Small Cap Strategist

Neste Renewable Diesel Plants Reveal Feedstock Channel

2012-03-02T14:16:00.000-05:00

Finland’s Neste Oil Corporation (NEF: F) brought its fourth renewable diesel plant on-line in September 2011, earning bragging rights to the world’s largest facility of its kind. Located at the Port of Rotterdam, the plant has the capacity to produce 800,000 metric tons of renewable diesel that Neste brands NExBTL and claims is the “cleanest and highest-quality renewable diesel on the market today.” Along with Neste’s three other plants already in operation in Finland and Singapore the fourth plant in Denmark brings Neste’s total production capacity to 2.0 million metric tons per year.

Start-up Date	Location	Capacity
September 2007	Porvoo, Finland	200,000 tons/year
September 2009	Porvoo, Finland	200,000 tons/year
November 2010	Singapore	800,000 tons/year
September 2011	Rotterdam, Denmark	800,000 tons/year

Neste’s augmentation of renewable fuel production capacity is also impressive against the total production capacity in the world. The Renewables 2011 report published by REN21 reported 19 billion liters in total renewable diesel production in 2010. Two of Neste’s plants came on-line subsequent to that production measure period, adding another 2.5 billion liters in production capacity and potentially increasing renewable fuel production by 13% if both its Singapore and Rotterdam plants operate at full capacity.

It is worth noting the location of Neste’s two largest plants - bustling ports with easy access to ocean and rail shipping lines. Leadership at Neste are not small thinkers. They apparently view the renewable energy industry the same way they have viewed the fossil fuel stream - globally. With access to rail and ocean shipping services, they are in a better position to source feedstock and distribute final production - in volume.

Neste positioning itself as a large producer of renewable fuel, begs the question of feedstock supply. Investment in upstream supply seems a logical next step after investment in production capacity. So far upstream supply has remained highly fragmented and localized and investment in the segment is limited to the large agriculture producers such as Archer Daniels Midland (ADM: NYSE) and Tyson Foods (TSN: NSYE).

In my view, investors need to consider upstream supply both in terms of potential bottleneck in the renewable fuels industry as well as an investment opportunity. As new production capacity comes on line, those who control the feedstock supply become more powerful in setting prices or in controlling ownership of production. Darling International (DAR: NYSE) is the largest independent food by-products recycler and presents a unique upstream play. Waste Management (WM: NYSE) is one of the largest handlers of municipal waste. I expect these two independent upstream suppliers to take on new value as renewable fuel production takes off.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a buy recommendation on DAR shares. DAR, WM, Neste, and ADM are included in Crystal Equity Research’s Alternative Energy Indices in the Waste-to-Energy, Ethanol and Renewable Diesel Groups of the Beach Boys Index.

Joule Pay-to-Play Ticket Costs $70 Million

2012-02-28T16:07:00.001-05:00

No less than an eclipse of known alternatives to fossil fuel is promised by the corporate website of Joule Unlimited, a private developer of renewable fuel technologies based in Massachusetts. Joule has been working a process using genetically engineered microorganisms - the exact nature of which is kept close to the Joule company vest - that will directly convert waste carbon dioxide to fuel such as ethanol or other chemicals.

Last month several unnamed investors bought “tickets’ totaling $70 million to see this eclipse take place. The private placement brings total capital raised to $110 million. Joule has a pilot plant in Leander, Texas but needs to demonstrate its process can scale to higher levels. The proceeds from the capital raise will be used to build a demonstration scale plant in Hobbs, New Mexico. Ultimately, the Hobbs site could be expanded to commercial production levels.

Note that both Leander and Hobbs are located in sunny climates, a key element in Joule’s SolarConverter system where its Helioculture platform is put to work. The company claims its direct production approach is more economical because it eliminates the expense of feedstocks. Perhaps more importantly the process is touted as lower cost because energy-intensive steps are eliminated and there is supposed to be no downstream processing required.

Joule claims to get 15,000 gals of diesel and 25,000 gallons of ethanol per acre. The company estimates its system can bring renewable fuels to market at $0.60 per gallon. However, in the fine print the company admits that this cost level is achievable only after subsidies are recognized.

Several private investors have paid-to-play so to speak in Joule’s game. The rest of use can play vicariously with no risk. We have placed Joule Unlimited in the Crystal Equity Research Beach Boys Index in the Biofuel Group and will be watching for an eclipse from Hobbs, New Mexico.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Texas Cows Inspire Terrabon BioFuel

2012-02-24T14:25:00.008-05:00

A self-described technology transfer company, Texas-based Terrabon (private) may be anything but the sidelines player seen in most technology licensors. As CEO Gary Luce described Terrabon's progress in a recent phone conversation, I could not help thinking Terrabon is headed down an operational track as a biofuel producer.

These days Luce and his team are waiting for approval of a loan guarantee by the U.S. Department of Agriculture. Loan proceeds will be used to build production facility that will turn municipal waste into jet fuel among other transport fuels. Luce suspects the Solyndra debacle in 2011 slowed the decision-making process at the USDA, but he is still hopeful an approval is around the corner yet in 2012. That would make it possible to initiate production in 2014 in the new facility designed to produce five million gallons of acetic acid per year.

Terrabon’s process has the usual fermentation tank in its demonstration plant, which has been operational since 2009. Not surprising for a company based in Texas, Terrabon based its production process on the wonders of a cow’s stomach. Cows are ruminants with four stomachs that do a phenomenal job in converting cellulosic matter like grass into organic acids. Terrabon’s patented process uses a mixed culture based on muck from the sea coast in the fermentation step. The acetic acids produced in Terrabon’s fermentation tank are converted to ketones and then to mixed secondary alcohols through a process called hydrogentation. The final step called oligomerization knits together the secondary alcohols into higher order alcohols with more carbon components, including drop-in renewable jet fuel.

Even if the USDA comes through with a loan guarantee, proceeds from the ensuing loan will only support the construction of an intermediate production facility. Terrabon will need additional capital to reach commercial scale production. A facility capable of producing 15 million to 17 million gallons of fuel per year is in the planning stages. So far the price tag is estimated at $150 million. Luce appears content to troll the private equity market for capital, leaving the initial public offering option on the table for a day when Terrabon is nearer positive cash flow.

I expect Terrabon to raise at least one more round in the private equity market and submit more applications for funding from various federal and state programs. For example, the company has been the recipient of support from Defense Advanced Research Projects Agency (DARPA). Also solid waste handler Waste Management, Inc. (WM: NYSE) and oil refiner Valero Energy, Inc. (VLO: NYSE) are strong supporters - and potential joint venture partners. Waste Management stands to gain from the cultivation of downstream demand for its wet waste volumes. Like every other refiner, Valero has a keen interest in sourcing drop-in renewable fuels. Finding a renewable fuel source near its refineries in Texas and Louisiana is just that much more appealing.

With deep pocketed friends like Valero and Waste Management, its seems more likely than not that Terrabon can continue in the private mode for several more years. I plan to continue watching. Terrabon is included in Crystal Equity Research's Beach Boys Index in the Waste-to-Energy Group.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Development Risk in Genomatica IPO

2012-02-21T14:23:00.002-05:00

Practice makes perfect! Renewable chemicals developer Genomatica, Inc. has filed with the SEC a series of amendments to its S-1 registration statement originally filed in August 2011. The most recent update was on February 13, 2012. The company needs capital to scale up production of two vital chemicals, butanediol (BDO) and butadiene. Genomatica technology supports production of at least a dozen or so other specialty chemicals.

The amended registration filings help chronicle the Genomatic’s accumulating relationships aimed at bringing its BDO production to the market. Early in 2011, Genomatic inked a non-binding memorandum of understanding with polyester king Gruppo Mossi and Ghisolfi. The two expect to produce BDO from sugars extracted from cellulosic feedstocks using the proprietary PROESA process technology owned by Mossi and Ghisolfi’s Chemtex subsidiary. The relationship seems to be building with a recent licensing of the PROESA technology by Genomatica. There is also a joint development agreement with Tate and Lyle Ingredients Americas, Inc. to jointly scale up the production of BDO from dextrose sugar feedstocks in North America. The most recent SEC filing describes a third joint venture and license agreement begun in December 2011 with Novamont Spa for commercial-scale production of BDO in Europe using Genomatica’s process technology.

Those three agreements cover the North America and Europe. However, Genomatica expects to be worldwide in reach and has been in negotiations with Mitsubishi Chemical Corporation for a joint commercial operation in Asia for the production of BDO also using the Genomatica process technology. The two are exclusive until June 2012.

What makes butanediol or BDO such a lucrative product is that it is a so-called “intermediate chemical” used in everyday products like athletic apparel, running shoes, electronics and automobiles. Genomatica’s S-1 filing suggests the world market is valued at approximately $4.0 billion. The market for butadiene appears to be an even more enticing. The company suggests that market is approximately $40 billion in value. The problem with these figures is that they are based on mid-2011 prices and 2009 demand levels. Despite the appearance of shakey market demand measures, it appears the market is sufficiently large to support profitable production levels as long as Genomatica’s production is good quality.

Genomatica management thinks they are ready technologically to get a piece of this pie. The company claims to have been producing BDO from dextrose sugar at demonstration scale since June 2011 at a plant located at a facility owned by its partner. The roadshow - if there ever is one - should give analysts and investors more insight into the economics underlying Genomatica’s business.

The S-1 registration statement and its many amendments provide a clue as to the reliability of whatever math will be presented in the usual roadshow power point presentation. Two of the most important sentences in Genomatica’s many filings: “We have successfully produced BDO at pilot scale and are now producing BDO using our process at demonstration scale at a plant located at an industrial site owned by our partner, Tate and Lyle. In order to produce commercial quantities of BDO using our processes, we will need to further refine our processes and maintain fermentation performance, such as rate, yield and titer, when producing BDO in those larger quantities.”

These two sentences mean investors in Genomatica’s IPO will be assuming a considerable amount of development risk - more than most investors expect when calling their broker and asking to get in the next big deal.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Genomatica is included in Crystal Equity Research’s Beach Boys Index in the Alternative Chemicals Group.

Gee! No Earnings at Gevo

2012-02-17T09:32:00.002-05:00

Gevo, Inc. (GEVO: Nasdaq) is expected to report its fourth quarter and year-end 2011 financial results on February 28^th after the market close. A conference call is scheduled for the same afternoon. There are a half dozen or so analysts following Gevo and the consensus among them is a loss of $0.49 per share on $16.5 million in total sales in the fourth quarter.

If the last four quarters is any indication, expect an even deeper loss than indicated by the consensus estimate. Gevo has failed to meet the average of its analyst following in any of the last four quarters. As an analyst myself I am quite sympathetic. You hear a story about a developmental stage company. By definition there are no precedents. So the analysts are left with all sorts of metrics provided by management, who by definition are flying blind because they have no precedents to go on either.

Gevo is trying to bring a renewable isobutanol product to the market. A laudable endeavor as this specialty chemical finds its way with its four carbon alcohol profile into myriad products like transportation fuel, plastics and paints. Unfortunately, Gevo has a ways to go before it reaches profitability.

So what should an investor pay for a stock in a company that is still needs a lot of red ink to reports its financial results? The stock is currently trading at 4.2 times trailing sales - making GEVO shares pricey to say the least. The analyst group is in wide disagreement on sales in the next year - low estimate is $43.5 million and the high is $142.0 million. The first is probably an estimate that has not been updated considering that the company will likely report near $60.0 million to $65.0 million in sales this year. In my view, the likelihood of 130% growth in sales is also not likely.

Even though GEVO shares are trading at $9.00 and change - well off the stock’s 52-week high of $26.36 - it seems prudent to remain on the sidelines for the time being. Gevo has a decent customer list, but I will be looking for that inflection point that indicates the company can produce and ship in volume before taking a position in GEVO. Perhaps that can be delivered through the company’s relationship with specialty chemicals producer Lanxess, which has signed on to jointly develop isobutene from Gevo’s isobutanol. New facilities in Minnesota and South Dakota (my home state) are expected to come on line this year and next.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Qteros: Here Today. Gone Tomorrow?

2012-02-14T19:27:00.003-05:00

Following private alternative energy companies offers unique challenges for those of us accustomed the myriad news feeds available for public companies. We check as often as possible with the private operations, mostly just to make certain they are still around. The challenges of alternative energy technology have a way of weeding out developers at a fairly high rate.

It was a bit unnerving the other day, looking for news from Qteros (former SunEthanol) only to find that the corporate website appeared blank in our web browser. Only after multiple attempts from several different computers were we able to get the site to display. Virtual presence - or the lack thereof - means nothing so we tried a phone call only to get no answer at the corporate phone number. Hmmm?

The most recent news article we could find about Qteros was dated November 2011 on the CNN Fortune Money site. The author cites several sources suggesting the company is being “wound down,” whatever that means. A licensing model was one possible outcome. Qteros was attempting a cellulosic ethanol process with its Q Microbe, an anaerobic micro-organism, that Qteros scientists and engineers think has the right stuff to process a variety of feedstocks into ethanol.

It appears that new leadership is at the helm at Qteros. The SVP of Commercial Development and Engineering, Mick Sawka, was promoted to CEO. Judging by Qteros announcements the last CEO spent a lot of time making presentations as investor conferences. In my view, this company needs to make an announcement related to commercialization. The new CEO claims experience in “managing R&D, business, licensing, and acquisition efforts has been demonstrated in both development-stage and large-scale organizations.” Minority investors like you and me have “no dog in this fight” but it will be interesting to see who will ultimately gain value from the development work that was done at Qteros - the private equity and venture funds that bankrolled Qteros or some licensor of the Q Microbe.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

KiOR Taps Capital Market...Again

2012-02-10T09:05:00.002-05:00

Affiliates of Khosla Ventures and two Canadian pension funds have fronted KiOR, Inc. (KIOR: Nasdaq) another $75 million through a four-year loan. The renewable fuel developer had as recently as June 2011 taken in $162 million in capital through an initial public offering of common stock. Earlier in the year KiOR had taken in $55 million from the sale of 11.2 million shares of preferred stock, which was converted to common when the IPO was completed.

By all measures, this is a serious capital accumulation for a company that guides for continued losses through 2013.

KiOR touts its two-step proprietary platform for turning biomass such as pine chips into so-called drop-in transportation fuel. A commercial scale facility is planned in Columbus, Mississippi and most of the proceeds from the stock sales are needed for construction. KiOR management wants the extra dollars to complete engineering studies on a second plant that is also planned for location in Mississippi.

Mississippi is in the heart of pine country and the yellow pine is growing in popularity for flooring and furniture. The industry creates a fair amount of wood chips, which for the most part go to waste. KiOR plans to source wood chips for its “biomass fluid catalytic cracking process. Unnamed catalysts from third parties are used in KiOR’s furnace.

