Strategies for Investing In
CleanTech Companies
Presentation to the Minneapolis CFA Society
March 15th, 2012
The Typical Clean-Energy Analyst’s Day…
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Agenda
• About The Leuthold Group
• Overview of the Clean Technology sector
• Skeptical Approach to CleanTech Investing
– Oil Correlation Study
– It’s Not Easy Being Clean
– Understand What People Are Selling
• Understanding Wall Street’s Motivations
• Thinking Skeptically
– Renewables, Biofuels
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About The Leuthold Group
• Research Group
• Capital Management
– Leuthold Weeden Institutional
Research
– Founded in 1981— Institutional
investment research firm started
by Steve Leuthold; conducted
by a staff of 9 analysts
– Proprietary research includes:
• Technical & quantitative
analysis
• Broad sector and industry
group analysis
• Earnings momentum
• Supply/demand dynamics
• Valuation studies
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– Leuthold Weeden Capital
Management (LWCM), based in
Minneapolis, MN, has managed
assets since 1987.
– AUM of $3.2B across 8 mutual
funds & hundreds of separate
accounts
– Strategies include:
• Tactical Asset Allocation
(“TAA”)
• Long-only, short-only, and
long-short funds & accounts
• Clean Technologies
About The Leuthold Group (cont.)
• Research Group
• Capital Management
All performance presented reflects past performance. Past performance is no guarantee of future results. Investment returns and principal will fluctuate so that investor's shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than performance quoted. For performance data current to the most recent month end, call Leuthold Shareholders Services, toll-free, 1-800-273-6886.
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The Prospectus contains this and other information about the Funds. For
current Prospectus, call toll-free, 1-800-273-6886, or download from our web site: www.LeutholdFunds.com. Please read the Prospectus carefully before you invest
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Defining Clean Technology (“CleanTech”)
• Any technology or service that reduces
humans’ impact on the environment
• Most people think of Alternative Energy,
but…
– CleanTech is very diverse
– Encompasses part of many existing industrial
sectors, including transportation, energy
transmission & storage, water treatment, pollution
control, advanced materials, recycling, and many
others
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It’s tough to make money in CleanTech…
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About The Leuthold Group (cont.)
Why Develop A Long/Short Strategy?
Because there will be winners and losers
• Motivations to take CleanTech companies public aren’t
always based upon wise business decisions
– CleanTech companies have significant capital
requirements
• Public venture capital
• V.C. exit mechanism
• Bankers seeking underwriting fees
• Investors get emotional when considering CleanTech
– Excellent source of euphoria & despair; volatility of
CleanTech stocks = Opportunities
– Potential entry / exit points for patient investors
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About The Leuthold Group (cont.)
Why Develop A Long/Short Strategy?
Opportunity to generate uncorrelated returns
and alpha with a low standard deviation
PERFORMANCE RESULTS, GROSS Return Since
Inception
(as of Feb. 29, 2012)
(Oct. 17, 2011)
CleanTech Opportunity Port.
8.08%
Ardour Composite Index
0.00%
S&P 500 Index
13.73%
Data Points
93
Risk-Free Rate (10-yr Bond)
2.0%
Correllation
to CT Oppt. Standard
Portfolio Deviation Alpha
1.00
1.78%
0.08%
(0.16) 5.92%
NMF
(0.04) 4.18%
NMF
Beta
(0.05)
1.00
0.56
"Gross" performance results reflect the deduction of all transaction costs, but do not include
custodial, investment advisory fees or other expenses. "Net" performance results reflect the
deduction of all fees and expenses, including investment management fees paid by any account
employing the Clean Tech Opportunity strategy.
Performance quoted represents past performance. Past performance should not be considered
predictive of future performance. As with any investment, there can be no assurance that
LWCM’s investment objective will be achieved or that an investor will not lose a portion or all of
its investment.
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About The Leuthold Group (cont.)
Why Develop A Long/Short Strategy?
