Go Long, Not Short With Great Wind Power Stock

 
Ten days ago I wrote an article arguing that big money from professional sports had turned many colleges and high schools into feeder programs for the sports industry, to the detriment of both academics and taxpayers.

The feedback was substantial, particularly from people with experience in academia, and I've reproduced some of the best below.

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No New Taxes

"Dear Mr. Lutts:

I can appreciate your consternation regarding high school and college "contributions" to professional sports. But, rather than come up with another TAX scheme, (which seems to turn all of us into losers somehow) maybe major league sports could be the contributors to the schools. Certainly they could pay the six and seven figure salaries for the so-called winning teams coaches that generate the professional players.

Frankly, I am more disappointed in the professional teams that take a free ride on the cities that are building the stadiums and coliseums in which they play their games.  Not everyone is a sports fan like myself. My wife could care less how the Chargers or the Padres are doing.  If all of the citizens of San Diego showed up at Qualcomm Stadium, the walls would fall down! Most of them, even though they pay taxes, can't afford tickets. It's too bad they get stuck with their "fair share" of the bill.

Back to the high schools and colleges.  Several years ago, I managed a hotel in Phoenix that hosted the minor league teams of the Padres during spring training. There were so many hopefuls that just didn't make it through that four to six weeks.  I can't tell you how many really great athletes I saw that simply didn't have the right stuff to make it to the "big show."

To my knowledge, all of the teams in MLB have a player development program that hones the skills of the new players. Most play for years without even getting a chance to make a big league team.  When you hear an announcer say, "They picked this young pitcher right out of high school," you know he's very special.

Finally, we have a Republican governor here in California who has been trying to save the taxpayers from higher taxes.  He is at odds with a powerful and omnipotent teachers union.  School programs have suffered.  And don't you know, it is never the teachers; it is always the athletic programs with the axe held up to their ears. The last thing I want to see is a tax on a dwindling number of high school sports programs.

M.O."

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Held Hostage

"Dear Mr. Lutts,

Thank you for all the tips and thoughts you share and the logic behind them. Your idea about education subsidizing sports was insightful. I agree with this thesis, and would like to add that these franchises also hold their local municipalities hostage to pay for new arenas regularly. At least this is true of Portland's Trailblazers and San Diego's Chargers.

Thanks again, loyal subscriber

R.O.

San Diego, California"

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MacArthur's Words of Wisdom

"In records (sic) to high school athletics, you are ignorant!!

HS sports are the cheapest expense in education and probably teach the most.

Find out what General MacArthur said about athletics at West Point.

Your friend,
C.H.
Florida"

(The most relevant quotation I could find by General Douglas MacArthur was this: "On the fields of friendly strife are sown the seeds that on other days and other fields will bear the fruits of victory."  I agree that amateur athletics programs can be great preparation for life, teaching the value of teamwork and providing experience in both winning and losing ... but I don't believe MacArthur, 60 years ago, meant to defend the unforeseen influence of professional sports on the amateur experience.)

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Favoring a Club System

"Hi Tim,

I agree with you 100% about college athletics. I'm a sports fan but I don't think preparing athletes for the pros should be the business of educational institutions. I would favor a club system like they have for soccer teams in Europe. I don't think there's much hope of changing the current system. It's too ingrained in our culture. Thanks for saying something that is sure to ruffle some feathers.

B. B.
Oregon"

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Irrational Fans

"I live in a big ten (I won't capitalize that!) university town and am amazed and appalled and very irritated at how important the football and basketball scores are, how much the coaches are paid, how the drunken fans clutter up the town every other autumn Saturday etc.  The number of times the big jocks get into trouble for rape, robbery, drunk driving, etc. etc. doesn't seem to bother the fans.

Please don't use my name.  I might get lynched by people who wear school-colored everything--probably even underwear.  Or lose friends who are actually nice people despite their irrational fanship.