The lack of transparency on the process is a bit troubling. However, what really has me wondering about KiOR is the Company’s yield data. During the IPO process, KiOR cited yields of 67 gallons of fuel per ton of bone dry feedstock. In my view, this is not an impressive figure. I cannot help wonder if the wood chip resource could not be put to higher use. Investors at the time of the IPO were somewhat mollified by the Company’s profession of a 92 gallons per ton of bone dry feedstock. That would be an impressive yield if it can be achieved. Achievement of such yields is dependent upon significant improvement in KiOR’s process. The Company has no timetable.

KiOR is now in our Beach Boys Index in the Waste-to-Energy Group. KIOR failed to take off following the public offering in June 2011. However, in the fall the stock soared. No doubt there were celebrations in at Khosla Ventures, which has been KiOR’s primary financial backer. Unfortunately the stock fell sharply in December 2011 and has only partially recovered. It is going to take some substantive news from KiOR to break the spell on KIOR shares. The stock has lost much of its luster and trading volume as gone with it. New debt on the balance sheet is not likely to impress.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. KIOR is included in the Waste-to-Energy Group of Crystal Equity Research’s Beach Boys Index.

Taking LS9 Seriously

2012-02-07T12:47:00.005-05:00

In early February 2012, just the day before publication of this post, industrial biotechnology developer LS9, Inc. (private) announced the hiring of a senior operations officer. The position is responsible for LS9’s renewable fuel plant in Okeechobee, Florida and will ultimately be oversee production at future sites. To me the announcement is a signal to finally take LS9 seriously. I have to confess, I have not given the start up much credence.

First, there is that self-righteous name - LS9. The L stands for Life, S for Sustain and 9 represents the nine million people forecasters estimate will be around forty years from now. The moniker gives me the impression that owners and management have an attitude or superiority, which in my experience is rarely followed by superior performance.

Second, there is the laundry list of compounds over which LS9 claims dominion: olefins, amines, amides, ketones, etc. For a company that has a business model based on licensing technologies to the fuels industry, the list of basic chemicals did not impress me as fertile ground for the development of proprietary chemistries or products.

My skeptical view is apparently not shared by string of heavy hitters from Silicon Valley and other venture capital and private equity environs. A bevy of venture capital firms, including Flagship Ventures, Khosla Ventures, Lightspeed Ventures Partners, CTTV Investment and Chevron Technology Ventures have been providing funding for LS9 for several years. The most recent round was completed in December 2010 and led by asset management giant Blackrock. The Company was also able to source another $9 million through a grant from the Department of Energy awarded in July 2011.

Perhaps LS9 was able to impress these investors with some of its technology applications. In July 2010, just prior to the last round of financing, LS9 had announced the discovery of novel genes in E.coli that produce alkanes, the primary hydrocarbon components in transportation fuel. The company explained at the time that the breakthrough would accelerate LS9’s demonstration of alkane production at pilot scale. Earlier in 2010, LS9 had made a “birth announcement” of sorts for its new microbe that could be used to process cellulosic biomass in one-step.

Still scaling to high volume production eludes LS9. In November 2011, the Company announced a scale up to 20,000 liters (5,283 gallons) from the 1,000 liter level. Next target is the 50,000 liter production level for both chemicals and fuel products. That is still only 13,209 gallons.

The new vice president of operations is probably hoping for fast progress. The plant in Okeechobee is undergoing a retrofit that is scheduled to be completed this quarter. The fermentation vessel, where LS9’s microbe will be housed, is to have a capacity to produce 135,000 liters (35,663 gallons) of chemicals per year. LS9 has plans to open the facility to full production by 2013.

I have added LS9, Inc. to the Alternative Chemicals Group in the Beach Boys Index.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. LS9 is included in the Alternative Chemicals Group in Crystal Equity Research’s Beach Boys Index.

Solazyme's Algae Work in the Dark

2012-02-03T16:55:00.004-05:00

The oil production potential in algae is beguiling….at least I thought so until data on actual yields disclosed laid bare a discomforting fact. Algae tend to become slackers and stop working at peak efficiency when crowded in the large-scale production containers used by biofuel producers.

Solazyme, Inc. (SZYM: Nasdaq) has been mum about the yields of its proprietary microalgae. The company is under the gun to bring production up to scale. In November 2011, Solazyme enter into an agreement with United Continental Holdings, owner of United and Continental Airlines, to provide 20 million gals of jet fuel per year beginning in 2014. Solazyme will provide oil produced by its algae to Honeywell International’s (HON: NYSE) UOP division, which will in turn turn that oil into jet fuel.

Just last month Solazyme announced the completion of a one-month trial by ocean shipping giant Maersk Line. Solazyme’s renewable diesel was used a Kalmar container vessel in a 6,500 nautical mile trip from Northern Europe to India. The trip took one month and 30 tons of Soladiesel. The U.S. Navy weighed in on the Maersk test through its fuel testing and certification program. The Navy has ambitious renewable fuels aspirations. Barring an outright failure of the test (and we already know the ship made the destination), I would expect some maritime order to arise.

With Solazyme’s algae oil headed for transportation fuels, the company is under more pressure than ever to increase production. Fortified by $200 million in proceeds from a June 2011 initial public offering, Solazyme pledged to launch a commercial fuels and chemicals facility in 2013 and add capacity in 2014 and 2015. The rate limiting step appears to be pinning down feedstock sources. Solazyme’s algae work in the dark confines of fermenters, processing the sugars found in plants.

One of the Solazyme’s partners, Brazil-based sugar cane processor Bunge Global Innovation Ltd. has plenty of sugar. Bunge has been incentivized with SZYM warrants ($13.50 exercise price), to reach development milestones including the construction of a facility to house Solazyme’s fermenters. The company also has an agreement with Ecopetrol, S.A. in Columbia to explore production options around Columbia-producer sugar care.

In the meantime, the Company own facility in Peoria, Illinois that is capable of producing as much as 2.0 million liters of algae-oil per year. A joint venture with Roquette Freres in France also gives Solazyme access to 5,000 metric tons of production capacity.

Compared to the $18.00 IPO price, shares of Solazyme appear to be a bargain at $11 bucks and change. The income statement remains a sea of red. However, in my view, the company is near an inflection point at which it will have commercial customers in each of its targeted markets - nutraceuticals, pharmaceuticals, chemicals and transportation fuel. This eventuality signals revenue ramp and profits potentially around the corner.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. SZYM is included in Crystal Equity Research’s Beach Boys Index in the Algae Group.

Mighty Micro-organisms

2012-01-31T16:11:00.005-05:00

The last post “Ethanol IPO” on Coskata’s planned common stock offering mentioned the company’s unique cellulosic ethanol process. A particular look at the Coskata process makes sense as it appears significantly different than most in the ethanol market.

Coskata puts syngas through a bioreactor filled with designer micro-organisms to turn out fuel grade ethanol. Ordinary anaerobic bacteria - single-celled organisms - have been “embellished” to make them particularly good at consuming the carbonoxide and hydrogen in syngas. Coskata claims the little biological wonders are better at capturing the chemical energy in syngas than chemical catalysts used in competing processes. Coskata’s bacteria are also apparently less susceptible to viruses that can require considerable downtime to clean the bioreactor.

Other ethanol producers have turned to enzymes such as those produced by Codexis, Inc. (CDXS: Nasdaq). Enzymes are proteins that accelerate the rate of chemical reaction. These proteins are highly specific and operate on only one substrate or material. Furthermore enzymes typically work best within a narrow temperature range and particular pH. Any process relying on enzymes must have the means to maintain a constant and optimal temperature

The company holds that its micro-organisms are not that fussy, ready to work in a wide range of nutrient (feedstock) and temperatures. Bacteria can extract almost the entire energy value available in the incoming syngas stream, producing approximately 100 gallons of ethanol per dry ton of biomass input material. This approaches the theoretical ethanol yields of corn and bagasse of 124 gallons and 112 gallons, respectively.

Coskata proposes to use a wide range of feedstock from corn stover to bagasse to wood chips to municipal waste. The micro-organisms are indifferent, since the feedstock is gasified in preliminary step. Coskata engineers claim gasification leads to higher yields of ethanol per unit of input material because it makes more of the carbon in the feedstock available for its bacteria to process.

Likely investors will hear more about Coskata and its bacteria over the coming weeks as the company prepares its IPO. I am staying tuned for this one, although it might be better to participate in the secondary market after the initial stock sale.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Ethanol IPO

2012-01-27T17:38:00.003-05:00

Can it be? An initial public offering of an ethanol producer? Yes, in mid December 2011, Pennsylvania-based Coskata, Inc. filed a registration statement to raise $100 million through the sale of common stock. Coskata needs capital to build a production facility planned for Boligee, Alabama that is supposed to initially produce 16 million gallons of ethanol per year. Eventually Coskata hopes to boost capacity to 78 million gallons per year.

Coskata expects to turn wood chips - there is plenty in Alabama - into ethanol with a process that combines elements of both the conventional biochemical and thermochemical methods for producing ethanol. Management claims this makes the process more efficient and less costly. The first step in Coskata’s proprietary process involves the conversion of feedstock to syngas, which makes more energy-yielding carbon available down the line. Coskata claims its process yield exceeds 100 gallons per bone dry ton of softwood. That is impressive.

Next the syngas is fermented by micro-organisms. The little critters are apparently less expensive than the fancy catalysts producers by Codexis, Inc. (CDXS: Nasdaq), Mascoma (private), Virent (private) and others. A continuous process is also key to low cost. That is just what Coskata has planned for Boligee. The company claims a $1.50 unsubsidized cost of $1.50 per gallon for its ethanol output. Given the ethanol is selling for more than two bucks per gallons, it sounds promising.

Coskata is starting small with the $25 billion ethanol market. Ultimately its ethanol can be further processed into ethylene (another $150 billion market) and propylene (another $100 billion market). Market opportunity is not among Coskata’s challenges.

Citigroup, Barclays and Piper Jaffray are joint book runners for the deal. An amended offering circular was filed January 27^th. Expect the usual comment period and adjustments, then the roadshow in the next couple of months. Estimates for revenue and costs will likely be a part of the pitch. In the meantime, we are adding Coskata to our Beach Boys Index in the Cellulosic Ethanol Group.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Fracking Fix

2012-01-24T14:44:00.003-05:00

If your e-mail in-box is anything like mine, it is chock full of messages from far and wide, hawking just about every product or service you can image. I get a fair number of stock promotion messages, most of which go the way of the male enhancement offers. However, today I received a very timely message introducing Ridgeline Energy Services, Inc. (RLE: TSX-V; RGDEF: OTC/QX).

Ridgeline is focused on waste water management for the oil and gas industry, providing solutions for recycling and reuse of hydraulic fracturing water, recovered chemical flood water and oil sands process water. “Fracking” or the practice of pumping massive amounts of water into underground structures in order to flush out oil or natural gas deposits has been widely debated. There is no doubt that the technique has turned feasible many otherwise marginal wells. The extent of environmental damage though has been a point of contention.

Ridgeline’s water reclamation solution relies on an electro-catalytic technology that was originally developed to extract usable biofuel from used restaurant fats, oils and grease. Ridgeline apparently teamed up with the inventor to adapt the technology for the treatment of waste water generated by oil and gas operations. Low cost-of-operation and minimal energy consumption help make the Ridgeline solution competitive against other waste water reclamation services.

As it happens, fracking has been in the news quite a bit recently. The relatively mild winter (so far) has sent natural gas prices to decade lows. Drillers have pulled back from production as well as scarp drilling projects in the absence of economic incentive to bring supply to the market. For example, Chesapeake Energy (CHK: NYSE) is curtailing supply and announced it will cut its gas drilling by half. News like that is music to the ears of environmentalists, but bad news for suppliers and services providers to the oil and gas industry.

We might expect Ridgeline to be in the latter group. However, as an innovator, Ridgeline might be among the few oil and gas sector companies that can realize strong growth even in a slow period for the broader industry. The company claims over forty customers in the oil and gas industry and displays a sizable list of its best friends on its corporate web site:

Apache Corporation
Canadian National Resources
Conocophillips
Devon Energy

EOG Resources
Enbridge Inc.

Husky Oil
Nexen Inc.

TAQA North

Talisman Energy, Inc.

Earlier in January 2012, the company closed on the acquisition of Danzik Hydrological Sciences, LLC, the owner of the electro-catalytic technology at the foundation of Ridgeline’s waste water solution. A series of capital raises, appears to have put Ridgeline in a position to close on the deal as well as move aggressively in capturing market share. The company appears poised for strong growth at least in the near-term.

Ridgeline shares have a limited trading history and volumes are nominal, leaving a wide bid-ask spread. Only the most risk tolerant investors will find the shares palatable. Nonetheless, Ridgeline Energy Services has been added to the Beach Boys Index in the Waste-to-Energy Group.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. REL/TSX is included in the Waste-to-Energy Group of the Beach Boys Index.

Tax Dollar Returns

2012-01-20T11:57:00.001-05:00

In researching the January 17^th article on making friends for algae-based renewable fuel production, I found it remarkable the disconnection between military fuel requirements and priorities and federal government spending.

Goal: The U.S. Navy’s goal is to have a “green fleet” by 2016 and increase alternative fuels to 50% of Navy operations by 2020.

Spending: According to the International Energy Agency, fossil fuels received $409 billion in subsidies globally in 2010, compared with $66 billion for renewable power.

If the U.S. military requires renewable fuel as matter of strategy - political and environmental, then why is it supporting the fossil fuel industry to a greater extent that it supports renewable fuels?

The critics of federal spending have pounced on the failure of Solyndra, a failed renewable fuels developer that received large federal loan guarantees. It is held up as an example of a waste of tax dollars, poor government administration and politics gone awry. All of that criticism is probably well deserved in this specific case.

However, I think the real question tax payers should be asking is why is the government using tax dollars to support opposing goals? There cannot be a very good return supporting fossil fuels all the while the country is attempting to reduce dependence upon imported oils and find alternative fuels in adequate volumes.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Algae Can't Have Too Many Friends

2012-01-17T11:08:00.003-05:00

Questionable yields from algae have not held back OriginOil, Inc. (OOIL: OTC/BB), one of the nascent developers of algae-based biofuel. In December 2011, the company entered into a joint venture with the U.S. Department of Defense (DOD) to developer biorefineries to serve U.S. and NATO fuel requirements. The joint venture - called Future Energy Solutions Unlimited, Inc. (FES) - will first carry out feasibility studies aimed at building biofuel refineries. Ultimately the DOD wants to place these biofuel refining centers in strategic locations around the world.

