal Rapid Transit [PRT] industry - the Physical-Internet.

Further government intervention will be required in order to meet the policy goal of supplying 20% of US power needs by 2030, according to a recent analysis by the Congressional Research Service.

Although windpower currently provides only about 1% of U.S. electricity needs, it is growing more rapidly than any other energy source. In 2007, over 5,000 megawatts of new wind generating capacity were installed in the United States, second only to new natural gas-fired generating capacity. Wind power has become “mainstream” in many
regions of the country, and is no longer considered an “alternative” energy source.

Solar stocks are again feeling the heat from a report that Spain plans sharp reductions in subsidies for solar power. On Friday, a number of solar stocks dropped sharply after Lehman’s Vishal Shah asserted in a research note that the country was considering sharp cuts in its solar subsidy program. Today, there were further reports on the same theme.

According to Bloomberg, the Spanish newspaper Cinco Dias reported that the Spanish industry ministry is considering cutting the electricity rate paid to photovoltaic installations by as much as 35%.

Are you interested in wind energy, but don't have billions to invest like T. Boone Pickens? Are you afraid that you are going to pick the next pets.com, and not ebay.com? Don't fear. IndexUniverse.com is reporting that the PowerShares Nasdaq OMX Clean Edge Global Wind Energy Index (ticker: PWND - prospectus) is expected to begin trading next week.

It is actually not the first wind ETF. A few weeks ago, the First Trust ISE Global Wind Energy Index Fund (ticker: FAN - prospectus) hit the market. The PWND ETF will begin with 31 companies in its portfolio. The FAN ETF currently has 67 companies. Both have a high level of global diversification, which makes sense, given that I am not sure how they could even find 31 companies in the U.S., let along 67, with a significant exposure to wind energy. As a result of reaching out to global players, PWND is able to list that 90% of its companies are pure-plays. FAN has about 66% pure-plays. What is a pure-play? As defined, most of the business in the company must comes directly from wind energy - or specifically, the company must either produce 1,000 megawatts of energy, or generate $1 billion a year from wind-related power. Non-pure-plays include companies such as General Electric and Siemens, each which have significant interest in wind energy, but for which wind is still a relatively small profit center when compared to other business operations.

On the first day of the second half of a thus-far difficult 2008 – and the second half is supposed to be the stronger half – we sat down with Director of Zacks Equity Research Dirk van Dijk, CFA for his take on what can be expected in the days, weeks and months ahead.

What is your latest thinking on the astronomical prices of oil these days?

By Murray Coleman

Less than two weeks after the first wind energy exchange-traded fund hit the market, a more concentrated and at least initially more expensive alternative is set to launch.

Wind power is widely seen as the alternative energy source that's closest to prime time. Wind can compete head-to-head on a cost basis, without subsidies, with most other kinds of electrical generating power.

First Trust launched the first wind-power ETF in the U.S. on June 17, with the First Trust ISE Global Wind Energy Fund (ticker: FAN). Robert Carey, chief investment officer for First Trust, spoke with the editors of HardAssetsInvestor.com about how the new fund works and where it might fit in an investor's portfolio.

A team led by MIT students this week successfully tested a prototype of what may be the most cost-efficient solar power system in the world--one team members believe has the potential to revolutionize global energy production.

I'm trying to build a 3 position basket of "alternative energy" (non-solar) names. I started this basket with a small stake in American Superconductor (AMSC) which I actually added a bit to here as it pulls back to $36 and fills a gap from June 9th. [Jun 12: Starting a Beachhead in American Superconductor (AMSC)]

A-Power Energy Generation Systems, Ltd., formerly Chardan South China Acquisition Corp., through its PRC operating subsidiaries, is the largest provider of distributed power generation systems in China and will enter into China’s wind energy market in 2008. The Company is also focused on developing and commercializing additional renewable energy technologies

This company moved to the NASDAQ Global market on Jun 2, 2008, and is actually followed by a few smaller brokerage houses; therefore I can conclude it's not a complete scam .. something I worry about with any tiny far flung Chinese name. At a market capitalization of about $800M at today's prices, it's far smaller than our average fare and I believe either the 2nd or 3rd smallest current holding.

Solar-panel maker First Solar (FSLR) should be able to reach grid parity in time to offset the effect of a possible decline in subsidies from governments, writes Collins Stewart analyst Daniel Ries in a note to clients this morning. Ries has raised his rating on the stock to “Buy” from “Hold.” Despite risks that subsidies will subside in 2009, writes Ries, “First Solar can hit lower price points if they are needed to drive demand as feed-in tariffs are reduced.” Calling First Solar “providers of the lowest cost solution on the market,” Ries goes on to say the company’s prospects for selling to utilities in both the U.S. and Europe countries have improved.

