Archive for May, 2007

A Hard Look at the Ethanol Industry

My weekly column for AltEnergyStocks again doubles as part of my study for the second CFA(R) exam.  The Equity valuation part of the curriculum contains a chapter by Michael Porter on analyzing competitive pressures in an industry.  I decided to apply it to the corn based Ethanol industry, and, as often is the case, it changed my way of thinking about the industry.  I’ve never been bullish, because I worry about a classic commodity squeeze: both ethanol and the main feedstock (corn) are commodities, and are subject to forces outside the industry which effect their prices.  For instance, if corn harvests were to be poor because of drought or pests, at the same time that oil prices fell, many ethanol producers would be forced out of business because their costs exceed their selling prices.

I also went on a little rant about the typical measures of Energy Payback and Energy Return on Energy Investment (ERoEI) often used in the industry.  These measures are often used to criticize ethanol, but it is a weak criticism, because they do not take into account the time value of energy: namely that a kWh of electricity today is a lot more useful than a kWh produced 30 years from now.  We should instead be thinking in terms not only of how much energy we have to use to get energy out, but also in terms of how soon we get that energy.

I propose a couple measures, of Energy Net Present Value (ENPV) and Energy Internal Rate of Return (EIRR) which I think would give us a clearer view of the undying energy economics (and hence the potential economic profitability) of various energy production technologies.  But that is a column for another week.

This week, here are my thoughts on competition in the corn Ethanol industry, and how it might affect your investments.

If you have a subscription, there’s also an excellent article in the NYTimes on ethanol in Hawaii.  I think it ties in well to this one, and the one I wrote last July about renewable energy in Maui.

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SNL: All the financial planning advice you’ll ever need

I usually stick to advice on investing, but if you don’t have any money to invest, or if you’re up to your eyeballs in debt, what should you do?

This Saturday Night Live clip answers that question.

I’m still laughing.

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Where and How to Look for Mispriced Securities

Part I of my series on how small investors might go about beating the market is up on AltEnergy Stocks. I focus on how to exploit two weaknesses of institutional money management, large investors’ greater need for liquidity, and the tendency to miss the forest for the trees: too much emphasis on the numeric side of valuation, and not enough on big picture thinking.

You can read the new column here, and, in case you missed it, the first part of the series is here.

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Divestment from Sudan

Monday I was speaking to a client who brought up some concerns about investments in Sudan/Darfur. Mia Farrow had come to her workplace and given a talk about how Fidelity has investments in Darfur, and she was happy because I had had her sell all her Fidelity funds when she moved her assets into my care.

Because I use individual stocks, however, she wanted to be reassured that she didn’t own any companies which do business there. Since I don’t invest in oil companies as a general rule, and most of the companies doing business there are involved in oil, I knew she wasn’t overly exposed to the country, but I wanted to check for some of the large conglomerates I inculded in her portfolio as part of my blue chip alternative energy strategy.

It turns out Amherst College has published it’s list of companies they won’t invest in because of investments in Sudan, and I thought this list would be useful to those of my readers who manage their own portfolios using individual stocks.

Here’s the current list:

    Alcatel SA
    Alstom S.A.
    Bharat Heavy Electricals Limited
    China National Petroleum Corp. (PetroChina and CNPC Hong Kong Ltd)
    China Petroleum and Chemical Corp. (Sinopec and Sinopec Shanghai)
    Dong Feng Automotive Company Ltd.
    Harbin Power Equipment Co. Ltd
    Lundin International SA
    Muhibbah Petrochemical Engineering Sdn Bhd
    Nam Fatt Co. Bhd
    Oil & Natural Gas Co. Ltd. (ONGC)
    Ranhill Bhd
    PECD Berhard
    PETRONAS and subsidiaries: PETRONAS Dagangan BHD, PETRONAS Gas BHD and MISC Berhad
    Schlumberger Ltd.
    Sumatec Resources (IR OilRigs International Ltd)
    Videocon Industries Ltd.
    Weir Group PLC (Weir Pumps Ltd.)

The original list included two companies I like because of their electricity transmission businesses, so I was happy to see that both Siemens and ABB SA had pulled out of the country, which gives me one more reason to like them both.

UPDATE 4/10/07

I just received an email from Max Croes at Sudan Divestment Task Force. They have their own, more in depth list developed in conjunction with Calvert. You can get an updated list from them by emailing, and much more useful infromation is on their web site.

They use more nuanced critera:

    1. Has a business relationship with the government, a government-created project, or companies affiliated with a government-created project; AND

    2. Provides little benefit to the disadvantaged populations of Sudan; AND

    3. Has not developed a substantial business-practice policy that acknowledges and deals with the fact that the company may be inadvertently contributing to the Sudanese government’s genocidal capacity.

UPDATE 4/14/07

And now we hear that The New York Times, CNN, Newsweek, Business Week and the Boston Globe all turned down anti-Fidelity ads sponsored by the Save Darfur Coalition.

My thought: Fidelity is a BIG advertiser.

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Colorado Renewable Energy Conference, June 8-10, 2007

CREC logo Next month is the annual Colorado Renewable Energy Conference, held this year from June 8- 10, 2007 at the Steamboat Grand Hotel in Steamboat Springs, Colorado. Keynote speakers are Dr. Chuck Kutscher and Patty Limerick.

CREC is a great place to fnd out what’s happeninging renewable energy in Colorado, and to network with people in the business here.

If you’re really desperate for something to do Saturday Evening from 4-5pm, you can go to a panel led by some guy named “Dr. Tom Konrad” on “Investing in Renewable Energy Stocks.” If you’re lucky, it will be dark in the back of the room and you can take a nice nap.

CREC 2007 Flyer
More info

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Wal-Mart completes first stage of Solar RFP

Today Wal-Mart Stores, Inc. announced a major purchase of solar power from three solar power providers, BP Solar (NYSE:BP), SunEdison LLC, and PowerLight, a subsidiary of SunPower Corporation (NASDAQGM: SPWR), for 22 combined Wal-Mart stores, Sam’s Clubs and a distribution center in Hawaii and California.

Back in December, when Wal-Mart first put out the RFP, I predicted that SunEdision would participate, and that the solar utility model (where you don’t own the panels, but rather contract for solar power) would continue to gain steam. I think we can take this to mean that BP Solar, Powerlight, and SunEdison are very serious about pursuing this model, and also that they are serious about supplying solar power at a reasonable price. Otherwise, they wouldn’t be doing business with Wal-Mart.

For more of my thoughts on this business model, see my original article.

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Where I find my Alpha

This week and next I’m taking a break from my usual analysis of some aspect of renewable energy. I’ve been studying hard for the second Chartered Financial Analyst® exam, and it has gotten me thinking about my investment philosphy. Why, do I, as a lone investment manager feel that I can beat the market, which essentially means making better judgements about stocks than all the other extremely bright an well funded people looking at the same stocks?

My answer is that large money managers are constrained by who they are: They have a lot of money, so they cannot effectively invest in small, thinly traded securities, and I also think that many institutions have a quantitative bias: they tend to use matematical models for valuing stocks. But mathematics has blind spots, and numbers cannot describe every truth about the world, or about companies, so I think that there is more potential for an individual to spot mispriced securities where the big managers can’t look: being a big fish in a little pond, as it were.

Here is Part I on “Beating the Market.”

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