Funding for the project totaling $4.5 million is coming from the Energime Group of Companies to support the feasibility studies. As an enterprise consulting firm Energime is an unusual partner in the project. Energime provides operations consulting services to the food and energy industries and specializes in creating operating efficiencies and reducing environmental impact. However, I am beguiled by the idea of a renewable energy company like OriginOil bringing a “cost-controller” into a development project.

It seems OriginOil can have too many friends. OriginOil is also teaming up with the Department of Energy’s Idaho National Laboratory (INL) plans to co-develop an integrated system for the direct conversion of raw algae into a renewable crude oil. The company already has a research agreement with INL to develop biomass processing technology, to which OriginOil expects to marry up with its proven single-step extraction process for algae harvesting.

It is not surprising that the DOD is a ready and willing partner in renewable fuel development. The federal government accounts for about 2% of the nation’s energy use, and the DOD accounts for almost 80% of the government portion. It is both important from an environmental standpoint as well as defense strategy to decrease dependence upon imported fossil fuels. The Navy in particular has made development of biofuels a high priority. The Navy’s goal is to have a “green fleet” by 2016 and increase alternative fuels to 50% of Navy operations by 2020. To achieve these goals the DOD must increase its funding for and participation in renewable fuels project.

OriginOil appears to be moving forward at a fairly fast pace, with keenly interested partners and a financing sponsor. The long slide in the stock price appears to have stopped if not reversed by the recent partnering activity. There is still significant business risk underlying OOIL shares, but for now the many friends of OriginOil make a good hedge.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. OriginOil, Inc. (OOIL: OTC/BB) is included in Crystal Equity Research’s Beach Boys Index in the Biofiels Group.

Lucky Day

2012-01-13T15:29:00.004-05:00

It is Friday the Thirteenth, a day to stay in the bed with the covers over your head. Not so, says the management team for Arcis Resources, Inc. (ARCS: OTC/BB). Earlier today I met Robert Di Marco and Kenneth Flatt, President and CEO, respectively, of Arcis as they were finishing up a week of hand-shaking in New York. For Di Marco and Flatt making friends on Wall Street is too important to worry about old superstitions.

Arcis Resources is a fluid recovery company, focused on recycling chemicals, solvents and distillates used in industrial and maintenance processes. Usually rags and other sorbent materials - think of those huge booms that were used to clean up BP’s oil spill in the Gulf - are used and then industrial producers pay a waste disposal service to collect and remove them. Arcis management estimates U.S. industry spends as much as $1.5 billion per year in collection and removal.

Di Marco and Flatt - call him Butch, please - want to turn a big part of that $1.5 billion into savings for their customers and a nice fee for Arcis Resources. The company is using a proprietary process to recover and recycle 100% of the chemicals, solvents and sorbent materials. Most customers take the recovered materials and chemicals back for reuse. If that is not possible, Arcis’ phones are always ringing with buyers interested in recycled materials.

Compelling economics make the Arcis “beneficial reuse and fluid recovery solution” a comparatively easy sell. It can reduce waste disposal and industrial sorbent replacement by as much as 30% to 40%. Many customers have achieved 100% closed loop systems where wastes going to landfills have been reduced to zero. Boasting rights on environmental neutrality is fast becoming a key to staying in business for producers and users of petrochemicals.

It is not surprising that Arcis’ customer base is growing. Of course, BP (BP: NYSE) is on the list, along with General Motors, Chrysler, Honda, Nissan, and Ford all of which have generate a lot of greasy rags. Arcis has strong relationships in the waste and chemicals industries, working with Waste Management (WM: NYSE), Nexeo Solutions, LLC, General Oil Co., Inc. and Tradebe Environmental Services. A twenty-year exclusive agreement with Al-Suwaiket Trading and Contracting, Inc. has also opened the door for Arcis in Saudi Arabia.

One of the most compelling elements of the Arcis’ business model is the distributed nature of their service. The technology and solution - a so-called “spin-cycle” - requires a fairly small form factor and fits neatly into a mid-size trailer truck. A one-person crew operates in a range of about 150 miles and can generate between $600,000 and $1.0 million in revenue per year. Arcis is using a hub and spoke organizational structure to expand geographically. Augmentation appears manageable from both an operational standpoint as well as in terms of capital.

That said, Arcis’ last quarterly balance sheet suggested the company is operating on fumes and could use a capital infusion for working capital and capex. Investors with some tolerance for risk as Arcis scales up might find the stock - priced below a buck - to be value-priced option on the technology and interesting business model.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Arcis Resources is included in Crystal Equity Research’s Beach Boys Index in the recycling group.

Risk-on, Risk-off

2012-01-10T15:20:00.002-05:00

If the Chicago Board of Options Exchange (CBOE) Volatility Index is any indication, investors in the

U.S.

equity markets have let go their worst fears in our future. The index has moderated down to the low 20s in recent weeks after spiking to the high 40s in each of the last two years, a level which while well above averages seemed tolerable compared to record high volatility indications set in 2008 and 2009.

However, major U.S. equity market indices continue to surge upward one day only to plunge by equal or greater amounts the following day. The almost daily vacillation by investors between accepting risk and then shunning it, has not only given financial media pundits a new catch-phrase - “risk-on, risk-off” - it suggests a continued wariness in our economic fortunes.

Which is the better read? the volatility index or the up and down daily trading roller coaster? The answer is open to considerable discussion. I decided to try another tack by pulling one of the Federal Reserve’s oldest tricks out of the bag - the Fed Model.

I have mentioned the Fed Model in this column before. It is a simple comparison of the earnings yield of the S&P 500 and the 10-year U.S. Treasury note yield. A ratio of 1.0 suggests “fair valuation” in the Fed world. If the equity earnings yield is greater than the U.S. Treasury yield, stocks are considered overvalued. Presently that comparison is a 7.69% earnings yield on the S&P 500 (through the September 2011 quarter) to a 0.0179% yield on the 10-Year

U.S.

Treasury note (0.0769 / 0.0179 = 4.30).

The fact apparently does not bother good folks at the Federal Reserve that bonds and stocks, and therefore their respective yields, are not comparable. Bonds after all have a certain payment stream and a pay-off date, while equity an indeterminate future payoff. Some have proposed putting the two in a better comparison by using an inflation indexed 10-year Treasury yield. At the present time that sits at a negative 0.21%, making stocks look even more overvalued.

Even with this nuance I am not convinced that stock yields should ever be as low as long-term bond yields in order to fully compensate investors for the risk associated with equity ownership. Indeed, some use the difference between the two yields rather than the ratio to determine the equity risk premium. This approach implies a current equity risk premium of 5.9% (0.0769 – 0.0179 = 0.059).

There is an alternative way to look at the disparity between government bond yields and equity yields. Perhaps bonds yields simply do not fully reflect risks in the fixed income market. The government has intervened with two rounds of quantitative easing and has used a variety of other methods to rejuvenate the credit market. The usual reactions to and acceptance of risk are out the window - risk-on? risk-off? Wait a day and I will let you know.

Green Dividends

2012-01-06T15:37:00.002-05:00

The last in the series on “green” utilities features OGE Energy Corporation (OGE: NYSE), a supplier of electricity and natural gas to residential and business customers in Oklahoma and Texas. It is a fairly good living to OGE, which earned $337 million in net income on $3.9 billion in revenue in the twelve months ending September 30, 2011. Its operating profit margin during this time period was 16.4%, well above the 13% average of the utility industry.

OGE converted 18.8% of its sales to cash in the last year, providing ample support for a $1.50 per share dividend. The current forward yield is 2.8%, slightly below the average five–year dividend yield. The slip in yield is largely due to a strong stock price. OGE is trading very near its 52-week high of $57.54, pushing the dividend yield down and driving up the price/earnings multiple to 15.4 times 2012 estimated earnings.

Is OGE worth its premium price? Last year the trade magazine Electric Light & Power named OG and E Oklahoma Gas and Electric Services OG and E as the utility of the year. The company’s energy saving and renewable energy initiatives helped earn the award. By the end of 2012, wind power will make up 10 percent of OG and E’s power generation. OG and E is also installing smart meters at customer premises at the rate of 1,500 per day and expects to achieve 100% penetration by the end of 2012. For the first time see on a near-real-time basis how much energy they’re using and what that monthly bill will be in advance of the bill arriving in the mail.

The consensus estimate for the December 2011 quarter is $0.33 per share in earnings. OGE has not been consistent in meeting analyst estimates. A miss could trim some fat from the OGE price, providing investors a chance to establish positions in an interesting utility.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Dividends from Across the Pond

2012-01-03T16:00:00.003-05:00

It is not that U.S. investors are that desperate for dividends. The

U.K.

’s National Grid Transco, Plc (NGG: NYSE; NG: LSE) is simply an appealing energy company that happens to be yielding 4.5% at its current stock price level. Besides National Grid may be domiciled in the U.K. but it serves over 3.4 million customers in New York and New England region with electricity and natural gas. National Grid traces it U.K. origins back to British Gas, which was privatized in 1986. The acquisition of Niagara Mohawk gave National Grid its toehold in the U.S.

A pretty little toehold it is too. National Grid reported a 28.7% operating profit margin in the most recent twelve months. The company converted 32.7% of sales to operating cash flow in the same period. High profit margin is part of the reason National Grid boasts recent return on equity of 28.8%. Strong cash flows have provided $734 million in levered free cash flow.

Unfortunately, analysts are not so bullish about National Grid’s fortunes in the coming months. Between the two analysts who have published estimates that are picked up by U.S. reporting services, expectation for next year growth is a paltry 3.3%. This gives National Grid a Price-Earnings to Growth Ratio of 2.85, a decided turn-off for investors who do not dig any deeper.

I applied the PEGY approach, which includes dividend yield. I determined that the Price-Earnings to Growth Plus Dividend Yield is 1.50, still signaling an overbought stock. Is the dividend worth premium pricing?

My thesis in beginning this series on top “green” utilities is held up by the notion that companies that invest early in renewable energy could ultimately generate higher returns that those who wait for more stringent government mandates. National Grid is certainly proactive and has been able to generate strong returns even while investing heavily in renewable energy projects.

The stock is worth putting on a watch list for possible price weakness that would afford an entry point. At present NGG shares are near a 52-week high.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Happy New Year!

2011-12-30T13:56:00.001-05:00

Wishing you the best of fortune in the New Year!

Crystal Equity Research

Green as Prairie Grass

2011-12-27T12:30:00.006-05:00

The service area of Xcel Energy (XEL: NYSE) stretches across the upper plains states of Minnesota, South and North Dakota, running into Colorado and stretching south to New Mexico and Texas. Power interests in Wisconsin and Michigan extend the electric utility’s footprint across the northern most section of the country. Xcel delivers electricity or natural gas to over 5.1 million customers across the eight states.

Xcel managed to double the amount of its power generated from renewable resources in the three years beginning 2008 and ending 2010. Over 10% of Xcel’s power production was from renewable sources in 2010. The company has not yet provided an official breakdown for the year 2011. However, the year likely represents another advance in Xcel’s renewable energy production from a mix of wind, solar, biomass and hydroelectric power sources.

It seems Xcel is assuming the profile of the new, distributed power producer. Power sources are mixed and vary by local conditions. Consumers are engaged to a much greater extent than ever in power conservation through rate plans and energy savings programs.

If consumers find all that power-plan making a bore, they can click on Xcel’s Bird Cams, which offer live monitoring of bald eagle nests not to mention osprey, falcons and owls. The feature on the company website is a sure draw for customer loyalty and respect. There are a few pictures left from the 2011 nesting season - fuzzy, frumpy little owls and eaglets that only a mother could love.

The baby birds might be helping Xcel garner a strong price earnings multiple of 16.0 times trailing earnings and 15.0 times the consensus estimate. Of course, it could also be a 7.9% profit margin and 10.3% return on equity that has investors prepared to pay a bit of a premium over the rest of the industry for Xcel shares. Another plus is lower leverage than most of Xcel’s peers.

Xcel may be as green as the prairie grass, but it is a pricey stock that is only made palatable by a generous dividend. The current dividend yield is 4.0%.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Happy Holidays!

2011-12-23T08:43:00.000-05:00

Wishing you a blessed holiday season.

What's Not to Like in Portland?

2011-12-20T08:19:00.003-05:00

Portland General Electric (POR: NYSE) is priced to yield 4.3% on its quarterly dividend. That is definitely something to like in a world where interest rates are at record low levels. A low beta of 0.50 makes the risk of equity ownership palatable even for a risk averse investor. Although POR is trading near its 52-week high, it’s trailing price earnings ratio of 13.2 is slightly below the average for electric utilities. Nice dividend, low risk, slightly below fair price.

That all sounds so compelling. However, there is a dark lining in this silver cloud. None of the dozen or so analysts following the company think there is much growth ahead for Portland. Maybe they are simply gun shy because the company has missed the consensus estimate in three of the last four quarters. Presently the consensus view is for flat or slightly lower earnings next year. The dividend does not appear to be in jeopardy, but Portland is apparently facing flagging demand and margin pressures. Indeed, unemployment is around 9.1% in the Company’s service area.

This is not an unusual scenario. Weak economic conditions have all consumers and businesses trying to economize on utility bills. Since this is a transient situation and likely to reverse on improved employment conditions, it may be more relevant to look at Portland in the long-term.

For a utility of modest size - the Company recorded $1.8 billion in revenue in the most recently reported twelve months - Portland appears to be more progressive than most. The investment has left profit margins and returns on equity and assets below industry averages.

Portland has been trying to create value through a renewable energy program and toxic emissions reductions. Granted this is not entirely voluntary. Government mandated minimums for “green” electricity and law suits by environmental groups are clearly at play in Portland’s investment decisions. That said, it is likely the cost of early investment in renewable energy sources and emissions control equipment in the near-term is lower than future costs of non-compliance.

In 2010 and 2011 PGE won top ranking by National Renewable Energy Labs for the number of renewable customers. The accomplishment gives Portland effective bragging rights to customers and advances the management team well along on the renewable energy learning curve.

The company is also well along on the emissions control learning curve. Portland is installing the usual scrubbers and filters at its Boardman coal-fired power plant. However, it has also staged successful beta tests of microalgae as a carbon sink for Boardman. Can algae represent cheaper carbon sink alternative to sequestration underground? That answer is not yet available, but we expect Portland to have that answer perhaps before the next utility.

Neither the author of this article, Crystal Equity Research nor its associates have a beneficial interest in the stocks mentioned in herein.

Risky Business

2011-12-16T17:50:00.006-05:00

Investing for gain entails risk, right? The real question is how much to pay for the risk. Stated otherwise, how much of a discount should an investor require for the level of risk in an investment? Economists have given us all sorts of fancy models to determine fair pricing. Not one has been able to top the seminal work of Harry Markowitz, William Sharpe and Merton Miller with their Capital Asset Pricing Model. The world has been so impressed with the CAP-M as it is fondly referenced in business schools the trio was awarded the Nobel Prize in economics.

