Shawn Severson: Surprising Opportunities in
Source: Brian Sylvester of
The Energy Report
Cleantech goes far beyond solar power, according to Shawn
Severson. As a managing director of cleantech research with
ThinkEquity in San Francisco, he finds mainstream companies poised
to cash in on common-sense technologies that save energy and money.
In this exclusive interview with
The Energy Report,
Shawn makes the case that cleantech is as much about saving
money as it is about saving the environment.
The Energy Report:
You recently joined ThinkEquity in San Francisco as a cleantech
analyst after doing institutional sales for Robert W. Baird &
Co. in London?
I have been a technology analyst most of my career. In London, I
actually switched roles from research to institutional sales. I
worked with a variety of industries and companies as I approached
my clients with ideas. That's where the cleantech aspect grabbed
hold of me. In the European market, there is a very different
approach to cleantech. I saw a tremendous opportunity to focus
research on cleantech in the U.S.
My goal has been to look at traditional companies, such as
Cooper Industries Ltd. (
Acuity Brands Inc. (
, and identify cleantech trends that are going to benefit those
types of companies. I want to find strong cleantech tailwinds and
underappreciated or overlooked companies as cleantech plays. These
are certainly great companies in their own right, but some of the
trends that are happening inside these organizations aren't always
fully recognized by cleantech investors.
What about the European market got your attention?
Investment in the cleantech industry is much more developed in
Europe and Asia. They have a more comprehensive view of what
cleantech is and how to invest in it. My experience with clients in
London expanded my knowledge on how to invest in cleantech and
other opportunities on a global basis.
Looking at companies like
Impax Asset Management Group Plc (LON:IPX)
Ecofin Water and Power Opportunities Plc
and many others in Europe gave me a comprehensive approach to
cleantech research that goes way beyond a few solar companies here
and there. Cleantech is encompassed in numerous different aspects
of water treatment, water conveyance, energy efficiency and
encompassing things like lighting and heating, ventilation and air
conditioning (HVAC) companies. I've developed a much broader
perspective on cleantech and how to invest in it.
How would you define \"cleantech\"?
Cleantech is generally anything that's involved in improving energy
efficiency and energy consumption, or in looking for renewable
sources of energy. But I believe U.S. investors need to broaden
this definition. Companies can benefit from all those aspects of
cleantech and have product that people don't always think of. Take
wastewater treatment, for example. How does that play into
cleantech? Well, it certainly does because it addresses water
shortages, pollution, environmental concerns and regulations.
Companies that are involved in that aspect of the market certainly
can benefit from those trends.
Could such a broad definition of cleantech lead some companies to
brand themselves as cleantech in order to leverage on the
burgeoning industry when perhaps their strategy isn't really
For a company to qualify as cleantech in my universe, it must have
25% of its revenue coming from cleantech products or services.
The index company FTSE in London and Impax Asset Management, a
former client of mine, developed the FTSE Environmental Markets
Index series. They meticulously broke companies down into cleantech
percentages. The indices have a broad definition of what an
environmental technology is, but they require that from 20% to 50%
of a company's business be derived from those technologies.
In Asia and in Europe, that's very important because the indices
are a benchmark for a lot of cleantech funds. However, in the U.S.,
we have a very underdeveloped market of cleantech funds. We have
some exchange-traded funds and a few funds define themselves as
investing in cleantech, but it's still a very early stage market
for the U.S.
Why should U.S. investors start taking notice of this relative
One of my favorite areas of investment is in \"smart\" buildings.
About 30% of the operating costs of a traditional commercial
building on an annual basis is from electricity. Lighting in a
typical building accounts for nearly 39% of an electricity bill.
There is a lot of potential to reduce that by doing something as
simple as turning the lights on and off automatically. That's where
investors should focus.
We spend billions and billions of dollars in areas like solar
and more speculative areas of alternative energy, but wouldn't it
be simpler to figure out how to use less electricity first? These
are the types of things that cleantech can offer in terms of energy
efficiency. Turn the lights off first. Figure out how to do that.
The economics of that are pretty straightforward. That's also the
beauty of cleantech for investors and for companies that
participate in this market.