Ries thinks the construction of a plan in Malaysia, currently “progressing well,” is just one factor that may boost production significantly starting late next year. That would, presumably, further help the company cut costs by producing panels in greater volume. Writes Ries: “First Solar has not clarified its CY10 capacity expansion plans at this time, but we believe the company will continue to build facilities at a steady pace even after its 16 line Malaysia expansion is complete in late-2009, particularly if additional contacts are announced in the months ahead.” First Solar could also have some additional revenue from the cost to install panels, suggests Ries.

Sushi rice, sticky rice, rice wine vinegar, saki and ethanol. Ethanol? Yes, ethanol - the Japanese are experimenting with rice as fuel. A recent article in the Wall Street Journal explored the subject. But as is always the case, there's more to the story than the quick hit.

With all of the recent news about food shortages and rising food prices worldwide, the idea of growing rice for ethanol would seem ludicrous on the surface. Rice is even more of a main staple than corn for most of the world's population - much more - and just look at the political blame being laid on the threshold of corn ethanol. But in Japan, it's possible, just possible that it makes sense.

The engineering and construction companies had a great year in 2007, and the current environment is like that of the deep offshore drillers. They have large backlogs of work, and an environment that is very bullish for their businesses. Fluor Corp. (FLR) is the largest, and arguably the best one of these companies.

One hundred and one days ago, I placed a buy recommendation on theupdown.com, and since then it is up 45.20%. The world is currently a bullish venue for infrastructure and energy, and based on its size and specialization, FLR is in the best position to take care of the world's needs. Revenue for 2007 was $16.7 billion and at the end Q1 2008, the company had a $31.5 billion backlog.

Since I last covered clean energy mutual funds and ETFs, the sector has seen the launch of two solar ETFs: (KWT), the Market Vectors Solar Energy ETF from VanEck,  and (TAN), the Claymore/MAC Global Solar Energy ETF.   Continuing in the tradition of cute ticker symbols, First Trust's new global wind energy ETF is (FAN).

I recommend that investors stay away from the (very expensive) green energy mutual funds, and invest either in one of the ETFs, or if they have a few tens of thousands of dollars to invest and are willing to roll up their sleeves a little, they buy a representative sample of the stocks (a "tracking portfolio") held by the mutual funds and ETFs, and save further on expenses.

The price of natural gas in the U.S. has about doubled in a bit less than a year despite the fact that U.S. production has actually increased by about 5%.  This is due in part to new horizontal drilling techniques being applied to recently developed vast “unconventional” gas fields in the U.S. and Canada. So it might seem like the price of gas has gotten ahead of fundamentals.  But there are good reasons to be bullish about gas prices longer term. 

Natural gas is inherently cheap on two scores.  One is that the BTU equivalency of gas to oil would price gas around $23 per Mcf, nearly double its current price.  Also, gas is the cleanest burning fossil fuel, so it should be advantaged if and when carbon taxes are passed to deal with climate change. 

According to Institutional Investor ("Buying into Green Investing" by Henry Teitelbaum, June 2008), green is good for at least one large UK pension fund, the Universities Superannuation Scheme Limited ("USS"). Joined by three other organizations (Alliance Trust PLC, SNS REAAL N.V. and Mitsui & Co Ltd), this trustee company with 30+ billion GBP in assets is part of a 56 million GBP financing round for the Climate Change Capital Group, a London investment bank "dedicated to the low carbon economy." Teitelbaum adds that the USS is already sold on the commercial viability of environmentalism, demonstrated by its membership in the Enhanced Analytics Initiative.

According to research done by this blogger, the USS is credited with taking "ethical, social and environmental considerations" into account when "assessing the merits of investment in a given company" as early as 2001. (See "Pension funds can get more from 'green investing' - SRI expert" by Nat Mankelow, bfinance, May 12, 2001.)

I wrote in a recent post how Barclays was getting into the physical trading of crude oil. Now IndexUniverse.com is reporting that Barclays is launching a new iPath Exchange Traded Note [ETN] targeting carbon emissions - the iPath Global Carbon ETN (GRN).

As cap-and-trade becomes more prevalent, it is expected that ETN funds tracking carbon emissions will become more popular. Some estimates have the global carbon market being worth more than $50 billion a year. Talk about making money out of thin air.