Required Return on a Stock =

Risk Free Rate + Beta of Stock X the Market Risk Premium

and

Market Risk Premium = Expected Market Return - Risk Free Rate

Economic models are no different than any other construct - it is only as strong at its weakest link. Thus I set about determining the weakest element in the application of the CAP-M in today’s investment environment.

First, there is the so-called risk free asset. What is a risk free asset anyway and where can we get one? It seems like a good idea in the current uncertain economic environment.

To be free of risk the investment would have to be free of default risk. While it is true that the U.S. government could default on its obligations, it appears to be highly unlikely given Congressional power to print new money at its discretion. Second investment in the riskless asset would to have a known outcome from the start, with the exact return known to the penny. The investor would need to be able to invest the cash flows received along the way to maturity at a known rate. In other words, there could be no reinvestment risks prior to maturity.

The only investments that meet these two requirements are a zero coupon bonds or U.S. treasury bills with maturities of one-year or less. Yields on STRIPS, which are engineered zero coupon bonds, offer yields in a range of 0.99% for a one-year maturity to 2.6% for a ten-year maturity. U.S. Treasury bills with a one-year maturity are currently yielding 0.11% - yes, that is one tenth of one percent.

Stopping here would be a mistake. There is then the issue of time frame. Investing in a company is typically not a short-term exercise. Thus the risk free asset must fall in-line with the expected duration of the investment - one year, five years, ten years. It amy be necessary to "build" a zero coupon yield. Even if no zero coupon bonds of the appropriate term are traded, we can estimate zero coupon rates for each period by using the rates on coupon bearing bonds. To do this, we start with the single period bond and set the rate on it as the zero coupon rate for that period. We then progressively can move up the maturity ladder, solving for the zero coupon rates for each subsequent period.

Some academics, such as Aswath Damoradian of New York University argue that it really only makes sense to derive a period-specific risk free rate under particular circumstances. For example, if the yield curve is downward sloping (short term rates are much higher than long term rates) or excessively upward sloping, with long term rates exceeding short term rates by more than 4%, there is a payoff to being year-specific. In market crises, for instance, it is not uncommon to see big differences (in either direction) between short term and long-term rates.

Next up in the CAP-M is the beta of the stock, which of is a number describing the relation of a stock return with those of the financial market as a whole. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.

Beta is the key to the CAP-M. An investor has the choice of investing in the risk free asset or in another “risky asset.” How much more return should the investor require in order to be adequately compensated for the risk undertaken? The Nobel Laureates answered that question by suggesting that the investor should receive a premium commensurate with the premium of the rest of the equity market - commensurate to the tune of the stock’s beta. For example, if a stock has a beta of 2.0, it moves in the same direction as the overall market but moves twice as much. Thus investors in the asset should receive twice the market premium equity.

Not all beta measures are calculated equal! Thus it is necessary to check the beta measure against common sense. If beta, which is by definition a historic or backward looking measure, does not appear to capture the current sense of the company’s situation some adjustment may be needed.

Then there is the expected return for the broader market. Based on the historical ratio of total market cap over gross domestic product (currently at 84.9%), the stock market is likely to return 5.6% in 2012 from this level of valuation. This includes returns from dividends, which is approximately 2.0%. Historical equity market returns and the implied risk premiums are very poor predictors of both short-term movements in implied premiums or long-term returns on stocks. Thus, if predictive power is critical or if market neutrality is a pre-requisite, the current expected market return and implied equity risk premium is the best choice. For those more skeptical about markets, the choices are broader, with the average implied equity risk premium over a long time period having the strongest predictive power.

In upcoming posts we will be looking at required returns on stocks using the Capital Asset Pricing Model and the implied fair price. If the foregoing discussion provides anything more than a head ache, it is the assurance that valuation is in itself risky business.

Horse Pucky!

2011-12-13T17:48:00.003-05:00

A Toastmasters meeting is always a treat. Everyone is so positive and up-beat. I belong to a club sponsored by the New York Society of Security Analysts. No matter the time of day or season you can expect to meet some very interesting people. I have become accustomed to meeting mountain climbers, Antarctica deep-sea divers, survivors of political oppression and civil wars.

The speeches can be fascinating. At a recent meeting one presentation made me pay particular attention. It focused on a popular argument against formulating government policies on global warming. The line of reasoning begins with the great horse manure conundrum of the late 1800s.

As cities grew in over a century ago, the number of horses pulling passenger coaches, delivery trucks and all manner of vehicles crowded the streets. Each horse left behind a considerable amount of manure. Great mounds of horse excrement rose at the outskirts of late nineteenth century metropolitan areas. It was not only a nuisance from an esthetic perspective. Health was also at risk from the spread of disease by flies and other insects.

The agenda for an international conference of city planners held in New York in 1894 was dropped in favor of taking up the topic of horse manure and the solutions that would be needed. Dire predictions of proportion and scope were bandied about at the conference and in the press forewarning the consequences of not addressing the issue.

Of course, none of the manure-crisis predictions came to pass because the “horseless carriage” was rapidly adopted as an alternative to horse and buggy. The great mounds of manure abated as the horse disappeared from the streets of London, Paris, New York, Chicago and every other large metropolitan area. In highsight the threat was entirely overblown.

Those who argue against global warming policies point to this turn of events as proof that ugly situations take care of themselves. They argue there was no need to deal with horse manure because the automobile - already invented and plying the streets in 1894 - would be the solution. This group points to the “unintended consequences” in meddling with nature based on faulty analysis.

It is a convenient proposition. We need do nothing because there is some invention right in front of our eyes that will restore earth temperatures to normal, bringing back the polar ice and curing whatever is ailing the fast-disappearing frogs in the Amazon. I like the idea. It is cheap and expedient, avoiding the messy political wrangling necessary to reach a solution to rising earth temperatures.

I cannot help noting that the solution to the horse manure problem - the automobile powered by the combustion engine - is at the heart of the environmental problems we face today. Is it not the proliferation of green house gases from automobile exchaust that has led to global warming?

Talk about unintended consequences! We can now see that there were real reasons those city planners should have considered many more options than various ingenious ideas on how to remove horse pucky from city streets. City planners did nothing, letting communities move from one menace to another. Now instead of foul smells and germ infested flies in urban areas, the entire planet is at risk.

Green Utilities

2011-12-09T17:50:00.003-05:00

There is more than one way to play the shift from fossil to renewable energy. I decided to look at a group of the largest USERS of energy - the electric utilities - to find the greenest of the power producers. It occurred to me that I was not the first to ask that question and quickly found a list of the top ten “green” utilities published by the National Renewable Energy Laboratory.

1. Austin Energy (private)

2. Portland General Electric (POR: NYSE)

3. Pacifico (PPW-P: Nasdaq)

4. Florida Power & Light (private)

5. Sacramento Municipal Utility District (community owned)

6. Xcel Energy (XEL: NSE)

7. National Grid, Plc (NGG: NYSE)

8. Basin Electric Power Cooperative (community owned)

9. Puget Sound Energy (private)

10. OGandE Electric Services (OGE: NYSE)

Candidly I was a bit surprised to find that half the list is made up of municipal, cooperative or otherwise privately held entities. I expected the list to be composed mostly, if not entirely, by large publically traded utilities, which have put quite a bit of effort into burnishing a “green” reputation for both consumer and investor brownie points.

Are utilities with a head start in embracing renewable energy in a better position competitively? Are their revenue and profits more sustainable having already begun the shift from fossil fuel to a mix of energy sources? Regardless of your view on the threat of global warming or even your political views on the

U.S.

dependence upon imported oil, there is a move underway toward renewable fuels, which is not likely to reverse in the near or even mid-term. Accordingly, I answer both these with "yes, better positioned" and "yes, more sustainable earnings."

If I am correct then these publically held leaders could present compelling investments for investors. We will be looking at each - POR, PPW-P, XEL, NGG and OGE - to find the investment case...if there is one.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

$POR, $PPW-P, $XEL, $NGG, $OGE

Calling all Biodiesel Producers

2011-12-06T13:32:00.004-05:00

Congress’ on-off support of biodiesel-renewable diesel has left the industry in a state of uncertainty at least in terms of long-term planning. As we noted in the two previous posts, federal tax incentives are set to expire once again at the end of December 2011. We have already had a chance to observe the impact of tax incentive sunset in 2010, which was a year of reduced production compared to the 2009 the last time the tax incentives had been in place. Reinstatement of the incentives led to a banner production year in 2011.

The National Biofuels Bureau claims over 160 member-producers ranging from the large producers such as Cargill and Archer Daniels Midland (ADM: NYSE) to small-fry such as Amerigreen Biofuel (private) based in Pennsylvania. The question is: are they still in business? We decided to try to track down the various biodiesel and renewable diesel producers to find out which ones are still in business and the general view on 2012 production and sales in an “incentive-less” world.

Our fingers are crossed for a better response than our effort to review algae-based biofuel production capacity and yield achievement. That was a flat 0% response rate.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Biodiesel vs. Renewable Diesel

2011-12-02T14:07:00.002-05:00

The last post “Biodiesel Rollercoaster” about biodiesel production reminded me that the terms biodiesel and renewable diesel can be a bit confusing. The key is the production process. There is nothing stopping us from using the term biodiesel or renewable diesel for a wide range of fuels made from organic materials. However, the industry itself has set a narrower definition of what qualifies as biodiesel or renewable diesel. The effort has helped get producers in line with standards for fuel and fuel additives set by the American Society of Testing and Materials (ASTM).

According to the National Biodiesel Board, biodiesel means “a fuel comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. Biodiesel producers aim to meet ASTM standard D6751.

Renewable diesel on the other hand is produced with a process called “thermal depolymerization.” Producers of renewable diesel aim for entire different fuel specifications found in ASTM standards ASTM D975 (petroleum diesel fuel) or ASTM D396 (home heating oil).

Does it really matter? From an investor’s viewpoint the nuances between biodiesel and renewable diesel may not seem to matter. According to the National Renewable Energy Laboratory engine manufacturers and fuel consumers are concerned that biodiesel is not of adequate purity and quality for engine and fuel system component durability. So for the producer, meeting the ASTM standards can make the difference in getting product sold.

Furthermore, the differences in the two processes have significant economic ramifications that affect profits. In September 2011, the largest producer of renewable diesel Neste Oil published updated production cost figures. Neste Oil (NES1V: FH) revealed its estimated production cost, not including feedstock, of NExBTL renewable diesel is $220 a ton (approximately $0.70 per U.S. gallon). That's up significantly from the firm's 2009 estimate of $175 a ton (roughly $0.56 per gallon). Neste blames rising utility and hydrogen costs on the higher cost per unit. A study completed by the University of Alberta in Canada, determine that average cost of biodiesel was near $0.92 per gallon excluding the costs of feedstock.

It also has implications for federal tax credits. The JOBS Act of 2004 provided a $1.00 per gallon tax incentive for biodiesel produced from virgin oils and $0.50 from recycled oils. The Energy Policy Act of 2005 extended the biodiesel credit through 2008 and added a new $1.00 per gallon tax credit for renewable diesel. Since renewable diesel is produced through different processes it was ineligible for the biodiesel credits. The tax credits were extended to 2009, left to expire in 2010 and then reinstated in 2011. The pending decision by Congress to renew the tax incentives or allow them to expire as schedule requires could potentially lead to a the renewal for one and not the other.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Biodiesel Rollercoaster

2011-11-29T14:06:00.001-05:00

Biodiesel production boomed in 2011, most probably thanks to the return of federal tax incentives at the beginning of the year that led to more favorable economic terms for producers. The National Biodiesel Board (NBB) reports that the industry is poised to produce more than 802 million gallons of biodiesel in 2011, more twice 2010 production of 315 million gallons. Production in 2011 also breaks the previous record of about 690 million gallons set in 2009, the last year the tax incentives had been in place before Congress in its infinite wisdom allowed the incentives to expire.

The tax incentives are not without economic consequences beyond the industry. According to environmental consulting firm, Cardno- ENTRIX, increased production in 2011 is supporting more than 31,000 jobs. This compares to fewer than 13,000 in 2011. The increased production is also expected to generate at least $3 billion in GDP and $628 million in federal, state and local tax revenues.

For many smaller biodiesel producers the on-off relationship Congress appears to have in renewable fuels has been a death knell. Investors with both profit and social reasons to put capital into biodiesel are not much better off. Of course, the dramatic decline in valuation for renewable fuels producers over the last year is a mix of concerns about systematic risk as much as future revenue and profits.

Nonetheless, it is well understood that investors dislike uncertainty. Federal tax incentives for biodiesel are again set to expire at the end of 2011. Would it be too much to ask Congress for a cohesive long-term energy policy that would give both producers and investors something to count on?

Food for Thought

2011-11-25T09:00:00.016-05:00

What better time than the major “food” holiday in the U.S. to visit the growing movement called Slow Food. It is a worldwide organization of “foodies” interested in the fine food experience. Do not expect an array of cookbooks and restaurant reviews from Slow Food. This group aspires to return to the local farm for fresh, naturally grown produce. Slow Foodies look for vine-ripened, field-ready produce that is free of pesticides and chemical fertilizers (as if the plants can tell the difference at the molecular level).

What makes it a movement - rather than a simple past time or hobby - is the tone of anti-fast food chain, anti-franchise restaurant and even anti-large scale farming. Slow foodies appear to be on an economic mission to bring back the small, truck farm that sells its produce locally.

Slow Food International boasts over 100,000 members in 1,300 local chapters worldwide, as well as a network of 2,000 food communities which the group claims practice small-scale and sustainable food production. National “branches” are located in eight countries including one in the United States.

It is a fine concept - fresh food, grown in a way that ensures highest food value and richest taste. I grew up in such an environment. My mother had a large, organic garden on our ranch and we rarely bought vegetables in the store. We ate fresh vegetables and fruit in the summer and home canned versions in the winter. She often sold tomatoes - her bumber crop - to the stores in town. She also sold eggs and cream. Unfortunately, the proceeds from these sales were not much more than pocket change for my mother. She did it nonetheless just to make certain that the excess food did not go to waste.

The step-up is critical from selling excess crops to producing enough profit to support the farmer and his/her dependents. Getting adequate compensation for farmers involves boosting yield from a finite land area, often through improved seeds, automated cultivation techniques, pest control and fertilizer - all of which are on Slow Food’s hit list of objectionable farming practices.