CleanTech shares some of the same risks as other
technology sectors
• A long-only strategy misses half the investment
opportunities
– Technology companies are exposed to high risk of
obsolescence
– Benefit from impatient capital seeking quick returns
• Some CleanTech strategies represent solutions looking
for a problem
– Investors often view Clean Technologies in a vacuum
– Incumbent technologies often can be “cleaner” for less money
and faster rates of adoption
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Guilt is not the only market driver at play…
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There Are Numerous Market Drivers
• The basic laws of economics (drive for productivity & efficiency)
• Political motivation (multi-governmental; Obama)
• Consumer demand (is green the new “luxury” for the developed
world?)
• Corporate agendas (green-colored glasses & “green washing”)
• Technological advancement (demand for energy; cost reductions)
• Social stimuli (rising living standards)
• Global climate change (socio-political consciousness; selfpreservation)
– Water shortages
– Population growth
– Higher fossil fuel prices
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Strategies For CleanTech Investing
Be Skeptical
• Don’t be in it to be green, be in it to make green
• Invest in common stocks, but watch the private
companies
• Use sector & asset allocation strategies
– There may be a component of sub-sector rotation
• Be open to shorting stocks (humility pays dividends…)
– Most CleanTech companies will fail
– Public venture capital
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We are “CleanTech Skeptics”
• Technologies that are dependent upon incentives
– Some technologies are, but it’s more complicated than that
– Most industries are dependent upon some form of government
assistance, tax incentives, regulatory support, etc.
• Perpetually 5 to 10 years from commercialization
– Don’t focus on “solutions looking for a problem”
• Money-losing technologies
– Don’t invest in money-losing technologies
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Correlation to Oil Prices? We’re Skeptical…
• The overall correlation between oil prices &
CleanTech stocks is weak
Oil's Relationship to Clean Technology Stocks: 2000-2010
Price of Oil vs. CleanTech Universe1
Price of Oil vs. Alt. Energy Stocks2
Correlation R-Squared
0.388
0.150
0.091
0.008
© 2011 Leuthold Group
Footnotes
In 2000, there were ~280 publicly traded CleanTech stocks in our universe; in
2010, there were between 470 and 510 stocks (excludes "diversified" CleanTech
stocks).
1
2
Includes just the alternative energy segment of CleanTech; in 2000, there were
~135 publicly traded CleanTech stocks in our universe; by 2010, there were over
270 stocks.
• But we found something interesting…
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Correlation to Oil Prices? (cont.)
Correlation steadily increased from 2007 to mid-2008, peaking as the price
of oil peaked, as a barrel of oil rose by 130%, from $61 to $140.
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Conclusions:
1) Investor psychology
(“sentiment”) is at work,
not economics;
$200
0.5
$160
Little-to-no correlation to oil prices…and then BOOM!
$140
0
$120
-0.5
2) The mere belief of a
relationship can have a
powerful (albeit limited)
role in determining the
correlation between
these investments.
$180
Correlation of Oil to Alternative Energy (Left-Hand Scale)
$100
A steady climb in oil prices,
followed by a rapid increase
$80
-1
$60
WTI Petroleum, Price per
Barrel (Right-Hand Scale)
$40
-1.5
© 2011 Leuthold Group
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What are Wall Street’s motivations?
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Understanding Wall Street’s Motivations
Tesla, the electric car company, makes a very nice car…
Source; Tesla Motors
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Understanding…Motivations (cont.)
In fact, last year Morgan Stanley called Tesla “America’s
Fourth Automaker” and gave the stock a $70 target price
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Source; Morgan Stanley reports
Understanding…Motivations (cont.)
To generate a $70 valuation required some fancy financial
modeling…and a lot of disclaimers!
Source; Morgan Stanley reports
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Understanding…Motivations (cont.)
What could be the motivation for a huge target price based
upon such far-reaching projections???