I try to find products that offer a return on investment that
will create demand. There are some interesting and compelling
growth stories driven on an ROI basis from products in lighting,
HVAC, insulation and windows. There are a number of applications
and products that are not speculative technologies and that aren't
being \"green\" just for the sake of being \"green.\" These are
financial decisions that can drive demand.
Many investors might think that cleantech is too specialized for a
diversified portfolio. Is this true of your coverage?
Inherently, I try to find diversification. An interesting aspect of
my approach is that these companies are mainstream but have
significant parts of their business that benefit from cleantech
applications. Take a company like Cooper Industries. It is a major
player in supplying utilities with products like transformers and
is also a major player in smart-grid applications. Cooper is one of
the top four suppliers of lighting fixtures in the world, as well.
It sells thousands of products to the refinery and manufacturing
sectors. About 30% to 40% of their business is driven by cleantech,
but they also have traditional exposure.
What percentage of an investor's portfolio should be in
If it was just pure cleantech, such as solar companies, natural gas
vehicle companies and lithium-ion battery maker
A123 Systems Inc. (
, an investor probably wants to keep about a 15% interest in that
type of allocation. However, the way I think an investor can
enhance that, while at the same time reducing risk, is investing in
companies like Acuity Brands and Cooper. Those types of companies
provide the cleantech aspect, as well as diversification through
Investors should be careful about piling too much into a very
narrow segment of cleantech, however. Those investments have a
role, but it is a small role, like 10% to 15%. Then boost that
exposure through other growth ideas that can benefit from the more
obvious cleantech tailwinds without being pure plays.
Are there any cleantech myths you would like to dispel?
One myth is that light-emitting diodes are the only way to play
enhanced lighting. It's certainly true that over time LEDs are
going to be a very significant part of the market, but there are
other ways to improve energy efficiency, such as an occupancy
sensor. I would encourage investors to keep an open mind and not
focus exclusively on LED suppliers like
Cree Inc. (
as the only way to play this trend.
On the fuel side, I've looked at a number of private liquefied
natural gas (
) companies and others trying to find alternative fuels. These
things take a lot of time and a lot of development. Solar was
supposed to be the thing even back in the 1970s and it's just now
being implemented in the marketplace. Investors should be focused
on products in cleantech that offer a legitimate ROI to the user
and to the customer.
In a recent ThinkEquity report you wrote, \"Energy efficiency is an
ROI-driven decision that is viable even in slow-growth economies.\"
In 2009, about three-quarters of the retrofit activity on existing
buildings worth about roughly $30 billion was related to energy
efficiency. By 2014, that's expected to grow to almost $50 billion.
What are some companies poised to benefit from that growth?
Acuity Brands and Cooper are the way to play this. Lighting is one
of the first points of attack for energy efficiency in smart
buildings. Both of these companies have excellent plays into smart
buildings and energy efficiency because they can offer paybacks
within three years. A company making an expenditure on upgrading a
lighting system can be paid back in as few as three years through
energy savings and everything after that is dropping to the bottom
In terms of the green angle, this is good for the environment.
The building could be certified as a Leadership in Energy and
Environmental Design (LEED) building or through the ENERGY STAR
program. That's why these companies offer a unique opportunity.
They're cleantech because they save energy, but energy is money.
These products save money and that's something everybody can relate
to-green or not green.
Let's talk more about Acuity, which you have rated a \"buy\" with a
target price of $51.
Acuity Brands, one of the leading lighting companies in the world,
makes lighting fixtures or luminaries. It does not make bulbs or
LEDs. It sources those from other companies like Cree. Acuity also
makes sensors and switches for energy-efficient lighting
Historically, this business has been focused on new commercial
construction, but now retrofitting and energy conservation are on
the forefront of people's minds. Acuity Brands is one of the
companies that will benefit from a three-year or longer trend of
retrofitting commercial buildings. The footprint of existing
commercial buildings is significantly larger than the new
construction that's put in place every year.
In fact, Cooper, one of their competitors in lighting, just
pre-released positive numbers for their fiscal third quarter
recently. One of the major factors that they specifically cited in
my conversations with them was the fact that retrofit commercial
lighting is significantly better than they had anticipated. Acuity
Brands is scheduled to report in early October.
We're not talking about small companies here. Cooper had revenue of
$5 billion dollars last year. You have a \"buy\" rating on Cooper
as well, with a target of $59. It's trading at about $48 right now.