No one wants to eat pesticide laced lettuce or half-ripe tomatoes. Yet in a world where hunger remains a reality, there is a certain arrogance on display in campaigning against yield enhancing farming methods. If the entire world demanded organically grown, field ripened grains and vegetables we might not be able to produce enough food for everyone without putting the entire planet to the plow. Farmers may also have trouble bringing a successful crop to market. That means the farmer's family goes without clothing and shoes, education, heat, etc.

Should some be privileged to eat the best foods grown for taste even if that means inefficient use of the land and perhaps a bit of hunger among those not wealthy enough to afford “slow food?”

The Slow Food concept is appealing - at least from a gastronomical standpoint. However, to sustain all humans and animals we simply must seek efficiency in the cultivation of arable land. That may mean automation, selling beyond the local community, seed development and chemical fertilizers among other practices. It almost assuredly means higher food prices.

Just a bit of food for thought.

Happy Thanksgiving!

2011-11-22T11:39:00.000-05:00

Have a pleasant and safe Thanksgiving Holiday!

Corn Heist

2011-11-18T10:00:00.001-05:00

The wisdom of diverting high protein food to the production of transportation fuel has always eluded me. Several years ago I found myself a lone voice questioning corn-based ethanol. Even after several studies that demonstrate the inefficiencies of ethanol production in general and corn-based ethanol in particular, we are still shoveling corn into our gas tanks.

The Agriculture Marketing Resource Center estimates that approximately 40% of the 2011-2012 corn crop will be used for ethanol production. Total supply, including imports is projected to range from 13.4 billion bushels to 13.9 billion bushels. That is an impressive number and at first might appear large enough to accommodate fuel production.

That impression would be wrong. Total acreage devoted to corn has grown over the last five years, from around 78 million acres in 2006 to an estimated 92 million in this coming planting season - 19% increase. This increase came primarily from the shift fields to corn from soybeans and the removal of acreage from fallow or conservation programs. Yields per acre have improved slightly from 149.1 bushels per acre in 2006 to 152.8 bushels per acre in 2010 - 2.5% increase.

Thus between added acreage and increased productively corn production increased by just over 20%. The rest of the corn used by ethanol has been purloined directly from the kitchen pantry. In a world where famine and hunger are common, one might even consider the use of food for fuel as immoral. At the very least it is just dumb.

Do not expect any changes in ethanol policy any time soon. Congress has shown an uncanny ability to quell reason with politics. The farm lobby offers too much in the way of political and financial support for Midwestern politicians in particular. There are few alternatives. The use of waste cooking oil and other animal fats also encroaches into the food supply chain, although not as egregiously as the corn heist described above. As beguiling as algae oil-based fuels might be, there appears to be much more development work to be done to make this feedstock a reliable source for transport fuel.

Enjoy your next breakfast corn muffin. It may be the last one you eat.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Water Spin Off

2011-11-15T08:21:00.002-05:00

Unlike the questionable valuation of the initial public offering of Groupon, Inc. (GRPN: Nasdaq), the market has been eager to trade stock supported by a consistently profitable operation. One grounded - no pun intended - by a highly coveted natural resource and proven product line. Last month ITT Corporation (ITT: NYSE) spun out its water resources solutions subsidiary Xylem, Inc. (XYL: NYSE).

Granted XYL shares have not been impervious to the sell-off in U.S. equity markets experienced in the first two weeks of November 2011. Yet the stock price remains within waving distance to the opening price of $25.35. The implied value is 13.8 times net income of $338 million in the trailing twelve months.

Xylem has built up considerable expertise in fluid technology and offers solutions for water management to utilities and other water resource owners. On the flip side Xylem can be your best neighbor it you have a lot of water in a place where water does not belong. Its solutions include potable water and waste water treatment solutions. The Company offers a line of pumps and accessories as well as analytical instruments and controllers.

Xylem did not have the benefit of the usual high profile IPO road show process. An S-8 was unceremoniously filed with the SEC on October 28, 2011. So CEO Gretchen McLain has been making the rounds on Wall Street gathering friends and generally getting the message out about the potential in the water industry. It does not take much persuasion to alert investors to the opportunities for companies with proven products that clean-up and conserve water resources. She has been well received.

Xylem is now included in the Crystal Equity Research alternative energy index The Mothers of Invention in the Efficiency Group. While no stock looks compelling in the present highly volatile market, Xylem is an interesting play on the water sector. The relatively scarcity of water in certain areas is likely to drive value among water-related companies for many decades to come. It makes sense to find take long positions when market corrections deliver value pricing.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Veterans Day

2011-11-11T08:46:00.000-05:00

The men and women who make it possible for the rest of us to live a life of privilege never get enough credit for their sacrifices. For the efforts of our military we live in a country where we can speak our mind on any political topic without fear of arrest; move about the country freely without interference and; yes, even drive in large, fuel inefficient automobiles to the mall for mindless shopping.

Granted military personnel have the privilege of shopping military bases stores. Yet let’s be honest the PX is no Mall of America. Military personnel do get to drive Humvees and other fuel-inefficient vehicles. The bullets and pipe bombs are on special for them.

Tax payers - at least the ones who claim they are supporting the entire country - have been critical of military spending. Yet military personnel are not sharing in the largesse if there is any. Salaries and other benefits have not kept pace with the cost of living or at least the way people live in our modern world. Our military personnel find themselves struggling to make ends meet just like the rest of us - even as they keep us and our country’s interests safe.

Today is a day set aside to express gratitude to military personnel for their sacrifices - large and small.

Thanks.

French Fries in the Sky

2011-11-08T17:57:00.002-05:00

Recently Alaska Airlines announced plans to begin regular flights using a blend of fossil jet fuel and bio-jet fuel. At least seventy-five of its flights in the month of November will be power by a blend

The airline is apparently paying a premium for biodiesel produced by Dynamic Fuels in Louisiana in an effort to prove that bio-jet fuel is a practical alternative to fossil jet fuel. It is not a cheap demonstration as Alaska is paying upwards of $16.00 per gallon for the bio-jet fuel compared to $3.15 for fossil jet-fuel. That brings the per gallon cost to $5.72 per gallon.

That price is expected to fall as producers like Dynamic Fuels reach economies of scale. The start-up produces its biofuel with used cooking oil and by-products from meat processing. With strong relationships like that with Alaska Air perhaps its greatest concern is ensuring reliable stream of feedstock.

Dynamic Fuels is a joint-venture of Tyson Foods, Inc. (TSN: NYSE), and Syntroleum Corporation (SYNM: Nasdaq). Of the two it makes sense to use SYNM for as a biofuel play. However, it would not be surprising to see an initial public offering from Dynamic Fuels in the future.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Dynamic Fuels is included in the Biofuel Group in Crystal Equity Research’s Beach Boys Index for alternative energy producers and developers.

Algae Angst

2011-11-04T08:20:00.002-04:00

Over the last several weeks we have been trying to pin down the yield claims of the various algae-based biofuel producers. Most of our calls have gone unanswered. While waiting for the phone to ring, we decided to try another tack.

Yields are not the only issue for biofuel producers hoping to squeeze oil from these simple organisms. Environmental issues plague algae much like any of the other renewable fuel alternatives such as corn-based ethanol. Although the accommodations need not be prime, arable land, growing algae requires space. Then there are power and water requirements to create the specific living conditions favored by algae.

A recent study by the University of Virginia looked at the environmental impact of algae production and came to some decisive conclusions. Their findings suggest it will make a difference if algae are used for direct combustion or anaerobic combustion. Direct combustion for electric production generally outperformed systems involving anaerobic digestion and biodiesel. Direct combustion of aglae generated four to fifteen times as many vehicle kilometers traveled per hectare as switch grass or canola.

However, when it came to energy requirements, water and greenhouse gas emissions, comparisons for algae came in mixed. The authors made it clear that not all algae systems are created equal and that from an environmental standpoint, the right choice of cultivation and conversion process must be made to avoid making more environmental damage than we are trying to clean up by using less fossil fuel.

Results like these are likely to cause a bit of angst among investors who have made big bets on algae as the replacement for fossile fuel. I have not abandoned the idea that algae is superior as a feedstock to land crops. It make sense that the land use burden will be lower than even the non-food feedstocks such as switch grass. However, there appears to much more to be learned reach the right algae system.

Brrrr!

2011-11-01T17:14:00.003-04:00

Over this past week-end The Northeast was hit by a Nor’easter snowstorm that affected over sixty million people. Over three million were left without power. Darkened and cold schools in the northeast took the first snow days, many setting records for the earliest-in-the-year snow days in history. The snow is gone on Wall Street in New York, but the potential impact of the coming winter on commodity and stock valuation is just beginning to dawn on traders and analysts.

I went to a favored source to get the best weather forecast possible - the Farmers' Almanac. They say “get ready for a wet, wild winter in 2012.” Ugh! Don’t we have enough of that sort of thing in the credit markets?

It also looks like traders in New York will not have snow as excuse to miss all the fun. The Greater New York area is expected to be stormy and wet with above normal temperatures - that means very cold rain, but less snow.

Could we have more cattle on the market than usual? Very cold temperatures accompanied by average snowfall, might bring a few cattle to market that would otherwise be left in feedlots.

The Gulf Coast states are likely to get a drenching, but its seems the mild temperatures that are predicted for the region will not unduly impact the farming and animal husbandry sector. Oil and gas is rarely impact by anything but the most extreme weather conditions.

West Coast crop production could be negative impacted by below normal precipitation expected in the winter 2012. Apparently, the upper northwest is getting much of California’s rain.

All in all the shock of seeing snow on the ground in October may have set off unnecessary alarms. The rest of the country - the places where weather really matters - appears more benign than suggested by Farmers’ Almanac editors.

Halloween Effect

2011-10-28T16:48:00.005-04:00

The Halloween Effect is getting passed over this year. All eyes are on the European debt crisis and most traders are preoccupied with calculating expected returns under ever riskier market conditions. The Halloween Effect is really the second half of the old market maxim “sell in May and go away.” In the fall investors return from vacation and begin picking up undervalued equities. The action has been noted to created an upward movement in stock prices that begins after Halloween and continues through April.

Academics ignore calendar effects altogether so you will not find a great deal about the Halloween Effect in scholarly literature, proving or disproving its existence. However, two professors Bouman and Jacobsen found the Halloween Effect very much in evidence in the U.S. and thirty-five other countries around the world.

This calendar effect has been a topic in this blog before, but this year is different. We see no trend moving back into the market propelled by the calendar-related investing or any other driver. Granted we have observed net money inflow into all sectors in the months of September and October this year. However, the uncertainty associated with sovereign debt problems has left the market in a state of volatility that has overshadowed sapped the impact such money flows might have on valuation and pricing.

Given, that investors appear to be entirely too skittish given debt problems in Europe in particular. We expect little in the way of Halloween Effect, making it necessary for investor to remain very careful in their stock picking. Simply allocating more to equities without discrimination among stocks is not likely to yield strong results.

Capitalists Occupy Wall Street

2011-10-25T17:53:00.005-04:00

This being the third post in a row on Occupy Wall Street it should be clear that I have been intrigued by the movement protesting corporate greed and economic inequality. They have been described as socialists and militants in the press.

I visited Zuccotti Park in Lower Manhattan a couple of weeks ago and found no one who looked subversive. They seemed more like a bunch of people down on their luck or just plain lonely than a militant movement determined to bring down our capitalist economy.

If they are not socialists, then what are they? Could they possibly be capitalists?

Think about this for a moment. We all learned about “market clearing mechanisms” in principals of economics. It is a process of give and take between suppliers and consumers to reach an equilibrium price. This is the heart of free market economics, the life blood of capitalism.

It would be short sighted to expect free market action to remain confined neatly to the X and Y axes graphically illustrating an economic model. Economics is a behavioral science. It involves real people and sometimes they do not behave predictably or even neatly. They transform, spill over into new territory.

Market clearing action does not have to be limited to the open outcry of the New York Stock Exchange or the sophisticated negotiations around a boardroom table. It can take place just as easily on the concrete benches of a small park a few blocks off Manhattan's Wall Street...or the south lawn of City Hall in Los Angeles...or the cobblestone streets of Boston.

Personally, I see protestors who Occupy Wall Street as among the greatest supporters of free markets. They have the right to set a price, to negotiate; and they are defending that right. They are telling the other side of the table that they have been the suckers in the trade too long. Their ability to provide a discount on their labor has come to an end.

Admittedly, even the Occupy Wall Street group might not define themselves as capitalists and free market agents. Some may have very romantic ideas about Karl Marx or some other proponent of socialism or communism.

Nonetheless, the visibility of Occupy Wall Street and its various supporters and sympathizers is serving an important function in “clearing” the market - whether they see it that way or not. That makes them capitalists. It makes all of us free.

The Protest App

2011-10-21T17:04:00.005-04:00

In Charles Dicken’s Tale of Two Cities Madam Defarge sits knitting the names of assassination targets into stockings. Her family was wronged and she seeks revenge against the backdrop of revolutionary foment in France. Through Dicken’s prose you can almost hear the crowds racing through the streets brandishing pitch forks and clubs as they protest inequality.

It might be a bit less romantic than Defarge’s knitting, but Occupy Wall Street has its codes and signals too. Indeed they have an App. Users of both the iPhone and Android smart phones can download an App called "I'm Getting Arrested" that enables broadcast of a message to fellow protestors if you are about to be arrested. Receiving the message enables protestors to steer clear of police or come to the aid a comrade.

I find this beautifully ironic. Here we have a group protesting greed and using two of the best symbols of large business - the smart phone and wireless communications - as protest vehicles.

Occupy Wall Street: militant or miserable

2011-10-18T16:26:00.003-04:00

A few days ago I walked around the concrete park in Lower Manhattan that is home to Occupy Wall Street protestors. I strolled around the periphery of the little encampment - along with the other “politico tourists.” There was the first aid station and the maintenance corner. A few artists were making signs and t-shirts. A dozen or so were dancing a jig around a small band of musicians and others had already bedded down for the night. I found the latter ironic given that it was around 9:00 pm and Wall Street analysts and investment bankers were just starting their so-called second shift that extends into the wee hours of the morning.

The police in New York and other cities with similar protest groups have reacted to their presence with considerable force - at least in numbers. NYPD had an armed presence at every side of the park.

Frankly, Occupy Wall Street looks more like a bunch of people who have no where else to go than a protest. I wondered where the militancy had gone, or if there ever really was any. It occurred to me that most of them would throw down their protest signs with the first job offer.

Personally, I think we need a good rumble. Certainly I am not advocating that we hoist any heads on a pike. However, our economy and our community need fixing. Politicians are not going to do anything meaningful. Someone has to step up and address rising unemployment, dwindling middle-class income, chronic poverty. Misery too can have power and Occupy Wall Street seems to have plenty of it.