M. B."

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In the Education Business

"Tim,

I have been a fan of college basketball at my alma mater for the past fifteen years. I have purchased tickets and made donations to the school each year. However I fully agree with you that colleges and universities are in the education business not the sports business. I would hate to see college basketball change, but how can a school justify paying the basketball coach $1.5 million a year to bring a winning program to your school, while the engineering professor makes $200,000 in the later portions of his career? Some people believe that having a winning program means more money for the school. But I believe that most colleges make substantial returns on men's basketball and football programs, these excess funds cover the school's cost for the other sports programs. My Alma mater used support from the state government to build a new arena for the basketball team. How could they justify taking $200 million of taxpayer dollars to build a tax-exempt arena for 20 games a year? I know my company would not spend the money in this fashion, when they have stockholders to answer to.

B. C."

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Book Recommendation

"I recommend a book entitled "Counterfeit Amateurs" by Allen Sack as an excellent history of the gradual professionalization of amateur athletics in this country.

M. M.
California"

(Amazon's profile says, "Allen Sack was a highly recruited athlete out of high school, a star quarterback and basketball player in a small town near Philadelphia, and he went on to become a member of Notre Dame's 1966 national championship football team. While drafted for the pros, he chose instead to go to graduate school, in Sociology at Penn State, where he became interested in the sociology of sports, teaching in the Department of Sociology at the University of New Haven for many years until he became Professor of Management in 1991. He has been Director of the Sports Management Program there since 2001. ... In "Counterfeit Amateurs," Sack brings together in a compelling way both his personal story of life as a highly recruited athlete out of high school and a football player at Notre Dame under legendary coach Ara Parseghian and his fight, since then, as a scholar-activist against what he calls the "academic capitalism" of the system under current NCAA rules. )

The book been added on my summer reading list, and that ends--for now--the amateur athletics discussion, though I do have some thoughts on the Olympics I promise to share soon.

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Betting on a Drop

On the investment front, my topic today is short-selling.

Short-selling is a way to bet that a certain stock will be lower in the future.   Basically you sell a stock that you don't own in the expectation that it will decline and you can buy it (cover) at a lower price in the future.  It's just like buying low and selling high, except that you do it in reverse order.

At Cabot, we don't have any official recommendations for short-selling, in part because interest in the topic is far smaller than it is for traditional long investing, and in part because it's more difficult.

One, fear is a more intense emotion than greed, and thus big drops tend to happen quickly.  That means your timing when shorting must be very precise, which is difficult for even the best professionals.

Two, the mathematics of the proposition are less attractive.  When you go long, the worst you can do is lose all your money; the best you can do is unlimited gains, 10-fold, 20-fold and more.  But when you sell short, the best you can do is double your money (less commissions.)  The worst you can do is unlimited; you can lose 10 or 20 times your money!

Another factor, immeasurable but important, is psychological.  We prefer to hone our skills in going long, discovering great growth companies and buying their stocks at the right time.  To contaminate that thinking by looking for the opposite would hurt our efforts in the main, most profitable avenue of investing, and we think it's not worth it.

Advice on Short-Selling

However, if you're determined to sell short, I do have a little advice.

-- Target companies with declining sales and earnings.

-- Target stocks of large companies that have declining public and institutional perception.  That creates a large supply of selling pressure.  (Can you think of any automobile manufacturers or airline companies that quality?)

-- Only sell short when the market's intermediate-term trend is down.

-- Never (never!) try to pick the top; only sell short stocks that are in confirmed downtrends.

-- Pick your sell point carefully, trying to sell after the end of a normal rally upward, preferably to the declining 50-day moving average.

-- Don't get greedy.  When you have a decent profit after an extended period of downside action, take it.

-- And finally, cut all losses short.  If the stock continues to rally after you short, cut your loss at 10% to 15%.

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American Superconductor: Go Long, Not Short

The most dangerous way to sell short is to pick a hot little stock that's "way overvalued" and bet that it will come down.

Such a case in recent weeks has been American Superconductor (AMSC), a company that for years focused on the hard-to-develop market for low-temperature transmission of high-voltage power but recently found new life by entering the market for wind energy.

