Being Thankful, Even for the Government
Simple Math, Simple Results
A Stock Benefiting from Wind, Natural Gas and the iPhone
I make a concerted effort to focus on the positive of life. Like most folks, I find that’s sometimes easier said than done, but it’s worth working at. Thanksgiving, of course, is an ideal time to reflect on all there is to be thankful for. It’s not hard for me this year: I have two ebullient girls, Lila, nearly 3, and Phoebe, 13-months, and a great wife of 10 years. Now that the weather has turned chilly, Lila can’t stop talking about wanting to go skiing again, while Phoebe just can’t stop talking. One of my brothers beat ampullary cancer this summer; that’s a big one on the thankful list. There’s my own health, of course, even those 20 extra pounds I carry I’m grateful for because they come from abundance much of the world cannot enjoy.
I’m thankful for the people I work with at my publisher Cabot Heritage and my subscribers and readers, such as yourself. Lots of good things. And less important things too: the Yankees, the national champion Boston College hockey squad, books printed on paper, sparkling wine, the fact people still admire my baseball (now softball) swing. I’m even thankful for the government, even if its members act more and more like an embarrassing relative you have to tolerate at holiday time.
Let me focus on where we are now, as investors, with that government. As Editor of the Cabot Green Investor, a newsletter dedicated to alternative energy, energy efficiency and organic lifestyle stocks, I’ve been hearing some concern about the fate of Green with the results of the November election. In fact, according to the New York Times, a candidate to head the House Energy committee, Congressman John Shimkus, dismisses global warming on biblical grounds: God promised he wouldn’t destroy the world by flood again, so the icecaps can’t melt. Certainly it hasn’t been hard to divine the Republicans aren’t fully on board with combating global warming and encouraging alternative energy. But I am here to tell you an important thing: To make money in Green stocks, we don’t need the government.
Don’t get me wrong. Certainly the government can help and I fall fairly squarely in the camp that alternative energy can be an economic driver superior to the Internet if we as a nation focus on it. We’ve done some of that recently, for instance, $100 billion of the stimulus passed in 2008 is directed to Green energy and energy efficiency. It is the largest energy bill ever passed in American history, according to respected energy analyst Daniel Yergin (who won a Pulitzer prize for his excellent book on oil, The Prize).
We’re seeing great benefits from that, especially in next-generation batteries—an area American businesses will be a dominant leader in within two years. Of course, the government didn’t help out in other ways. One year ago a lot of very smart money on Wall Street was betting heavily on two things happening in 2010: Carbon cap-and-trade and healthy incentives for trucks to use natural gas, since it burns over 70% cleaner than diesel. Neither happened, and with the likes of Shimkus having a say, we shouldn’t wait for them.
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So why am I so optimistic about Green right now? Because even during a year like this one, with its “flash crash,” Irish bank trouble and our own battle against (depending on the time of year) deflation/stagflation/inflation, we’ve done pretty well. The Green portfolio of my newsletter, Cabot Green Investor, is up 14% year-to-date (as of end of day 11/18/10), including open positions. That’s even better when you look at the market. The best four Green mutual funds, for instance, are down an average of 5% this year, with the best not even close to our performance. The Green stock benchmark, the WilderHill Clean Energy Index, is down 11% year-to-date.
I credit the combination of the time-tested Cabot method for market timing and the hard fundamental research we perform. Each issue, subscribers get our market outlook, updates and two featured Green stocks with out research, our opinion, and a discussion of technical indicators and whether—and when—they tell us to buy.
One example is ReneSola (SOL). We bought the Chinese solar panel maker in July at 7 when we saw two major factors converge. One was trading data telling us the market was starting to turn bullish on the stock again, including the fact ReneSola finally pushed over its 50-day moving average for the first time in a year. The other was fundamental. As we wrote at the time: “Recently, it was trading at a price-to-earnings (current 2010) ratio of under 8—a level more appropriate for a second-tier coal stock—and that was before the company adjusted its revenue guidance upward last Thursday for the second time in the past three months.”
We sold our position in ReneSola two weeks ago when we saw a high-volume break of support at the 50-day moving average and walked away with a 54% profit, one of the highest gainers in the portfolio this year. As of this writing, shares have fallen another 22% since we advised subscribers to sell. ReneSola looks to be a good company, and we may very well buy it again one day, but we know from the history of the markets that it could be a very long time before we’d be back at a 50%-plus gain in the stock again if we sat on it.
We’ve had a few losers too this year—that’s unavoidable. But we have a policy of selling to cut our losses and preserve our ammunition to fight another day. In general, when a stock falls 20% from our purchase price, we sell. Why is this important? Simple math tells the story. Lose 20% on a $1,000 and you have to see gains on the remaining $800 of 25% to get back to break-even. Lose 50% and you need gains of 100% to get back to break-even.
So if you bought the WilderHill Clean Energy Index at the start of the year you now have to hope it gains 13% to get back to your starting point and 28% to catch up to where we are with the Cabot Green portfolio. Covering the past three years since we launched the newsletter, the WilderHill needs to gain 172% and the four best mutual funds need to gain 67% to catch up to where the Cabot Green Investor portfolio is now. And trust me, we’re not standing still. And for that I am thankful too.
I am also optimistic for Green because of a number of factors converging in coming months and years. I’ve discussed a lot of them at length in prior columns so I won’t belabor them here, but they include some fantastic technological innovations in Green, rising oil prices thanks to coming demand and the weakening dollar and the fact many governments do recognize the dangers of global warming and the other environmental hazards fossil fuels create. Here’s another: $33 trillion in new spending will be needed in the next two decades to meet world energy needs, according to the recently released World Energy Outlook from the International Energy Agency. That’s a lot of opportunity for Green and it brings me to my stock suggestion for this edition: MasTec (MTZ).
MasTec is a long-established firm out of Florida that had been known mainly for installing DirecTV satellite dishes. Management made a successful effort to de-emphasize that business three years ago, so while DirecTV sales continue to grow, today they are far less significant as a percentage of sales. Powering growth are Green areas such as building the electrical infrastructure for solar farms and wind turbines. In its latest quarter, four of MasTec’s top 10 customers were using the company for wind turbine projects and the company will claim 25% market share of the U.S. wind business this year. MasTec is also a growing player in constructing new natural gas pipelines. Through 2012, energy industry projections are that 6,000 miles of new pipeline will need to be built. MasTec expects to be competitive in bidding for every one of those $1 billion or so in projects.
Adding to business nicely is booming business in helping AT&T expand its cell phone infrastructure to meet iPhone customer demand. The technicals look promising too, with shares recently experiencing a crossover of the two upwardly trending moving averages, often a very bullish signal.
Here’s hoping that will be one more thing to be thankful for. Whatever you’re doing this Thanksgiving and whatever your circumstance, I hope you take the time to reflect on the good fortune life has brought you.
All the best,
For Cabot Wealth Advisory
P.S. Cabot Green Investor, is up 14% year-to-date, including open positions. That’s even better when you look at the market. The best four Green mutual funds, are down an average of 5% this year and the Green stock benchmark, the WilderHill Clean Energy Index, is down 11% year-to-date. Learn more about this market-beating newsletter today!