Do you believe that we're going to see a short-term catalyst right
now for share appreciation with Cooper?
I do. Cooper has a cleantech theme, but it's not the only reason to
own its stock. They also participate in the utility industry.
There was actually a decline in the demand for electricity in
the U.S. recently, which is the first time that's happened. A lot
of stress came off the grid and utilities deferred expansion and
upgrades that they had planned.
Going forward, however, there are limits to how long utilities
can go without spending on expansion. Cooper is in a very
interesting position because it will benefit from the lighting
trends we talked about and it's also a significant player in the
utility grids-smart grids, traditional infrastructure and
An investor in Cooper gets great participation in lighting and
great participation in the grids.
In the same research report you wrote, \"A large portion of the
cleantech industry is focused on driving new ways to generate
energy, but we believe this sector offers a large body of product
and services capable of significantly reducing energy consumption
TODAY.\" What are some companies with those game-changing products
Capstone Turbine Corp. (
manufactures a micro-turbine that generates clean energy. It can be
used during peak times instead of paying very high prices for
energy coming from a grid.
The interesting aspect is that it's not just a generator. It
works very well in what's called CHP, or co-heat and power
generation. Think of all the heat that comes out of a generator. It
can be used to heat a building or water, or for any industrial
process. Taking the energy-efficiency theme one step further is
capturing that heat and utilizing it for any one of those
applications. Products like the micro-turbine capture all of this
potentially lost energy otherwise just emitted as heat. It's green
and it's clean, but the fact of the matter is it is a financial
decision. It reduces electricity consumption for heating.
Capstone's a pretty small company, with a market cap of around $250
million. You rate it a \"buy\" with a target price of $1.50. It's
trading around $0.70 now.
It's very speculative.
Is there something about this technology that makes it a clear
winner above similar technology?
The problem with the micro-turbine industry has been that upfront
costs have been very high. They're more efficient over time and
total cost of ownership. The key is to drive down the upfront costs
versus a reciprocating engine.
A micro-turbine is significantly cleaner, however. A company
could spend hundreds of millions of dollars and make very, very
little improvement on the emissions of a reciprocating engine. In
areas like California, where there is California Air Resources
Board (CARB) certification, most reciprocating engines can't even
qualify. To get to a new level, we have to change the technology.
Micro-turbines are a proven technology. I expect that over time
there'll be a greater adoption rate of micro-turbines in the
Capstone just happens to be a market-share leader. Bear in mind
there are plenty of turbines out there, but they're not micro. This
is a smaller unit generating about 250 kilowatts versus 1 megawatt.
It's a smaller portion of the market in terms of the size, but
nonetheless a very interesting technology.
You said in a report that investors should view water as an
\"investable theme\" because of supply/demand imbalance. Can you
give us a couple of names that match with that thesis?
Some people believe that water is an inalienable right and they're
not going to pay for it. But every study indicates that we're going
to have an increasing problem with water as agricultural needs
rise, the population expands, and as standards of living increase
in developing countries.
PICO Holdings Inc. (
owns a significant number of water rights in the Southwest-the Las
Vegas and Phoenix areas and the Colorado River corridor. That area
has seen a big boom in demand over the years. The real estate
bubble drove demand because you can't build a new subdivision or
development until you have access to water. PICO is subject, to
some degree, to what's happening in the real estate market,
industrial production and growth of the southwestern states. As an
investment theme, PICO is an interesting way, and perhaps the only
way in the public market, that an investor can get access to a
Another play on long-term water shortages is
Energy Recovery, Inc. (
, which I have rated a \"hold.\" The company has a product that's
used in the reverse-osmosis market to turn saltwater into
freshwater. The product is about 60% more energy efficient than
older, traditional technologies. Areas like Australia, Spain, North
Africa and developing nations rely on seawater as one of the
primary sources of incremental freshwater. Those areas require
Energy Recovery shares have a fair-value estimate of $7.50 and
recently traded in the $4 range.
PICO just agreed to build and operate a canola processing facility
in Minnesota, but the stock has come under pressure recently and
come down quite a bit.
Yes. It was trading around $28 today. I have a \"buy\" on PICO with
a $48 price target.
