The road to a greener future has been a bumpy one for investors.
The entire spectrum of clean energy stocks have risen and fallen in
tandem with changing government policies and wildly swinging fossil
fuel prices. Yet the industry has made considerable inroads as
industry revenue for solar, wind and efficiency companies have
risen nicely higher in recent years.
At the moment, investors are jumping back on the bandwagon of clean
energy stocks. For example, the PowerShares
WilderHill Clean Energy Fund (
has risen +25% since late August. Yet even as many clean energy
stocks have moved up sharply off of their lows, a handful of stocks
remain stuck in the mud due to company-specific problems. Here's a
quick look at five industry laggards -- at the end, I'll select the
one most likely to rebound.
A123 Systems (Nasdaq: AONE)
This maker of advanced batteries was supposed to be a great way to
play the burgeoning electric car market. A123 pulled off a
about a year ago, but a series of missed quarterly targets has
pushed shares down more than -70% from their peak. Investors came
to realize that profits will likely be elusive for the next several
years, as the electric car market will evolve at a slow pace.
But A123 has another problem on its hands. A pair of giant
lithium-ion battery makers -- Japan's Panasonic and Korea's Samsung
-- has recently stated plans to radically boost spending to retain
industry dominance. They also plan to cut prices to pursue
, and that's a battle that relatively tiny A123 is ill-equipped to
fight. So even as the company looks set to sharply boost sales in
2011 and 2012, gross profit margins may be so low that the
company's operating losses fail to shrink. The key for aturnaround
in this stock is a path to eventual profits. And until investors
can see that path, shares are unlikely to rebound much.
Echelon (Nasdaq: ELON)
In the last decade, this company emerged as one of the most
promising plays on energy efficiency. The company developed a range
of remotely-monitored electricity meters and industrial controls
that opened the door for much greater control of energy
consumption. For example, utilities could use the devices to
control when air conditioners cycled on and off.
For a while, Echelon's shares were in favor as the company secured
a large contract for wireless electric meters with a large Italian
utility. Shares hit nearly $30 in late 2007 (when sales grew +140%)
but now trade for less than $10. Blame it on the
. Sales fell in 2008 and 2009 and are likely to grow only modestly
this year. Investors have come to view this company as filled with
But Echelon may be getting a second wind. The company has recently
released a range of new products that allow manufacturers to build
"smart-grid" controls right into their products. That will allow
the electrical grid to talk straight to the device and allow for
more control over energy consumption at times of peak energy usage.
That's exactly the plan in place for the coming wave of electric
cars that will need to re-charge their batteries when it is most
convenient for the utility.
Echelon fits well into my approach of "love them when they're
hated." The company's recent stumbles have left many investors
dubious and perhaps discounting the company's future prospects. Yet
those prospects remain bright. To be sure, the company will have to
start generating real sales traction for shares to rebound. Right
now, analysts expect sales growth to climb back to +20% in 2011 and
again in 2012. Yet many investors will wait to see if that forecast
actually materializes. Growth forecasts have needed to be ratcheted
down many times in the past.
As is the case with A123 noted above, Echelon needs to prove that
it can move into the black. The company has not made a profit since
2004. This stock should be on your radar, even if it's not a
compelling buy just yet.
Broadwind Energy (Nasdaq: BWEN)
The wind energy market hasn't developed as quickly as the solar
energy market, leading many industry players to issue downbeat
sales forecasts. Broadwind Energy, which makes wind towers, gears
and other equipment, has had an especially tough go if it, and a
slow slate of new orders is expected to lead to a -23% drop in
sales this year. Shares have fallen from $10 to a 52-week low of
$1.42, before a recent rebound to $2.15.
Why the rebound? Rumors abound that
is looking to buy the company to further penetrate the wind market.
Shares also received a lift from recent news that
Google (Nasdaq: GOOG)
and other firms are joining forces to build a massive $5 billion
offshore wind farm near Delaware, giving the industry fresh
credibility. With prospects for climate legislation pushed out into
2011 -- at the earliest -- shares may lack catalysts in the
near-term, that GE rumor aside.
Energy Conversion Devices (Nasdaq: ENER)
Talk about low expectations. This company has stumbled so badly
that industry watchers have hardly anything positive to say about
it. Of the 13 analysts that follow it, not a single one has a
buy rating. And Energy Conversion Devices is a favorite of short
sellers, with more than 11 million shares held short, even after
its shares have fallen from $70 in 2008 to a recent $5.
Why all the animus? Blame it on a brokenbusiness model . Energy
Conversion Devices spent heavily to build massive factories to
produce a large amount of solar equipment, only to find that
competitors' technologies were more cost effective. So the company
sports wafer-thin gross margins and can't seem to trim stubbornly
high operating losses.
With all that gloom, is this a short candidate? Well, it's getting
crowded out there, and every time short sellers get spooked by a
healthier stock market, they look to trim short position in names
like this one. That's what happened when shares ran from $3.80 to
$5.60 in July and August, and it may be happening again now as
shares have risen more than +10% in the last five trading sessions.
Bank Hapoalim recently initiated coverage on Energy Conversion
Devices with a paltry $1.50 target price. But it's probably safer
to short this stock when the rest of the market is falling as well,
so you don't have to worry about short covering.
A-Power Energy (Nasdaq: APWR)
This China-based supplier of wind turbines, energy distribution
systems, power plants and water conservation systems has been a
great growth story, boosting sales from $40 million in 2004 to more
than $300 million last year. But that top-line growth hasn't always
translated to the
, as rising expenses have forced down operating margins in the past
few years. But shares are really in the doghouse due to a lack of
confidence in management, which seems to alter the company's
forecasts every quarter.
At the end of 2009, the company blew past forecasts, but issued
weak guidance. In the next two quarters, the company badly lagged
estimates, but issued fairly robust guidance. And on a full-year
basis, profits are falling in 2010, but are expected to rebound
sharply in 2011. That pattern has played out for much of the last
Investors don't like that kind of erratic behavior. So shares
trade for less than half the 52-week high and just seven times next
year's profit forecasts.
But investors may be mistaken by focusing so closely on erratic
quarterly results. If you take a step back, you'll notice that
A-Power has become a favorite of the Chinese government,
continually securing new contracts that should help sales keep
growing at a solid clip. New contracts are also being signed in
Vietnam, Thailand and Pakistan. This is a stock for strong
stomachs, and when it posts the occasional rally, you should always
think about booking profits as future results will also be
Action to Take -->
And the winner is... A Power -- by a smallmargin .
Echelon looks awfully tempting, as the company is currently unloved
and investors may be overlooking the intriguing slate of new
products. Both of these stocks carry risks, so you may want to
start with a small position and build over time as the companies
prove their ability to steadily boost sales and profits (or in the
case of Echelon, at least move toward profitability).
Broadwind is a curious play. If the GEbuyout rumors fail to
materialize soon, then shares may slip back toward the $1.75 mark.
Then again, any further improvement in sentiment from investors
about wind stocks is likely to re-focus attention back on this
name. It's a high-risk/high-reward play.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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