Light Speed

2011-10-14T09:03:00.002-04:00

Preparing the last post on SemiLEDS (LEDS: Nasdaq), the Taiwan-based LED manufacturer, was enlightening - no pun intended. Although we began looking for public offerings in the renewable energy field, we found a sector on the skids that had once been a Wall Street darling. Everyone on Wall Street has at least one road show token with a twinkling LED light.

SemiLED’s beating has been in the public market square. Private LED producers, if they are also suffering, have the benefit of nursing their wound out of the public glare.

One private LED producer, Bridgelux, is proudly holding up its recent award as one of the fastest growing companies in the U.S. It was ranked 751 out of 5000 by Inc 5000. Of course, Bridgelux also makes a bit out of its “made in America” status. It also discusses the LED market place as if it is growing "at light speed." Apparently, news of analyst growth estimate haircuts has not yet reached BrightLux.

The verdict is still out on Bridgelux. We have added it to The Atomics Index in the Solar Group. We will be watching to see for its potential as initial public offering candidate.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Leave LEDS Alone?

2011-10-11T08:48:00.002-04:00

Investors have to look high and low to find an initial public offering these days. A deal is even more rarified in the renewable energy field as low valuations serve up a bit too much dilution potential than most companies are will to accept. That did not deterred SemiLEDS (LEDS: Nasdaq) a Taiwan-based manufacturer of high brightness LED chips.

SemiLEDS went public in December 2010 at $17.00 per share. Since then the stock has delivered a whopping 131% loss to shareholders who dared to buy shares in the offering. Weak valuation is not the only problem for LEDS. The company has yet to show a profit and sales growth has been weak.

With the stock trading at less than a quarter of its IPO price, it might appear to be a compelling contrarian play. Caution might the better watchword. Industry analysts are consistently bearish on demand and pricing for LEDS and there does not appear to be a clear timeline for recovery. At least the near future may hold “more of the same” for SemiLEDS. Unless an investor’s time horizon is five years or more, it might be the wisest choice to leave LEDS alone.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. LEDS is included in the Solar Group in Crystal Equity Reseach’s The Atomics Index of alternative energy companies.

Bringing New Tech to Old Sectors

2011-10-07T08:27:00.002-04:00

Silver Springs Networks is the latest addition to a growing list of energy efficiency companies in The Mothers of Invention Index. The company offers an array of smart grid applications to electric utilities such as advanced metering and distribution automation. It also offers solutions for used by customers opting for demand response or with electric vehicles. The various solutions are based on a mix of technologies from a string of networking, metering and electronics manufactures. Silver Springs’ partner list is lengthy and includes some of the usual utility suppliers such as General Electric and ABB. However, there are a few partners that are not usually associated with electric power grids such as Oracle and Cisco Systems.

The list of customers is also impressive and includes Baltimore Gas and Electric, Execlon’s ComEd, American Electric Power, Pacific Gas and Electric, Florida Power and Light Company, Western Power and Indianapolis Power and Light among others. Silver Springs has also sold to customers outside the U.S. such as Australia’s CitiPower.

Clearly Silver Springs Network products and services have gained a foothold in the electric utility market. The customer based most likely has already delivered strong sales and perhaps even profitability. We expect the company to be a target at some point of larger player such as General Electric that wants a complement to existing utility products and services. An initial public offering seems less likely as the company is not likely pressured to raise capital to support operations or grow. With the IPO market in the dumbs, it hardly seems worthwhile.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Opower Savings

2011-10-04T15:02:00.003-04:00

Developing new energy and power sources is not the only way to solve our nation’s energy problems and reduce dependence upon oil imports. Bringing efficiency to the user side of the equation can also make a difference. A small company with offices in Virginia and California Opower has developed a white-label customer engagement platform for electric utilities. Essentially it is a Customer Relationship Management (CRM) interface. The company claims to have worked with 57 utilities around the U.S., serving more than 10 million households.

What sets Opower apart from other CRM applications is its focus on the unique neds of the utility operation and customer. For example, the platform offers customers a Home Energy Report and Energy Alerts in addition to giving the utility a way to offer energy source alternatives. Opower boasts that utility customers register substantially improved customer service ratings after using Opower. On the utility side of the platform customer service representatives are given an array of computer-based tools to managed customer accounts.

The CRM tools are encompassed in a patent-pending analytical platform Opower calls the “Insights Engine.” It takes advantage the newest rave in the power industry - information based energy management or IBEM. The idea is to use behavior science to understand and change power usage. Then targeted, user-friendly communications take aim at mobilizing utility customers on a large scale to use energy more efficiently. For example, utilities using the Insights Engine have discovered new success in promoting the adoption of dynamic rate plans and in-home hardware to control power usage.

Opower displays a meter on its corporate website ticking off kilowatt hours saved through its products and services. The meter topped 470 million recently and continues to climb. Some investors might consider this a modest beginning. With only 57 utilities on board, the company has a long way to go to capture a meaningful share of the utility market.

The company is private, but if it scales up could present a potential initial public offering opportunity. Accel Partners augmented the founders’ seed money to finance Opower’s development and beginning operations. We expect the venture capital element to push for an exit at some point in the near future. Opower has been added to the Efficiency Group of The Mothers of Invention Index and suggest investors join us in watching what happens at Opower.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Opower is included in the Efficiency Group of The Mothers of Invention Index for alternative energy companies.

Island Economy: Exporting the ABCs

2011-09-30T08:55:00.004-04:00

In the previous post “Island Economy: Volcanic Trade” I mentioned my experience as a Peace Corps volunteer in the Pacific in the early 1980s. Last week the Federated States of Micronesia threw a party to help former volunteers celebrate the 50^th anniversary of the Peace Corps and the forty-fourth year of operation in Micronesia.

At the reunion party last week one of the Jesuit priests who has spent many years in Micronesia gave a brief update on the state of Micronesia’s educational system and its economy. The island nation is well educated, with strong public and private primary and secondary schools. It has its own community college now. Young people can get an education while staying at home. This is in part the legacy of Peace Corps volunteers who toiled in tin-roofed classrooms, fighting off mosquitoes and scorpions to teach math and English and world history.

The lessons are serving Micronesia well it seems. I listened intently to Father’s talk and I was taken back to the first lesson that I learned about the “island economy.” For all the lush greenery that greats the unschooled visitor, small islands like those found in Micronesia, rarely have enough resources to support much more than a subsistence economy - a carefully regulated one at that. Fias Island where I had been assigned as an economic development specialist had been uniquely able to export food in its early history. However, its three villages also lived under very closely enforced rules that might seem social in nature, but really are ingenious means of allocating resources.

Take for example, the island dress code. Fais residents were prohibited from wearing more than one piece of clothing at a time - at least in the village area. In gardens and elsewhere it is acceptable to pile on cover from the elements. Most foreigners - including me at first - thought it was intended to restrict personal freedom. After I had worked with my counterpart on the island to count island resources, it because apparent that there was flat out just not enough material on the island to produce more than one article of clothing for each person - excluding imports. When you live on an island without a lagoon and the strong current of the Marianas Trench run right by your front door, you do not build a heavy reliance on trade.

Of course, now that Fias Island has an airport, transportation is no longer an issue. Remember the phosphate mining operation I mentioned in the previous post. They filled in the holes left by Japanese soil extraction effort and laid down a tarmac. Trade matters and the dress code are permanently changed. Just the same - what can a little island produce?

Right now Fias along with the rest of Micronesia is exporting labor. Truly Micronesia’s educated population is its most valuable asset. All those little girls and boys who learned to count and say the ABCs at the urging of Peace Corps volunteers have become doctors and lawyers and engineers. Micronesia has sent more than its fair share of young people to the U.S. military to serve in the Iraq and Afghanistan arenas among others. Today remittances back home are the largest component of the country’s gross domestic product.

I learned a great deal about economics on that little island in Micronesia - and quite a bit more about my own country at the same time. The spread of knowledge and understanding is after all the purpose of the Peace Corps. Fifty years later it seems to have worked - at least for me. We are spoiled in a land of plenty in North America. In our decisions related to energy and other natural resources, we would do well to consider the merits of a “dress code” - of some sort,maybe not one-piece of clothing - to bring balance to our own economy.

Thank you to the Federated States of Micronesia a pleasant evening and a still-relevant lifetime lesson in economics.

Island Economy: Volcanic Trade

2011-09-27T17:54:00.000-04:00

Last week I had the privilege of attending a reception hosted by the Federated States of Micronesia to celebrate the 50^th anniversary of the Peace Corps. Volunteers have served on the tiny Pacific Islands that comprise Micronesia for forty-four of those years. The event was attended by about a hundred or so aging former volunteers who eager for news of their adopted families and old haunts. Most had been school teachers and a few were involved in the health care field.

It was an economic disaster that took me to Micronesia as a Peace Corps Volunteer. I was assigned to a tiny dot of real estate called Fias Island - about one and one-quarter square miles of coconut palms, pandamus and banyan trees. Unlike most Pacific islands Fias has no lagoon. It sits on the very tippy top of a long dormant volcano. Island folklore describes strange gases emanating from the island center - a location long considered “taboo” for residents.

The wisdom of locating on such a precarious place might seem questionable. Nonetheless, archeological studies indicate the island has been populated continuously since at least 400 AD. The attraction had been the island’s rich soil, which was laced with phosphate by volcanic activity. Fias became known as the garden spot of Micronesia and its residents frequently filled large canoes with overflowing baskets of sweet potatoes, breadfruit, coconuts and papaya for friends and relatives on other islands.

Agricultural production was more than sufficient to support a strong artisan population. Fias produced wooden fishing tackle boxes, coconut fiber twine, weaving looms and accessories, and woven tapestries known as lavalavas that serve as clothing or ceremonial purposes. Fais was also a popular destination for getting a full body tattoo. In earlier times the island’s three villages boasted several “houses” where men and women could receive adornment with designs inspired by dancing dolphins and flying fish.

The life of plenty soon came to a screeching halt with the onset of World War II. The Japanese had been assigned responsibility for the Micronesia region after the conclusion of the previous world war. Apparently it made sense at the time to remove the phosphate-rich soil to Japan to support that country’s war effort rather than leaving it to the benefit of scantily clad islanders. Japanese military forces used large, motor-driven brushes to whisk away Fais’ rich soil. The last shipment of soil went to the bottom of the Pacific after U.S. bombers attacked the ship on its way back to Osaka.

After that Fais islanders were left to garden in small plots at the island’s periphery, coaxing a few potatoes and a bit of papaya from the weak soil. Most put their time into “cutting copra” for pressing into the coconut oil that ends up in pet food or cosmetics. Cash receipts from copra sales were used to buy bags of rice from government trade ships carrying the copra buyers and cooperative store. If the price of copra was down on the world markets or the trade ship schedule got delayed, islanders were sent foraging out into the thick tropical vegetation for something edible.

My language tutor taught me a very important economic term while I lived in Fias and pondered the implications of world policy decisions on who gets to eat and who does not. As all words in the unwritten Fias language, the verb thō-ră-vee is pronounced phonetically. It means to “grasp” something as in opportunistically grabbing anything that goes by whether it is an idea spoken in the casual repartee of the “island men’s house” or flotsam on the ocean current. Either has value - real economic value either as intellectual property or a natural resource.

While I bemoaned the recent turn of misfortune for my island friends, I also realized that they had survived on that tiny bit of land for many centuries, probably knowing both feast and famine. It occurred to me that a culture with a word like “thoravee” is a bunch with economic resilience. My visit to the FSM reception confirmed that view.

Next post will be about how Fias volcano trade has turned to other exports.

Made in America

2011-09-23T15:34:00.003-04:00

Suniva has been added to The Atomics Index in the Solar Group. Based in Atlanta, the company produces monocrystalline silicon solar cells and module. Suniva boasts an efficiency rate of 19% for its Artisun-branded solar cells and 16% efficiency for solar modules produces with the Artisun at the core. Suniva is elbowing its way into the growing pool of solar cell producers, making bold predictions of a market without subsidies.

The U.S. let Asian producers take over solar cell production. Finding the country nearly shut out of the market, U.S. political and business leadership has thrown everything but the kitchen sink at solar cell producers. The recent collapse of solar power solution provider Solyndra may be a consequence of the cold-then-hot policies of recent U.S. Congresses and Administrations.

It is not surprising then that Suniva attempts to distinguish itself from the rest of the pack as a “Made in America” product. It also claims its cells have the world's lowest cost, highest conversion efficiency commercially available. If the latter claim was true it would seem a world-focused marketing strategy would be the preferred choice – not one touting it has been produced in the U.S. where manufacturing costs are perceived to be sky-high.

Suniva is still a private company, but we have hopes that the rest of us minority investor-types might get a bite through a future initial public offering. The company received backing early on from Warburg Pincus, Goldman Sachs Group and New Enterprise Associates, among others. It is reasonable to expect this group to lobby for some sort of exit and an IPO seems the logical choice.

The company is highly dependent upon its founder, engineering genius Dr. Ajeet Rohagti. A professor of engineering, Rohagti is recognized the world over for his contributions to the photovoltaic industry. He serves as the company’s chief technical officer. Suniva’s CEO John Baumstark hails from one of the venture capital investors, H.I.G Investments. As is often the case in early stage operations, it takes a bit of time for an effective transition from leadership by a founder to a CEO with an entrepreneurial or even operations orientation.

While a public offering might be welcome, I can wait for the chairs in the boardroom to get broken in before I risk money on an early stage solar company.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Suniva is included in Crystal Equity Research’s The Atomics Index in the Solar Group.

A Change in Name Only

2011-09-20T08:55:00.002-04:00

A new name has been chosen for our alternative energy index listing companies using the earth’s forces to generate power and electricity. These are developers and producers of geothermal, wind, hydro and solar concentration technologies, which are employed in a variety of conventional and novel power systems. Previously called the Earth, Wind and Fire Index after the 1960s pop group, the list is now named after Electric Earth, a somewhat obscure rock band with a style reminiscent of Led Zeppelin.

The name change comes on the notification by the International Securities Exchange (ISE) that it claims to have named an index Earth, Wind and Fire before we began our indices. We had completed only an Internet search of the name before beginning our indices and found no reference to Earth, Wind and Fire in the context of alternative energy. In other words the ISE index is not recognized and ranked by Google or the other search engines. Alas, the group and their lawyers are all twisted in a knot over our use of the name. Accordingly, we have cheerfully stepped aside with a new name for our index.