Back on May 1, American Superconductor was featured in Cabot Green Investor, where editor Brendan Coffey wrote the following:

"Originally founded to develop highly conductive wiring for power systems, American Superconductor has used that expertise to expand into a few promising areas, the most significant of which is wind turbines. While American Superconductor already had some exposure to the business, it transformed itself into a wind energy powerhouse with the acquisition of Austrian firm Windtec in early 2007 ...

The Windtec division designs wind turbines that other companies incorporate into the wind towers they build on behalf of wind farm customers. ...The arrangement is a lot like razors-you buy the razor itself, but then you have to buy the blades repeatedly in order to be able to use it. As Gillette found out many years ago, there's money to be made in selling the razor, but much better profits to be found in the blades.

American Superconductor has other major clients with favorable arrangements, including Germany's Fuhrlander and Canada's AAER. It also just announced its first deal in India, with Ghodawat Industries, which will market turbines based on Windtec designs to India, the Middle East and Africa ...

Overall, the company is focusing growth in two regions-North America and China. In the U.S., utilities are expected to double their wind power spending this year, driven by a federal production tax credit of 2 cents per kilowatt-hour. China is expected to ramp up even faster; by 2020, China wants to increase its wind energy capacity more than 13-fold to 80 gigawatts."

Back then, with the stock trading a 26, Brendan rated AMSC a buy, writing, "Resistance is seen at $28.50 and $32, with good support seen around $24 and then around the $20 mark."

Since then, the stock has been on fire.  Friday it closed at 43, after pulling back from a high of 45 two weeks before.

Investing Opportunities in Alternatives

And here's where the short-selling story comes in.  (I hesitate to spend much time on this, because, as I said, it detracts from our main focus, but here it is.)  There's a firm named Citron, run by a man named Lemon (get it?), that specializes in short-selling, and in publicizing (criticizing) the firms it is shorting in order to help drive their prices down.  American Superconductor is one of Citron's targets.

Apparently, Lemon questions whether the orders American Superconductor professes to have or expects to have will truly bear fruit.

Now, some people, reading his critique of the company, will sell their shares, or even sell short.  But others, believing that the company is truly in the early stages of a major growth wave, will buy.  Me?  I don't believe or disbelieve anyone; I believe the chart.  Remember, the goal is not to be right; the goal is to make money.  Think about that.  Tattoo it on your chest if you want.  (I'm not into tattoos.)

So what does the chart say?  For the past five months, AMSC's chart, in climbing from 16 to 45, has rewarded investors who were long on the stock, and it has punished short-sellers ... despite the broad market being unsupportive.  The chart, which typically reflects the opinions of all investors with an interest in the stock, appears to be telling us the future is bright for this company.

Volatility in the stock, however, is likely to be substantial for some time to come.  If you're inclined to buy, I recommend that you choose your entry point carefully.  Today, the stock is consolidating under resistance at 45, and there's support at 37, though a breakdown below 40 might kill the short-term momentum.

Finally, I want to close with this one big thought.  There's a lot of talk about the price of oil today ... perhaps too much.  Everyone wants to know when the price will decline ... or whether it will stay up here.  I ask a different question.  I ask, "Given the new reality that limited supplies of energy and growing demand make high energy prices likely in the years ahead, what are the investing opportunities in alternatives?"  I think AMSC is one of them.

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Editor's Note: You can get further advice on investing in Green stocks with great growth potential by taking a trial subscription to Cabot Green Investor, which uses the same time-tested growth investing system as our flagship Cabot Market Letter.  Since its first issue in January, Editor Brendan Coffey has brought subscribers double-digit profits in Clean Harbors (CLHB), Gushan Environmental (GU), Sims Group (SMS) and more.  Nor bad for a year when the Dow is down almost 11%!  To start your own no-risk trial subscription, simply click the link below.

http://www.cabot.net/info/cgi/cgiii02.aspx?source=wc02

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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Timothy Lutts can be found on Google Plus.

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