Alternative Energy Stock #5: SatCon Technology (SATC)

Satcon Technology is another alternative energy stock that I would consider a speculative play.  Satcon’s primary focus is helping large-scale utilities by designing and delivering power conversion systems that allow producers of renewable energy to convert clean energy into grid-connected electrical power.  It produces an array of products to provide the critical bridge between clean energy sources and large-scale power grids.

Alternative Energy Stock #4: Broadwind Energy (BWEN)

Broadwind provides services and products to the wind energy industry. It is a micro-cap company with a market cap of only around $45 million. The stock is currently priced at only 43 cents per share.

Competitive Position
BWEN competes in the wind energy industry as a supplier. Wind energy could be one of the main energy sources of the future, but it might not. Wind energy is less reliable than most other energy types, but is extremely renewable and once wind turbines are established, maintenance cost is low. The problem is that upfront installation cost is high, and the amount of power a single turbine provides is low compared to that cost. Broadwind is one of the largest suppliers to the wind energy business, and like other alternative energy companies (especially those involved with wind power) has struggled through the recession.

Buying and Selling

As the Oracle of Omaha says, I believe that it is best to buy when everyone else is fearful and sell when everyone else is greedy. As an investor, stone-cold discipline is my best friend. I tend to go on buying sprees when all I see is negative news about the stock market and economy, and I tend to pick my spots to sell when there is nothing but positive news and/or a stock has recently had a big run.

A few weeks ago, when everyone thought Europe was crumbling, I took a look at my portfolio and looked at the stocks that I liked the most and I pumped some more money into the ones that had dipped the most. Several weeks later, one of them rocketed up about 30% from its low and the other is up about 15%.

It pays to be be disciplined. Don’t follow the crowd or let fear guide you in your investing.

Alternative Energy Stock #3: Clean Energy Fuels (CLNE)

Clean Energy Fuels (CLNE) is an alternative energy company, but is different from the other companies that we will mention in that it deals with a fossil fuel, specifically natural gas. The company supplies natural gas to vehicle fleets in the US and Canada. Additionally, through its wholly owned subsidiary, BAF Technologies, Clean Energy Fuels also provides application engineering and assists its customers in converting their fleets to natural gas systems, as well as providing service and warranty support.

Alternative Energy Stock #2: Woodward (WWD)

Woodward is a slightly less conventional, if you will, alternative energy company. Instead of focusing on developing or improving new energy sources, Woodward’s focus is creating energy control and optimization solutions. Instead of focusing on building solar panels or running a geothermal power plant, Woodward works with manufacturers to design and produce energy-efficient systems to control the energy of combustion, motion, fluid movement and electricity.

If you’re looking for the next home run, Woodward probably isn’t for you. In my opinion, Woodward is purely a value play and not a growth stock, and as such its growth is likely to be steady because the company derives its revenue from contracts with a diverse group of manufacturers, and not from products in a single market with mass market appeal.

Alternative Energy Stock #1: Ormat Technologies

Ormat Technologies is a vertically integrated company that produces geothermal energy and operates recovered energy-based power plants. With a market cap just slightly north of $800 million, Ormat is a small-cap stock.

Business Model and Competitive Position
While Ormat’s primary area of expertise is geothermal energy, its mission is “to continue to build a geographically balanced portfolio of geothermal, recovered energy assets and Solar Photovoltaic power plants, while maintaining its leadership position in the growing geothermal, recovered energy power generation and other renewable energy businesses.”

Alternative Energy Stocks?

Alternative energy is, in my opinion, one of the most interesting investment topics. There are many forces driving us toward increased usage of alternative energy, including a rapidly increasing global population, accelerating depletion of fossil fuels due to increased usage by developing economies such as China and India, and concerns about climate change due to fossil fuel consumption.