The Electric Earth Index includes all the same companies as before. The newest addition is BrightSource Energy Corp., a developer of solar convection technologies for electric and power generation. We highlighted BrightSource in the “Silk Suits in the Boardroom” post last week. Brightsource has made considerable progress in applying solar concentration knowhow to electricity generation, demonstrating that truly earth can be electric.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Silk Suits in Boardroom

2011-09-16T14:44:00.002-04:00

The boardroom - or at least the conference room - at BrightSource Energy, Inc. (private) has been graced by a steady stream of “silk suited” investment bankers and venture capitalists. The fledgling developer of solar thermal power plant systems has raised over $300 million from the likes of Vantage Point Capital Partners, Black River, DBL Investors and Morgan Stanley. BP Alternative Energy, Google, Alstom and StatoilHydro Venture have also cut shceks to support BrightSource’s strategic plan.

Based in California, BrightSource is using the power of the sun instead of fossil fuel to heat water into steam. Then just like in conventional power plants the steam drives turbines connected to electric generators. Tracking mirrors called heliostats track the suns progress across the sky, concentrating the sun’s power on a boiler filled with water. The boiler is perched on a tower immediately adjacent to turbines or other industrial machinery that can be driven by steam.

What is interesting about BrightSources boiler, which they also refer to as a “solar receive,” is that it is designed to be heated from the outside rather than by some internal flame. Inside the boiler high-temperature, pressurized stream is generated as the heliostats focus the suns rays on the boilers exterior. Then conventional systems take over generating steam for electricity or mechanical processes.

The heliostats and boiler are not the limits of BrightSource’s innovation. The company is also using proven molten-salt storage technology. The salts are also heated to high temperatures with some of the steam output, which then serve as a storage unit. Storage some of the heat helps extend the period of electricity generation beyond sundown.

The company already has a demonstration plant installed in Israel at what they call the Solar Energy Development Center (SEDC). The SEDC is located in the Rotem Industrial Park in Israel’s Negev Desert, about southeast of Jerusalem and produces 6 MW of thermal power using 1,600 glass mirrors. BrightSource’s solar thermal system is to be installed at the Ivanpah Solar Electric Generating System (ISEGS) in California’s Mojave Desert. The planned project is expected to yield 390 MW of electricity.

What probably has the “suits in the boardroom” particularly excited is another proposed project in California. In August 2011, BrightSource Energy filed an application for construction with the California Energy Commission for the development of a two 250 megawatt solar power plants in Inyo County. A big selling point for the application is apparently the claim that the land use requirement is 33% less than would be required for a solar photovoltaic plant with similar output. BrightSource also claims the pedestal design of its heliostat units is more environmentally friendly and less disruptive for plants and animals.

We are adding BrightSource to the Solar Concentrating Group of our Electric Earth Index (recently rename from Earth, Wind and Fire Index). It presents limited investment opportunity for the minority investor in as much as it appears the company might have already raised adequate capital to support the company through to profitability. Indeed, an initial public offering is more likely at this point than another private round of financing.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. BrightSource Energy is included in Crystal Equity Research’s Electric Earth Index (previously name the Earth, Wind and Fire Index) in the Solar Concentrating Group.

The Novelty of Alternative Energy

2011-09-13T11:03:00.001-04:00

Earlier this year Crystal Equity Research published indices of sorts…lists really…of alternative energy developers and producers. Named for popular rock bands, the lists were intended to give followers of Crystal Equity Research and the Small Cap Strategist a glimpse at which companies we think are relevant in the alternative energy and conservation world.

The Beach Boys Index is composed of companies exploiting the power of the sun through photosynthesis. Here investors can find all the biofuel and ethanol companies. There are some waste-to-energy developers as well. Less obvious is the group of alternative chemical producers.

The name Earth, Wind and Fire Index says it all for a list of wind, geothermal and hydro-electric power developers and generators. We also include solar concentration applications in this group.

We attempt to capture energy sources tapped from the atom in The Atomics Index. This group includes nuclear power, solar photovoltaic and hydrolysis technologies.

My personal favorite is The Mothers of Invention Index. Investors will find companies developing and selling products and solutions that save energy, make our machines and processes work more efficiently and distribute our energy more efficiently.

Updated lists were published earlier this month. We changed few names, although there appears to have been a decided shrinkage in fortunes for alternative energy developers. It seems that progress has been slow as credit and equity markets contracted. Several of the companies appear to have hit road blocks as they attempt to scale their technologies to commercial volume. For all the work, all the public funding and all the hype, alternative energy remains a novelty in many respects, making our novel index names all the more appropriate.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Everything is Changed, Nothing is Different

2011-09-09T11:15:00.004-04:00

Over the Labor Day week-end I had the pleasure of showing a friend from Canada around the Financial District of New York City. Of course, her primary interest was in the World Trade Center Site. She was surprised at the amount of work that had been done. Yet we were also cognizant of the fact that it is now ten years since that horrible day when so many lost their lives in the collapse of the two World Trade Center buildings. The replacement buildings are still not completed.

After walking around the perimeter of the construction site that has now replaced the wreckage of the buildings, we made the requisite pilgrimage to the larger-than-life bronze bull statue that serves as the Financial District mascot. Yes, she took fore and aft pictures of the robust animal, elbowing her way through a throng of tourists.

Then it was off to the U.S. flag-draped New York Stock Exchange on the corner of Wall and Broad Streets. On the opposite corner more tourists rested on the steps of the museum memorializing George Washington's first inaugural speech as President of the United States. As we walked I pointed out the new residential high-rises that have sprouted up among the older buildings, some of which are dated back over a century. Then we looked for a spot for a cool beverage, landing on stools at a long-time established Irish pub on Maiden Lane just down the street from the Federal Reserve Building.

In the days since our quick tour of the neighborhood, I reflected on the day and was struck by little New York's Financial District has changed since September 11, 2001. By this time I had begun to hear media coverage anticipating the 9/11 remembrance that would come on the week-end. News media clips were in stark contrast to the little mini-tour with my friend. The country was profoundly impacted by the event, seemingly changing everything. Families were shattered with the unexpected and violent loss of parents and children. So many first responders went into those buildings and never came back out, leaving their families with only the comfort of knowing their husband or father died a hero.

Yet the stock exchanges housed in New York’s Financial District still open each day, with traders and analysts arriving each morning in buses, cabs and subway trains. The Federal Reserve is still functioning. Real estate investors still find reason to raise tall, graceful buildings for people to live and work in the neighborhood that the Dutch started back in the 1500s. Residents walk the streets with purpose, no fear in their eyes. Tourists still flock to icons of capitalism and freedom with no less zeal than ever.

So much for bringing Western Capitalism to its feet. The master minds behind the attacks on September 11, 2011, were sociopaths with a thirst for blood and violence - nothing more. There was no real political objective. The religious inspiration was just a cloak to give murder legitimacy in the eyes of whoever paid for the plan. Such criminals are no match for productive people who love to work and have a passion for peace - the kind of people who live in New York City.

Everything changed on September 11, 2001, but ten years later nothing is different.

Careful Parsing of Words

2011-09-06T10:36:00.003-04:00

“We harness the power of microalgae to yield substantial volumes of oil and bioproducts…. We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry.”

Solazyme, Inc. Initial Public Offering Circular, May 27, 2011

These were big claims by Solazyme, Inc. (SZYM: Nasdaq) in its debut as a public company earlier this year. During the road show with institutional investors, Solazyme management described a commercial-scale production capacity made available to the company through contract manufacturers and a new facility purchased in May 2011. The company claims to have already produced over 500,000 liters of oil using its proprietary tailor-made microalgae.

We are certain that at least 80,000 liters were produced since that is the amount of marine fuel produced for the U.S. Navy. What is less certain is the ability of the Solazyme to transition to larger scale production. The company had been producing test quantities at contract facilities that held a capacity of 75,000 liters. In May 2011, Solazyme bought a facility with several 128,000-liter fermenters providing annual production capacity of over 2.0 million liters.

We have covered in previous posts how precarious scale-up can be for these living factories. The verdict is still out on whether Solazyme’s “designer” microalgae will thrive in a large-scale environment. Indeed, the IPO offering circular cited scale-up production and yields as two of the risk factors for Solazyme’s business.

At this juncture Solazyme has been careful about making too many yield claims. While it has not put oil yields into print, Solazyme has made claims related to the fatty acid content of its oil. The company claims that it has succeeded in increasing the concentration of capric, lauric and myristic fatty acids by 20% compared to palm kernel oil. It also claims that its oils have less oleic acid content.

Investors will need to wait until the Company has had some time in the new Peoria, Illinois production facility to determine whether Solazyme can deliver on its road show promises for total production.

Labor Day

2011-09-02T09:23:00.000-04:00

Have a safe and pleasant Labor Day Holiday!

Algae Crush

2011-08-30T19:21:00.003-04:00

In the post “Holding up a Yield Sign to Algae” on August 19, 2011, I promised a fresh look at algal-based biofuel developers. It is vital for investors to scrutinize their yield claims. Not all algae is created equal and some of the little guys are not up to the production statistics sometime bandied about by zealous management teams.

A benchmark is needed. For that we surveyed algae authorities. Oilgae is an up and coming resource on the sector. It was their data cited in the August 19^th post. The National Renewable Fuel Laboratory is another prominent resource. Nonetheless the data provided by industry groups is aimed at supporting their constituents or at least their political position.

The other problem dogging investors in critically evaluating yield claims by algae-based biofuel producers is that the laboratory where most yield standards have been determined and the “factory” are worlds apart. Apparently algae can get “all choked up” in a large scale environment.

The National Algae Association provides an excellent forum for the practical aspects of algae-based biofuel production. Unfortunately the NAA is a bit weak as a data resources.

It appears investors will need to look at each algae biofuel producer and use some common sense to determine if their claims are valid.

Life After Biofuel

2011-08-26T20:58:00.004-04:00

Management of TexCom Resources, Inc. (TEXC: OTC/PK) has a story to tell. It could be a tale of woe. Britt Brooks, Executive Vice President and Director, tells it as a survival story. They company started out as another aspirant to produce renewable fuel. Commercial success eluded the company. Early on the decision was made to redirect the Company's technologies to a market that was within reach - environmental clean up.

TexCom is targeting the market for clean up of naturally occurring radioactive, a nuisance common in the pipes and wells of the oil and gas industry, and wastewater by-products in from oil fields. Increased drilling for oil and gas in Texas and the Gulf Coast and increasing use of "fracturing" to enhance yields have supported growth in oil field waste collection.

Since turning to oil field services, TexCom operations have turned highly profitable even if on a low revenue level. Management is guiding for a profit of $3 million in net income on $10.3 million in revenue in the year 2011.

The company recently acquired a new disposal site in south Texas that is within close proximity to growing number of wells in the Eagle Ford Shale region. The company's site in Altascosa County in Texas is also near a high concentration of oil rigs. TexCom as a growing list of customers that already includes some of the leading oil and gas producers.

TexCom is a fully reporting company even though it still trades on the Pink Sheets. Accordingly, it is a company with readily available financial information. TEXC has been added to our Mothers of Invention Index in the Waste Reclamation Group.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. TEXC is included in the Waste Reclamation Group of the Mothers of Invention Index for alternative energy companies.

Under Pressure

2011-08-23T19:30:00.002-04:00

In the infinite wisdom of FINRA, the Financial Industry Regulatory Authority, a new license requirement was established for proprietary traders. Listed as the new Series 56 Examination, proprietary traders have until September 19, 2011 to pass the exam in order to continue working in a trading situation.

The new requirement has been met with more than just a bit of grumbling. Traders are a unique lot. Most are accustomed to operating daily under intense pressure - just not examination pressure. Many accomplished and successful traders, who consistently perform well for clients of their so-called "prop desks," have not attended a class in years. They learned their craft on-the-job. The prospect of taking an examination, especially one that is administered on a computer, is intimidating.

To make matters worse FINRA was slow in publishing guidance on the content of the exam. Thus far it appears the exam is largely composed of options related questions borrowed from the ubiquitous Series 7 Examination question pool. The Chicago Board of Option Exchanges finally issued a guide for the content of the Series 56 exam.

Failing the exam on the first round is not a "deal killer" for traders. There are second and third chances if necessary. However, a trader could get "logged out" if her or she fails to pass the exam on the second try. A six-month wait period is required after the second failed exam. Do not be surprised if a new voice answers the trading desk phone on September 20th. Your usual trader is likely "under pressure" to pass an exam.

Holding Up Yield Sign to Algae

2011-08-19T08:25:00.007-04:00

A presentation a few weeks back detailing a failed algal-based biofuel project got me wondering just how much oil can algae produce. Many investors, including me, have been looking to algae to provide that highly scalable alternative to petroleum as a transport fuel alternative. What if those little green blobs turns out to be...well lazy blobs and not highly productive blobs?

A website holding itself out as an authority on algae, oilgae.com, suggests algae can produce between 5,000 to 15,000 gallons of oil per acre per year. This compares to corn and palm, which can produce 18 gallons and 635 gallons of oil per year, respectively.

Apparently not all algae are created equal. As percentage of dry weight the most productive algae are chlorella protothecoides and nannochloropsis, which have oil content up to 55% and 68%, respectively. Green algae has been the most popular among developers of biofuel. Green algae apparently produce more starch and the lipids or fats, but they proliferate at a astonishing rates when temperatures are kept at a steady 30 degree Centigrade. Marine nannochloropsis reportedly has a theoretical maximum yield of 20 gallons per cubic meter per day when grown in open ponds. This data was gathered by the National Renewable Energy Laboratory in laboratory tests.

Now all these figures are wonderful. I am not taking issue with even one number. However, investors should take note of those key words "theoretical" and "laboratory." Algae may not perform so well in large scale commercial conditions. Thus it is incumbent upon investors to hold up a big yellow yield sign to algae companies hungry for capital and first verify the claims of algal-based biofuel operations.

There are over forty companies in the Algae Group of our Beach Boys Index for companies involved in production of alternative energy through processes and sources involving photosynthesis. Over the next several weeks we plan to verify the production claims of each company, beginning with the public companies.

Hanging By a String

2011-08-16T16:20:00.005-04:00

Yesterday Evergreen Solar, Inc. (ESLR: Nasdaq) filed for bankruptcy protection in a Delaware court, asking for relief from the collection proceedings of creditors. The company has already come to terms with holders of more than 70% of its outstanding debentures, filing at the same time a restructuring agreement.

The agreement stands out because of a provision for a “stalking horse,” a role being filled by a new entity named ES Purchaser, LLC. The idea is prevent a hostile takeover by some low-ball bidder looking for a deal. If there are no bids at acquire Evergreen’s assets at acceptable levels, the stalking horse will most likely end up the acquirer.

Evergreen wants breathing room to perfect its proprietary String Ribbon wafers for solar panels. The Company owns a manufacturing process that pulls high temperature resistant wires through molten silicon to form a multi-crystalline ribbon of silicon crystals. The idea is based on a simple concept of surface tension much like we observe when children dunk a little metal ring into a soapy solution and blow bubble. Once pulled through the hot silicon, the “ribbon” is then cut into proper lengths for processing into solar cells.

