A Riches to Rags Story

A Riches to Rags Story

The Panic of 1893

An Attractive Alternative Energy Stock

Visiting the beautiful little city of Boulder, Colorado recently, my wife and I stumbled on this extravagant little house.

Named the Arnett-Fullen house for its first and subsequent owners, it’s the most iconic historic home in Boulder, Colorado, and its story is interesting.

It starts with Anthony Arnett, who immigrated from France in 1828, married a girl from Illinois, and made a fortune in mining and real estate.

His son Willamette tried to duplicate his father’s success, but proved far more skilled at spending money than making it.

Willamette was a snappy dresser, and fond of entertaining, but the biggest monument to his character is the house, which was built at a cost of some $4,000 between the years of 1877 and 1882-roughly twice the cost of comparable houses at the time.

With ornate ironworks brought from the East Coast by train, it was the first house in town with an indoor residential bathing room, and soon after became the first with central heating.

But-just 10 years later-Arnett fell on tough times.

Granted, it wasn’t entirely his fault.

Arnett was simply one of the most visible participants in the region’s economic boom. As in any boom, speculators got a little carried away.

And the boom was exaggerated, particularly in Colorado, by the soaring price of silver, which was fueled by the 1878 Bland-Allison Act and the 1890 Sherman Silver Purchase Act, both of which required the federal government to buy silver.

When the government increases demand, the market tends to increase supply. Thus, more silver mines were opened up, more railroads were built to these mines, and the supply of silver grew.

The Panic of 1893

Eventually, the oversupply of silver led to plummeting prices, which led mines to close, which brought railroad bankruptcies, which brought bank failures.

And suddenly, anyone who had invested in, or leveraged their exposure to, silver and railroads, experienced a rapid reversal of fortune (just as in our recent housing bubble and its subsequent deflation).

In total, over 500 banks and 15,000 companies failed, including the Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad.

The stock market dropped 40% in seven months.

The specifics of Arnett’s situation are not known, but given his penchant for living large, it’s natural to assume that his debts outweighed his assets.

So what did he do?

He headed to the Klondike in the late 1890s, hoping to reverse his fortune.

And in 1891 he died there, penniless, at the age of 52.

As to the house, it’s endured quite well, and today it’s owned by Historic Boulder, which seems to take good care of it.

Final Trivial Fact: Our popular concept of the deserted Victorian haunted house has its roots in that Panic of 1893, which left thousands of homeowners all across the country-just like Willamette Arnett-incapable of holding onto or maintaining their recently built homes.

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So what can we learn from the tale of Willamette Arnett?

Well, the same old lessons, of course.

Don’t spend more than you earn.

Save for a rainy day.

And, the greater the boom, the greater the probability that there’s a painful correction just around the corner.

Which brings me to today’s stock.

Yieldcos and SolarCity (SCTY)

Over the past year, investors have fallen in love with the concept of yieldcos.

Yieldcos are investment vehicles similar to Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs). They hold the fixed assets of a business and use them to generate cash for the riskier parts of the business, rewarding investors with a steady flow of dividends.

These vehicles generally don’t pay taxes; the dividends are taxed at the investor level.

MLPs generally serve the traditional (oil, gas and coal) energy industries, while REITs generally serve the real estate industry. Yieldcos serve the alternative energy industry; early yieldcos focused on hydroelectric power and wind power, but today most of the action is in solar power.

For the alternative energy industry, which now has at least eight yieldcos yielding between 1.8% and 5.5%, these new vehicles provide a low-cost way to raise capital. For investors, they offer a steady stream of dividends, along with the potential for growth as the industry grows.

Overall, it’s a good thing.

Of course, once upon a time, MLPs and REITs were a good thing, and early investors in those vehicles did quite well. But excesses developed (just as in silver and railroads in Willamette Arnett’s era) and now there’s very little excitement about them.

But that fate is far in the future for yieldcos; today, the sector is still very young and I’m sure I’ll be writing more about them in the future.

But I’m not recommending one today, and the reason is this.

Short-term, some of these yieldco stocks, like Terraform Power (TERP), look a little high priced. With growing excitement about the industry, and buyers jumping in, I think a small correction (at least) is quite probable.

So what I’m recommending today is SolarCity (SCTY), a leading installer of solar energy systems, with operations in 15 states but no associated yieldco-yet.

SolarCity is big enough ($255 million in revenues last year) and growing fast enough. Revenues mushroomed 56% in 2014 after growing 29% in 2013.

But the company is not yet profitable, primarily because of all the assets it owns that are sitting on customers’ roofs. SolarCity has securitized some of these; the latest group of notes pays interest of 4.59% and matures in 2022.

But it hasn’t made any noise about forming a yieldco, and I think it might.

If it does, I think the stock is likely to respond well.

And if the company doesn’t join the yieldco parade, I still like the stock here.

You see, SCTY was a hot stock from its December 2012 IPO through early 2014; over 15 months, the stock zoomed 1,004%, peaking at 88.35.

And in the year since, SCTY has been cooling off, building a base at 45 (nearly half its peak price) and setting the stage for a renewed advance that is bound to begin eventually, yieldco or not.

In short, risk is low, and the stock is ready to move.

So, you could simply jump in and buy the stock here; it’s trading right at its 50-week moving average.

But even better would be to become a regular reader of Cabot Top Ten Trader, where every Monday, Cabot growth investing expert Mike Cintolo presents the market’s 10 strongest stocks. Mike has recommended SCTY before, and if the stock gets going, you can be sure he’ll recommend it again.

For details, click here. 

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Chief Analyst, Cabot Stock of the Month and
Publisher, Cabot Wealth Advisory

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