And the first stock is (drumroll please)… Netflix (NFLX)

I thought it would be a good idea to start with a company that everyone has heard of and that has been in the news lately – Netflix. After the overwhelmingly negative reaction of its subscriber base to the announcement that it was changing its pricing structure and splitting up its traditional dvd mailing business with its streaming service, the Netflix stock price has recently fallen off a cliff. But is the downgrade that investors have given Netflix justified, or is now a good time to buy? Let’s take a closer look.

Let’s start out with a quick look at the company’s stock price over the past 5 years. The company’s stock price had steadily ballooned as its business expanded from the low 20′s in 2006 to nearly 300 at its peak in July 2011, and has since tanked to around 113 as of today. But the question is, while it is appears on the surface to be relatively cheap compared to its recent highs in July, what is driving this sharp decline in stock price and is it worth a buy at current levels?

Subscriber Revolution
I can remember seeing more than one indignant facebook post by angry Netflix subscribers when Netflix announced its pricing changes in July. How could they possibly do this to their loyal subscriber base? Well, as it turns out, Netflix is a corporation and, like any other company, can do whatever it wants with its pricing structure, as long as it is willing to pay the price for its actions. And pay the price it has.

In August, the company did an about-face and admitted that instead of the 400,000 subscribers it had expected to gain in the third quarter, it had now expected to lose 600,000 by September 30. Since Netflix had been valued (and for good reason) like a rapidly growing company with incredible growth potential, the prospective substantial loss in subscriber base sent shock waves through the ranks of its shareholders and precipitated a September selling spree.

The Numbers
Between 2009 and 2010, the company’s revenue grew by over 30%, and its net income had been growing by about the same percentage since 2007. However, due to both the aforementioned subscriber revolution and otherwise slowing demand for its services in the U.S., the company’s ability to sustain this level of income growth is in question. To top it off, its growth must come from foreign markets where expenses exceed revenues.

Netflix’s current PE ratio hovers at around 28, which on the surface appears to be relatively low for a company that just 3 months ago was treated by the market as a skyrocketing growth stock and had a PE ratio of nearly 80. However, looking at the bigger picture, the current PE is still relatively high when compared to levels prior to 2010.

Grade: B-. Although its past earnings growth has been strong, with competition and recent subscriber base defection, who knows what the future holds.

Management
Following the recent de-bundling of its DVD delivery and streaming service, many analysts and investors have questioned the competency of the company’s management. I would personally argue that, in the current environment, the bundled services were an advantage to the company and not an impediment.

Think about it this way – are there any other companies that offer the flexibility of being able to order DVD’s or stream content? With only a small percentage of its overall library available in streaming format, those who opt for the streaming-only option will be missing out on a lot of content, and those who opt for the DVD-only “Quickster” service will lose out on the convenience of streaming. In other words, by de-bundling the company has taken away the flexibility that its customers have come to know and love.

Grade: C-. Management is inexperienced and grossly underestimated the impact of the pricing shift, and in doing so severely undercut investor confidence. This will likely take years to rebuild.

Competitive postion
Netflix faces competition from all sides, from cable and satellite providers to other online streaming services, such as Hulu, Blockbuster, and Amazon. By ceasing to be a bundled service, Netflix has opened itself up to stronger competition with streaming-only companies like Hulu. However, with Netflix there are many more ways and devices to stream its content than the other services offer, and its streaming library (although only 20% of its DVD selection) is still formidable.

Click here for a full comparison of services of the major streaming services.

Grade: B.

So should you buy? Well, that’s up to you. I am waiting for its PE ratio to come down and to see if management is able to improve its streaming service after the pricing change in a way that gives it a better competitive advantage over the other streaming services.

Full disclosure: I do not own any shares of Netflix stock or of its competitors.

Want to research this stock in more depth?  Try using my free stock analysis spreadsheet.

Investment Philosophy Part II – Size Matters (sort of)

Before moving on with any posts about individual stocks, I just wanted to clarify a specific statement in the original Investment philosophy post. In that post, I said that I am interested in investing in both large and small companies. I stand by that comment, but feel like I need to qualify exactly what I meant by it.