The Evergreen process offers considerable efficiency in manufacturing and raw materials costs. Unfortunately, String Ribbon technology is not capable of achieving the same electrical performance as wafer technology. Conventional silicon wafers can convert 15% to 16% of the incoming light into electricity. However, solar cells using String Ribbons are capable of converting only 13% to 14% of light into electricity.

That is not the only hurdle Evergreen has to jump. Note the term “molten silicon.” The crystal growth process requires considerable thermal energy. So even though Evergreen’s solar cell design uses less silicon, it runs up a scary energy bill just to get the ribbons pulled and cut. To make matters even worse, not all of the cuts can be used as they are not of consistent thicknesses.

Evergreen has yet to produce its solar cells in sufficient volume to breakeven. It seems that solving the energy cost and batch issues should be higher priority than trying to scale production.

The company’s balance sheet tells the entire story. The accumulated deficit is $1.1 billion - yes that is Billion with a B. Evergreen has only $31.4 million of the total funds its raised over the years and has borrowed $394.8 million. Creditors are now saying enough is enough, driving Evergreen to seek protection in bankruptcy court.

Evergreen is literally hanging by a string....in its market and in court. The name is still included on our list of alternative energy companies called The Atomics Index. There could be hope that Evergreen management is motivated by the bankruptcy process to make some hard choices on production. Co-location with a low-cost energy producer, tweaks of the process to improve yields, sale to a more practical competitor....such moves could look more appealing from the court room.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Evergreen Solar is included in Crystal Equity Research’s The Atomics Index in the Solar Group.

Tough Act to Follow

2011-08-12T08:50:00.001-04:00

Earlier this week a major law firm in New York, Hodgson Russ, LP, hosted one of its NYC Cleantech events, showcasing start-up clean technology and clean energy companies. This event featured a keynote presentation by Michael Gilbert, now a private consultant in the private and public energy field.

Gilbert has not always been a consultant. His was a story of failure as a business development officer for a Texas-based company aspiring to lead the way in algal oil production. His presentation was a bit of tongue in cheek reminiscence on his years with the company that has failed to generate much more than press releases. Gilbert described the need to accurately assess risk and the importance of verifying performance claims, among other key hurdles that investors enamored with the "green" story are wont to confront.

It was a tough act to follow for the rest of the companies presenting at the event. Directly following Gilbert was Unified Fuels Technology. Based on Jersey City, Fuel NJ as they like to be called, had to acknowledge Gilbert’s admonitions at nearly every point in their presentation.

FuelNJ has developed a proprietary biomass conversion processes that accepts all manner of feedstock, from municipal waste to sugar cane bagasse. The company claims it is not necessary to shut down to re-gear or clean-up equipment. That could be a big plus for a plant that is not blessed with a consistent and abundant feedstock.

FuelNJ is a private company and thus leaves most of us at the station when it comes to making an investment. However, it is a company that is worth adding to our Beach Boys Index in the biofuels group. We expect to see some consolidation in the biomass conversion group over the next few years. There appears to be considerable divergence in technology among the biomass conversion developers. Not everyone will survive as an independent. It seems more likely that a leaders will consolidate the best of technologies.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. United Fuel Technologies, Inc. is included in Crystal Equity Research’s Beach Boys Index in the Biofuels Group.

Shake Rattle n Roll

2011-08-09T21:21:00.000-04:00

The trading week is well on its way to the history books…and its only Tuesday…bringing back a bit of nostalgia for the old days. There appears to be a “whole lot of shakin’ goin’ on” but it is not the trim beats of old time jazz tunes. It is the heady to and fro of market volatility that has investors harkening back to the fall of 2008.

Indeed, the U.S. equity market has not experienced the current level of volatility since those memorable days in late 2008, when the financial world seemed to be coming apart at the seams. The CBOE Market Volatility Index, the popular VIX measure, appears poised to hit 50 before the week is over.

What does new volatility mean for stock selection? In my view, it is a clear call to search far and wide for the deepest value possible.

The spike in volatility is a clear sign of uncertainty and confusion. Much has been written by much smarter financiers and economists than me about market efficiency. Many argue that information is immediately incorporated in stock price. I beg to differ. The information may be in the marketplace but investors are wont to accept news that differs from their previous viewpoint. They are even more reluctant to take losses in a stock and will close their eyes to the most blatant of truths until forced to accept the obvious. Then comes the famous “capitulation” and only then does all information become reflected in the stock price.

Even then there can be a whipsaw effect as we have seen in the past few days - one deep correcting day following by a small but still significant upturn in the major indices. Clearly not everyone got the memo and even some who got it may have misunderstood the bad news of economic slowing and fiscal disaster.

Deep value stocks provide a cushion against such volatility. They are less likely to participate in wild price movements as the stock is already priced at low multiples to earnings or cash flows. As might be expected I would recommend a screen for strong cash flow, low debt, and high sustainable growth rate all at low price to earnings or price to cash flows multiples. Sometime left out of popular screens is beta. Low beta names are a good play in a volatile market, giving investors much lower return and many more nights of restful sleep knowing their picks are not likely to vary much more than the broad market.

Stand Corrected

2011-08-05T10:21:00.000-04:00

The equity market has a way of humbling even those with the sharpest pencils. No matter how brilliant or successful, analysts and traders were dealt the harshest of critiques yesterday. Yesterday, on August 4, 2011, the U.S. markets declined by the largest percentage since the Fall 2008 financial system crisis. Some pundits have called it a “correction.”

What is a market correction anyway? It is defined as a downward movement in the equity market from 5% to 20% that is not large enough to be called a “bear market.”

If you subscribe to the most strict form of the Efficient Market Hypothesis you believe that stock prices always fully reflect all available information about a company, both that which is reported in filings to the SEC as well as the information known only to insiders. Yet the fact the several European countries as well as the U.S. are having debt problems is hardly a revelation. The problems have been widely reported for months, even years.

Perhaps it is not a matter of information distribution. It is a matter of capitulation - giving in to what investors are wont to do - admit they are wrong. Valuations placed on U.S. equities were simply too rich against the backdrop of European and our own domestic debt problems. A growing number of investors had adopted this view, yesterday spilling over into a crowd of sellers. Today we all “stand corrected.”

Tomorrow we begin the hunt for cheap stocks.

Wherefore Growth Art Thou?

2011-08-02T09:55:00.001-04:00

The entire country has been laser focused on the debt ceiling crisis and the complete and utter failure of our political leaders to face up to their elected responsibilities. IT is difficult to figure out which is worse. There is perhaps a more worrisome matter at hand - lack of growth in our economy.

Recent earnings reports suggest that the economic recovery is uneven at best. Some companies have produced earnings surprises, but most were only because analyst had set their sights much too low in the first place. The June 2011 report from Ben Bernanke downgraded the Federal Reserve’s expectations for growth. The Fed lowered its forecast for economic growth for 2011 to between 2.7% and 2.9%. At the last meeting of the FOMC in April, the Fed had projected growth for 2011 of between 3.1% and 3.3%. For 2012, the central bank forecast growth of between 3.3% and 3.7%, compared to its April projection for 2012 of 3.5% to 4.2%.

In my last post, I offered a counter cyclical idea - the food sector - as a place for investors to take a defensive position against a tough economy. Consumers need to eat no matter what the economy is like, right? They also need to drink water.

Consolidated Water Co., Ltd. (CWCO: Nasdaq) is trading at the lowest multiple of forward earnings among a group of a dozen water utilities. It’s forward earnings multiple of 4.4 times compares quite favorably to a multiple of 23.6 times trailing earnings. The consensus estimate of $0.47 on $53 million in total suggests a dramatic change in fortunes for the company. At last there is a golden nugget of growth.

Consolidated has long been a favorite on Wall Street, in part because it has an exotic business model. Based in the Caribbean, the company uses reverse osmosis technology to produce fresh water from seawater. The stock has commanded a strong premium since it went public several years ago.

Investors should inspect the CWCO nugget carefully just in case it turns out to be fool’s gold. The company has missed the consensus earnings estimate in each of the last four quarters, suggesting that analysts are just a bit too optimistic about this company.

Consolidated has established a brief but admirable record for paying dividends. The current yield is 3.5% - decent compensation while waiting for the company to deliver the results analysts have projected.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Food Defense

2011-07-29T09:20:00.003-04:00

Although I thought my appeal in the last post on deficit spending would register a strong appeal with members of Congress, it appears my call has gone unheaded to “follow the economic arrows.” Members of Congress and the Administration seemed more interested in political games than in rising in solving real economic and fiscal problems. The debt ceiling limit is looming larger than ever over our heads.

It is time for investors to get defensive. Short of hiding money in a mattress, the best investment in tough times is food. B and G Foods, Inc. (BGS: NYSE) was profiled in our Small Cap SEARCH newsletter a few issues back.

B and G Foods, Inc. is a leading manufacturer and distributor of shelf-stable foods in the U.S., Canada and Puerto Rico. Its products are sold under popular brand names including Ortega, Cream of Wheat, Polaner, Las Palmas, B and M, Ac’cent, Emeril’s and Brer Rabbit, among others. Food choices include Mexican cuisine, fruit-based spreads, jarred wet spices, baked beans and brown bread, meat spreads, pasta sauces, flavor enhancers, molasses products, vinegars, cooking wines, sauces, marinades and soups. Its portfolio of brands and foods has been assembled in part through a series of acquisitions over the past fourteen years. The Company’s most recent acquisition was the Don Pepino and Sclafani brands from Violet Packing, Inc. It was the first deal in four years and is expected to help drive sales and earnings over the next few years. We expect the Company to continue pursuing tuck in acquisitions of strong brands that complement the Company’s portfolio of specialized foods and unique flavors.

Despite the economic downturn, B&G has been successful in growing sales and profits in each of the last three years. The Company reported $513.3 million in total revenue in 2010, providing $98.9 million in net income or $0.68 per share. This represents a net margin of 6.3%, which compares favorably with the net margin of 3.5% in previous year. Operations generated $98.9 million in cash, implying a cash conversion rate of 19.3%.

Ample profits have fortified the balance sheet. The Company held $98.7 million in cash and equivalents at the end of December 2010. Working capital totaled $153.9 million. B&G holds $477.7 million in debt, most of which was accumulated in support of its acquisition strategy. We note that the Company’s dividend of $0.84 per year appears secure given the Company’s cash balances and consistent cash flow generation.

Analysts following the Company expect strong growth in the coming year. The consensus earnings estimate for 2011 is $1.02 per share on $536.3 million in total sales. The anticipated growth is expected to be driven in part by the Company’s recent acquisition of the Don Pepino and Sclafani brands. Margin pressure from inflationary influences in product ingredients may be a factor in 2011 and 2012. However, it appears analysts have minimized the threat.

When we first profiled BGS in the Small Cap SEARCH Newsletter, we set our price target at $23.00. The price target implies a multiple of 20.0 times the 2011 consensus estimate. This is dramatically higher than the consensus target price of $17.92. At the time we thought the consensus target price does not adequately credit the Company for its building profitability and top-line growth. That target price might be a bit aggressive given recent economic developments. Nonetheless, the stock still seems undervalued.

In our view, the Company should trade near the average price-earnings multiple of the S&P 500. We expect positive year-over-year comparisons throughout 2011 to attract investor interest. We suggest investors accumulate BGS during periods of price weakness so maximize potential dividend yield. The stock yields 4.8% at the current price level. We expect the stock to trade as high as $23.00, but suggest investors accumulate shares up to the $20.00 price level and only begin buying aggressively below $17.50 per share.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. BGS was profiled in the Small Cap SEARCH Newsletter in April 2011 with a generally favorable view.

Follow the Economic Arrows

2011-07-26T08:58:00.000-04:00

Remember the days in Econ 101 when the professor drew the seemingly incomprehensible charts on the board (if you remember it as a black board, it means you are old)? We should have all paid more attention. Those arrows are coming back to haunt us now with the federal deficit well beyond the comprehension of most taxpayers.

The lesson went like this. Consumers are savers. They supply capital to the market in the form of savings. Businesses require capital to grow; to produce new products and services. They present the demand for capital. Here the professor drew an elegant upward sloping curve across the board, the arrow pointing toward the sky as if there would be no end to the supply of money. Then there was the demand curve, a flat line, pointing sharply downward and making it very clear that as the cost of borrowing increases, businesses will demand less capital. The meeting point of these two lines, represents “equilibrium” the place where suppliers of capital and those who require it are in harmony on interest to be paid.

Now enters the government - an indirect player in the supply-demand conversation. Government is neither a supplier nor user of capital. Lurking on the sidelines, government claims to be a disinterested party to the capital tug of war. Unfortunately, every fiscal and monetary decision shoves either savers or users of capital to the right or left.

If tax receipts are not enough to support the government’s spending plans, it prints out its own credit card by selling treasury bills and bonds. We all know this leads to deficits. John Keynes argued that governments should run deficits during difficult times to make up for slack consumer demand. Then the government should run a surplus during flush times. Who could disagree with such a social responsive and considerate view?

The problem is that the U.S. government is simply a spendthrift. Very few presidents and practically no one in Congress are willing to bring spending under control. We enter one-war after another. Indeed, we even pick a few fights without provocation, burning up precious military assets and creating new ranks of wounded soldiers to support. When was the last time a president made any measurable progress in curing the inefficiencies in federal programs? Is the postal service operating efficiently? Has Medicare fraud been eliminated? Has the rampant duplication of effort between federal agencies been eliminated? Not lately. No, no and no.

Some politicians would have us believe that we need to rein in spending on entitlement programs such as social security and Medicare. After all, these categories represent the largest portions of the U.S. budget. It makes sense to cut here first. However, the economic arrows point to a fact that rarely gets mentioned in all the political rhetoric. Members of Congress comprise a group of “insured” people who have the very best in health care insurance coverage and access to the best physicians in the country. There is something very disingenuous about that idea.

Some of the same politicians feverishly argue for making permanent the lower tax rates introduced by the second George Bush. Those with higher incomes benefited the most from this move. Proponents promised that the tax savings would encourage this class to save more, investing in new business and creating jobs. It happened just as the Republican administration promised - the consumers “saved” more money and invested, creating new jobs.

The problem was that at the same time, the new, lower tax rates went into effect, investment returns were substantially higher outside the U.S. than at home. It does not take a Nobel Laureate like Keynes to follow that economic arrow. Advances in electronic trading and communications, was making it ever easier for individuals to invest outside the U.S. Corporations were already getting very skilled at “outsourcing.” Indeed, the Bush tax cuts led to job creation - just not in the U.S.

Can Congress finally follow the economic arrows that to the rest of us seem so clear? In the coming weeks all taxpayers will have chance to answer that question for themselves.