The Green Dragon and Others
Two Renewable Energy Stock Ideas
Recently, word came out about something that has not happened in over a century: The United States is no longer the world’s largest energy consumer. That, held by the U.S. since at least the first decade of the 20th century, now goes to China, which used a total of 2.25 billion tons of oil equivalent energy in 2009. The U.S. used 2.17 billion tons, according to the International Energy Agency.
In the time the U.S. has been the predominant energy consumer, U.S. Gross National Product (GNP) grew from $737 billion (all figures are in today’s dollars) to $14.7 trillion today and GNP per person from $6,629 to $47,240. It’s no surprise that increased energy used to build railroads then factories and, more recently, medical and technology hubs fueled that growth.
We don’t know what China’s GNP was in 1900, but in 1980 it was $632 billion, while last year it topped $7.96 trillion. As in the U.S., there is also a close correlation between China’s economic growth and its rising energy use. In 1980, China used the equivalent of 610 kilograms of oil per person, while last year the country used 1,570 kilograms per person.
At the risk of throwing too many numbers at you, I want to point out just two more that I think are telling: China’s per capita GNP last year was $6,010, just 13% of America’s. The U.S. used five times more energy per person than China did last year, a whopping 7,700 kilograms. The question is: What happens to energy usage as Chinese GNP continues to grow and the average person there gains the comforts of the Western lifestyle, from flat panel televisions to cars to fully heated homes? The answer is obvious: China’s energy usage is going to continue to grow sharply.
China’s government recognizes this too. It also sees two problems on the horizon related to its growth: Tight world oil supplies and environmental troubles. By 2020, China is expected to import as much oil as the U.S., a significant shift considering that less than 20 years ago, China was a major oil exporter. While China could burn more of its massive coal reserves to make up the difference, its air quality is already so bad officials are in the midst of shutting down the dirtiest factories and coal plants. A New Yorker columnist noted last year that Beijing’s air quality frequently hits 500 on a scale of 1 to 500, with 1 being the cleanest air. By contrast, U.S. cities consider their air dirty at 100, rarely hitting as high as 300 and then only when surrounded by forest fires.
For those reasons—fast growth, tight oil supplies and dire air quality—the Chinese government has launched a plan for a massive renewable energy program that aims to generate 15% of its energy needs from Green energy by 2020. And that 15% is just the official target. Between 18% and 20% is the unofficial target bandied about by officials in Chinese state-controlled media, with some Westerners in China saying they hear the true goal is as high as 30%.
It almost goes without saying that if China comes close to even its official 15% figure, it will make the Red Dragon a Green dragon too. By official Chinese goals for solar, annual installation will need to quintuple in the next nine-and-a-half years to 1.8 GW, wind will need to grow nearly 10-fold to 150 GW capacity from 16 GW in 2009, nuclear will need to grow almost 1,000% and the country’s already extensive hydroelectric capacity will have to double. China will be investing at least $1 trillion to fund Green power growth this decade.
China isn’t the only country legislating a greater percentage of renewables be a part of its energy mix. The European Union, currently the world’s largest solar power market by far (Germany alone is a 3 GW annual market), still gets just 7% of its energy from Green power. It has mandated that by 2020, one-fifth of its power come from renewables.
Here in the U.S., we don’t have a firm federal standard and the government is spending just $5 billion on Green research and development. Still, bellwether states have mandated their own standards. California, for instance, is aiming to get 33% of it energy from renewable sources by 2020 (up from 12% today), New York is aiming for 29% by 2020 from 3% today, and Colorado is setting it sights on 33% by 2020 from 6%, according to National Public Radio.
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A popular saying around the Green investing world right now is that Green stocks are at the same stage as Microsoft was when it released Windows 1.0 or where Motorola was when it rolled out its $4,000 DynaTac mobile phone. With mandates like these in the world’s three largest economies, that hardly seems an exaggeration.
Today I have two suggestions for stocks that are already experiencing the initial wave of all that investment. One is a Chinese solar maker with a good European client base; the other is an American company with a dominant foothold in the Chinese wind industry.
The solar company is ReneSola (SOL), a solar wafer maker that is vertically integrated, meaning the company controls its product line from sourcing its own polysilicon through fashioning its own solar panels. It’s a fast-growing company that has gone from its founding in 2005 to being the third-largest maker of solar wafers in the world this year.
Margins are improving as the cost of the raw material for panels has been falling sharply. Its other costs are dropping too, thanks to manufacturing efficiencies (its producing larger wafers) and more energy-efficient factories (slashing high electric costs). ReneSola expects to hit record sales this year of $795 million and I expect it to do even better at around $1 billion in sales for 2010. Cabot Green Investor bought ReneSola shares at 7.45 in July, and shares have since rallied 40% to over 10. With estimated earnings of $1.26 per share for the current year, ReneSola shares are still cheap at just eight times earnings.
The other company is American Superconductor (AMSC). It’s a Massachusetts-based maker of highly conductive utility-grade cable being used everywhere from the Tres Amigas project in New Mexico to better interlink the U.S. electrical grid to Seoul, Korea’s grid as part of that country’s $80 billion five-year plan to invest in Green energy.
Those are excellent deals, but the real value in American Superconductor is its burgeoning business designing wind turbines, which grows out of a small Austrian design firm it purchased a few years ago. Among its 12 major turbine customers are five Chinese companies, including Sinovel, the dominant leader in turbines in China. As part of all of American Superconductor’s licensing deals in China and elsewhere, it has the right to sell the electrical systems for every turbine built, a business model like the razor/razor blade model that built Gillette so successfully.
Since the start of 2008, the company has had 13 straight quarters of increasing sales. It also boasts six straight quarters of net income and for its fiscal 2010, which started April 1 of this year, management projects sales growth over 30% to $430 million with net income surging 75% to $1.25 a share. The Cabot Green Investor model portfolio bought AMSC in May 2009 and sold in February 2010 during the market correction, making a profit of 40% on the position. We bought the stock again this April at 31. It’s down a little, at 29, which makes for an attractive entry point.
The market has held both stocks down out of concern that a double-dip recession is coming. Whether or not it is (and I’m with Warren Buffet in believing it’s not coming), the Green rally is only just starting.
Click here to learn more about ReneSola, American Superconductor and other leading stocks featured in Cabot Green Investor.
All the best,
For Cabot Wealth Advisory
P.S. This week brought the first episode of the Cabot Chart School by Cabot Market Letter Editor Michael Cintolo. Watch the video to learn how to read stock charts like a professional investor!