Everyone knows the old phrase, “It’s not the size of the wave, but the motion of the ocean”. In my opinion, this phrase not only applies to men preemptively defending the perceived inadequacy of their manhood, but also to company size as it relates to its prospective performance capacity.

Or, in English…

It means that it doesn’t really matter whether a company is large or small, whether it has a market cap of $300 Billion or $10 million. What’s really important is the economic landscape in which it operates and how that impacts its prospects for growth.

To illustrate that point, let’s look at an example of two companies in an industry that everyone understands – retail.

Everyone has heard of both Amazon.com and Walmart. They are both retailing giants, Amazon with a market cap of around $95 billion, and Walmart of around $170 billion. While both operate in retail, Amazon has a number of distinct advantages over Walmart and because of this reason it’s stock is valued much more highly (Amazon’s price-to-earnings multiple as of 10/1/2011 was around 95, while Walmart’s was closer to 11).

While Walmart has obviously been successful in its own right as a more traditional “brick and mortar” type of retailer, Amazon has been able to much more effectively harness the internet’s global reach and ubiquity to rapidly improve its sales in recent years. While Walmart has recently made strides in its internet sales, Amazon’s sole focus is and has always been to be the best online retailer in the world.

Unlike Walmart, Amazon doesn’t need to build and maintain stores, and thus has a business model that is more suited to the current economic environment. Even though it is a massive company in its own right, Amazon’s global reach will allow it to continue to accumulate new customers in developing areas of the world, wheras Walmart needs to actually build new stores in these areas if it wants to expand using its more traditional retail business model.

Because of all this you would need to pay almost 9 times more for Amazon’s stock in comparison to earnings than you would pay to buy a share of Walmart’s stock.

So to answer the original question, the size of a company does matter, but not nearly as much as how effectively it operates and takes advantage of external market conditions.

Investment Philosophy Part I – Why are we here?

Before posting any specific stock analysis, I thought I would attempt to answer the age-old question – “Why are we here?” After scouring thousands of websites about evolution and dozens of discovery channel specials explaining how mammals evolved during the age of the dinosaurs, I thought I would be easier to narrow the focus and simply explain my investment philosophy and why this blog exists.

As an investor, like our primitive mammalian ancestors who inhabited the forest floors with relative anonymity during the Jurassic period, my goal is to not only survive but thrive over the long-run. I don’t need to be flashy and gamble on high-risk trades. I just want to give myself enough options and diversify enough in the right places so that I end up a winner.

I really don’t care a whole lot about what my portfolio looks like tomorrow or next week compared to today. The stock market is a roller coaster from day-to-day or week-to-week. But unlike most roller coasters, over the long run, the stock market almost always finishes at a higher point than where it starts. As an investor, I want to be disciplined and still be on that roller coaster 10, 20, 30 or more years from now.

As an investor, I am looking for companies, large or small, with a number of qualities, including:

1.  A strong financial history.  If a company doesn’t have at least three years of solid financial history, I’m not interested.  It must have increasing sales and a good and improving balance sheet.  It also needs to have increasing revenues and a sizable and ideally improving profit margin.  Also, a strong history of EPS growth is important.  ROE and ROI should be ideally trending upward.
2. Strong Management.  Management must be experienced and must have proven itself as evidenced in improving margins, earnings, and ROE/ROI.
3. Competitive Position.  Company must have compelling products and/or services and maintain a strong competitive position in an industry with promising long-term potential.
4. Stock price must be attractive as it relates to earnings and earnings growth.

Traders beware – this blog is not for you.  If you like to buy a stock and sell it hours, days or even weeks later, this blog is not for you.  If, however, you are interested in investing over the long term then you’ve found the right place.

My goal is to spark your interest in specific stocks or ideas, and then it is up to you from there to do the research and confirm that you like my ideas. Ultimately,  I cannot take responsibility for your investment decisions.  However, I would love to be able to give you some interesting ideas and therefore a starting point for your investment research.

Happy investing!

Also, if you like this blog, check out my free stock research guide and stock analysis spreadsheet at SmartStockResearch.com .