What are some small-cap cleantech names that investors should be
A very important part of cleantech that should be in investors'
portfolios is natural gas vehicle companies. There's been lots of
buzz about those companies since the New Alternative Transportation
to Give Americans Solutions (NAS GAS) Act of 2009. I definitely
think investors should own one stock in that space.
Natural gas has a lot of appealing aspects: It's cleaner,
cheaper and abundant. Now electric vehicles are certainly
interesting, but we need a bridge technology before something like
that becomes widespread. The fact of the matter is that big,
heavy-duty Class A trucks will probably never run off of
electricity. They will still need a large engine. Natural gas
provides a great bridge technology.
The adoption rate of this could accelerate dramatically if there
is some positive legislation, which is likely to get passed late
this year or early next year. That could create a major uptick in
demand for fleet vehicles and larger trucks.
What are some companies in that space that are poised to benefit
from that type of legislation?
Westport Innovations Inc. (TSX:WPT)
is my favorite. I also think
Fuel Systems Solutions Inc. (
is a very interesting investment opportunity. There are also some
companies that I don't cover, such as
Clean Energy Fuels Corp. (
and the Italian company
Landi Renzo S.p.A. (BIT:LR)
, which is active in Europe and the U.S. now.
Natural gas vehicles are all over the place in Europe. If you
were a European, you would have one or know someone that has one.
It's more of an unknown in the U.S. Natural gas vehicles are also
common in emerging markets like Pakistan and South America. It's my
perspective that investors should own at least one of these names
What do these companies do?
They basically take a traditional engine, be it a large-scale
diesel engine or a car engine, and convert them to run off of
gasoline, natural gas or both. The conversion can be done right on
the factory floor or as an aftermarket retrofit. There are very
large aftermarkets for conversion in other parts of the world.
Westport is a little different-it is focused on the heavy-duty
and medium truck market. Westport, which is partnered with
Cummins Inc. (
, converts engines to natural gas right on the Cummins
Some of those run off of liquid natural gas, which is required
for the big Class A trucks. That's a much more complicated
technology that other companies like Clean Energy, Fuel Systems and
Landi Renzo don't have the patents for. Westport is the only
company today that can supply those types of engines.
One issue that I would have as an investor is that there's no
infrastructure here for natural gas vehicles. Where do you go to
fill up your natural gas car in the U.S.?
Right. In Europe and other markets it's no problem. China, like the
U.S., does not have much of an infrastructure. However, China and
the U.S. are still tremendous market opportunities. The opportunity
isn't from individuals buying natural gas vehicles. The opportunity
is from companies like UPS, AT&T or the post office that have
fleets of vehicles that return to the same place every night. In
that situation, there's no problem with infrastructure because they
can have a natural gas fueling station at their sites.
Are there cost benefits that would make that type of investment
worthwhile for a company?
Yes. Natural gas is about $1 less a gallon compared to its gasoline
or diesel equivalents. If a large truck burns 20,000 gallons a
year, that could add up to a lot of savings for a company. Plus,
there are some excellent subsidies from the government for buying a
natural gas engine. Upcoming legislation could increase these
incentives even further.
Do you have some final thoughts on cleantech that you'd like
investors to take away?
I would encourage investors to open their eyes and understand that
cleantech can be a driver within a company. It doesn't have to be a
pure-play approach. Look at how some of these companies can benefit
from a cleantech segment of their business. The market has not yet
fully recognized the growth potential that can come from cleantech
tailwinds. I want to find positive surprises. Cleantech can
generate surprises over the next couple of years for companies that
we don't always identify as being in the cleantech sector.
Thank you for your unique perspective, Shawn.
Shawn Severson has more than 16 years of experience in the
investment industry as an equity research analyst and institutional
salesperson. He recently joined
in San Francisco from Robert W. Baird in London, where he was a
director in the institutional sales group and specialized in
working with global hedge funds and proprietary trading desks.
Previously, he worked as a senior analyst at Raymond James in St.
Petersburg, Fla., where he covered the IT supply chain for more
than eight years. He has been ranked numerous times as one of
The Wall Street Journal's
\"Best on the Street\" and received recognition for stock
picking and earnings estimate accuracy from Starmine. Before
joining Raymond James, he worked as a senior analyst at EVEREN
Securities (Kemper) in Chicago covering the technology sector.
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