Using the 6% rule of thumb, this could be worth up to $9
million in underwriting fees for the banks involved
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How To Be A Skeptic (“Contrarian”)
Don’t believe everything you read…particularly if it comes
from investment bankers…
Source: http://www.zimbio.com/member/malikharis/articles/734928/Funny+UK+Signboard
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Thinking Skeptically: Renewables
• Renewables will continue to have a tough time
– Pricing is going against them, margins are coming
down
– Incentives are on the cutting block:
• Conservatives are questioning the integrity of incentives and
loan guarantees (think: Solyndra)
– “Austerity” & “Deficit Reduction” are the new
catchphrases
– Single-digit multiples are likely to become the norm
(except during periods of euphoria)
• How much would you pay for a 10-20% revenue grower with
flat or falling earnings?
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Thinking Skeptically: Biofuels
• Risks facing biofuel investors: “Non-correlation” Risk
– Ethanol producers understand this very well
– Particularly prevalent when the input, such as corn, has other
uses and/or is subject to supply constraints that have little or
nothing in common with the demand for the output, such as fuel
ethanol
• ~39% of corn will be converted into fuel ethanol or
exported to other nations (largely Brazil)
– Our single largest use of corn
– Animal feed/residual uses: ~37%
– The rest is consumed, planted in future years or exported
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Thinking Skeptically: Biofuels (cont.)
• The ethanol producers’ quandary
– Corn represents 75% to 85% of the cost of ethanol
– Corn price is subject supply, which is subject to numerous
market dynamics that have nothing to do with the price of
ethanol
•
•
•
•
Adverse weather patterns (heat waves, hurricanes, tornadoes, etc.)
Export demand
Availability and cost of fertilizers
Economic cycle
• The difference between razor-thin margins or losing
money
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Thinking Skeptically: Biofuels (cont.)
• Risks facing biofuel investors: “Radius” Risk
– Biomass lacks density, so supply usually must be secured within
a 40- or 50-mile radius
• Sourcing biomass a very local, highly logistical effort, one that can
lead to increasingly intense competition and rising feedstock prices
– Advanced biofuel producers generally argue that their feedstock
protects their business models from “Radius” risk
• Suggest that biomass feedstock prices are stable and characterized
by long-term availability
• We’re skeptical: demand for industrial quantities of feedstock can
dominate a local market
• Biodiesel: razor-thin margins, government incentives might expire =
biodiesel is quite a gamble
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Thinking Skeptically: Biofuels (cont.)
• Risks facing biofuel investors: “Technology” Risk
– Pre-commercial technologies
• Not aware of a cellulosic, biomass, or algae technology that is cost
effective without government subsidies, incentives, or mandates
• Not aware of an operating and profitable industrial-scale facility in
the western world
– So why where there some many biofuel IPOs recently?
• Timing was right for venture capitalists to seek their initial exits
• Their good timing isn’t necessarily our good timing
• VC’s interests are not aligned with that of the public company
investor
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Thinking Skeptically: Biofuels (cont.)
• Risks facing biofuel investors: “Technology” Risk (cont.)
– Most will require substantial additional capital, probably dilutive
equity
– Many of the technologies have only been operated at “pilotscale” facilities
• It’s a science fair project on steroids
– Substantial R&D still required to achieve cost-effective
production….if they reach cost-effective production at all
• They probably wouldn’t even win the science fair contest
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Thanks.
Q&A
(difficult questions please)
David Kurzman
dkurzman@lwcm.com
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Disclaimers
Investing in foreign securities presents risks that may be greater than
U.S. securities. These risks include, but are not limited to, currency
rate fluctuations, regulatory differences, accounting standards,
higher trading costs, and political risks.
Investors should consider the investment objectives, risks, charges and
expenses of the investment company carefully before investing. The
Prospectus contains this and other information about the Funds.
For current Prospectus, call toll-free 1-800-273-6886, or go to
www.LeutholdFunds.com. Please read the Prospectus carefully
before you invest.
Not FDIC Insured ~ No Bank Guarantee ~ May Lose Value
Distributor: Rafferty Capital Markets, LLC, Garden City, NY 11530
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