Alternative Energy Wars - Investment Ideas
June 09 2011 - 8:00PM
Zacks
When our own Mr. Reitmeister went to Washington DC on Wednesday for
the White House's First Personal Finance Online Summit, he reported
back on the administration's "economic All Stars" team and their
initiatives to attack American challenges. Heather Zichal, Deputy
Assistant to the President for Energy and Climate Change, outlined
the battle plans for energy security.
Zichal noted that China has overtaken the US in
terms of energy consumption and that Obama's goal is to reduce net
oil imports by 1/3rd by 2025 with a simple three-pronged
approach:
- Expand domestic oil and gas production
- Encourage smarter consumption
- Energize the quest for alternative sources
What Are the Investment Opportunities?
The good news is that we are in a global megatrend
for energy that rewards those investors with their fingers on the
pulse of oil and gas companies creating earnings momentum.
Following Zacks #1 and #2 Rank stocks here for the past two years
has been a winning strategy that capitalized on the strong earnings
recovery of many E&P and integrated names.
The bad news is that because of our nation's
dependence on imported oil from unstable areas of the world, and
because $5 a gallon gasoline is a consumer-killer -- not to mention
the omni-present environmental concerns -- it is in every American
investor's best interest for us to find long-term alternative
solutions.
My focus since October has been on the opportunity
that could kill two birds, namely, the Natural Gas Act legislation
that would provide significant tax and investment incentives to
convert America's trucking fleets to run on natural gas engines.
Why is this such a big deal?
Because we have an incredible abundance of domestic
natural gas. And because it is extraordinarily cheap. And because
it has such an extremely low environmental impact compared to oil
and gasoline production processes and emissions. Need I go on?
So I looked at lots of trades in natural gas
E&P firms like Chesapeake (CHK), EOG Resources
(EOG), Cimarex Energy (XEC) and Occidental Petroleum
(OXY), all of which are Zacks #3 Rank (hold) stocks.
And I also looked at the companies involved in
building the engines, conversion kits, and other infrastructure
necessary to use compressed natural gas (CNG) and liquefied natural
gas (LNG) in trucks and cars safely and efficiently:
Westport Innovations (WPRT): specializes in
building natural gas engines and has joint venture with Cummins
(CMI)
Clean Energy Fuels (CLNE): leading provider
of CNG and LNG products for transportation
Fuel Systems Solutions (FSYS): manufactures
products and systems that allow on-highway and off-highway engines
to operate on clean burning, gaseous fuels such as propane and
natural gas
Political Tipping Point
The problem with investing in these early growth
stage companies on the verge of a potentially explosive industry is
that it seems everything hinges on Congress "doing the right
thing." I put that in quotes because there is a big difference of
opinion about what "the right thing" is in Washington.
Initially, I assumed that natural gas economic
incentives were a no-brainer for our economy and environment and
that the only people standing in the way -- the Nat Gas Act
legislation has been pushed to the side at least twice in recent
years -- were big oil companies with a vested interest in the
status quo. Billionaire T. Boone Pickens seemed like the
archetypal, honest, plain-spoken, patriot who just wanted what was
best for his country.
But there is another economic angle on this besides
the vested interests of political lobbyists on either side. Last
month, four Republican lawmakers who had been co-sponsors of the
bill that Pickens helped engineer withdrew their support on mostly
philosophical grounds. In other words, it's not just crude oil vs.
nat gas. It's free market vs. more subsidies and potentially higher
taxes for some, if not all.
As Mr. Reitmeister asked Heather Zichal at the
White House, "How much does the Administration believe in the free
market to help solve our energy dependence issues?" If you had
asked me a few weeks ago, I would have said that we need government
to be the architect of an energy policy that creates good catalysts
and incentives, instead of just letting big oil run the show on de
facto incentives that are leading to higher prices, continued
foreign dependence, and ecological threats.
But Steve's point was simply that higher prices
should be a natural trigger for innovators to create solutions. We
experience this phenomena already as triple digit oil spurs
investment in tar sands exploration and solar alternatives. And
maybe the purest way really is the best way. Goodness knows we
don't need any more complicated tax laws or new subsidies for
industries in an era when the country has a debt and deficit
crisis.
Cummins Wins Either Way
Still, I think that natural economic incentives
that would drive the massive process of converting trucking fleets
to nat gas won't happen fast enough. Oil might have to go to $150 a
barrel to be the "trigger." And that's why I tend to favor
government assistance. But, since this is a debate I need to learn
more about, I will withhold final judgment and close simply with
the best investment idea in this space.
Since all four of the nat gas E&P firms
mentioned are Zacks #3 Rank (hold) stocks, not much stands out
there. If you own one, you might just as well keep it. Regarding
the engine makers and CNG/LNG providers, WPRT and FSYS are both #4
Rank (sell) stocks and should be avoided now, while CLNE is a #3
Rank.
The one company that does stand out is
Cummins (CMI), a Zacks #1 Ranks (strong buy) name. With
strongly profitable conventional engine divisions, it also has
exposure to the nat gas engine industry. If something significant
happens on the legislative front, CMI will likely capitalize since
they are firing on all cylinders anyway. See my article from last
week "Industrial Strength Economics: CAT and CMI" for more on their
earnings drivers in light of emerging markets demand.
When in doubt, don't risk investment capital just
to speculate on future wild cards. Go with the strength of dominant
global companies with the earnings momentum to prove it.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
CLEAN EGY FUELS (CLNE): Free Stock Analysis Report
CUMMINS INC (CMI): Free Stock Analysis Report
FUEL SYSTEM SOL (FSYS): Free Stock Analysis Report
WESTPORT INNOV (WPRT): Free Stock Analysis Report
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