The World Has Gone Crazy About Alternative Energy


They say that the cure for high oil prices is higher oil prices. The so called alternative energy sources – solar, wind, biofuel, etc. did not need high oil prices, in order to earn a spot among the best performing stocks in the past couple years.

The biggest surprise in 2013 was the performance of solar stocks. After being the biggest dogs in the market for 3 years in a row, they suddenly started to report better than expected earnings. The market noticed that there might be an undergoing change in solar industry’s pricing power and started to bid all solar shares. Stocks like SolarCity, Sunpower, Sunedison and Canadian Solar more than quadrupled in 2013 alone.


This trend has had its indirect continuation in 2014. The best performing stocks so far this year are biofuel producers. Biofuel Energy is up 620% year-to-date. Pacific Ethanol is up the more “humble” 340% this year.


The last time biofuels and solar stocks were market leaders was in 2007-early 2008, when the price of crude oil passed $100 per barrel for the first time in history and there was rampant inflation. Today, the price of crude oil is near $100 again, but its effect on public psychology has significantly diminished. We have seen this number before and we have paid for it at the gas pump. $100 is the new normal. It is not something that people complain or talk about any more. We have accepted it and we won’t notice until crude oil climbs above $150 per barrel.

crude oil

What is interesting about the recent huge outperformance of alternative energy stocks is that there hasn’t been a big spike in oil in 2013 or 2014. If anything, in 2014 crude oil is trading near its year-to-date lows as the new form of horizontal drilling called fracking has helped us to find ample new supplies of oil and natural gas. Has the market ran out of stocks to bid that it is going after them or it is seeing a bigger trend in the making? We are more inclined to believe in the latter. It remains to be seen. The truth to the matter is that you didn’t have to know anything about big macro energy trends in order to profits from the moves in solar and biofuel stocks. All you had to do was to follow price and pay attention to stocks that were showing up on the 52-week high list.

Sand Is the New Gold

Sand Dunes in Gran Canaria

During the Gold Rush in the 1850s, merchants made a lot more money than gold diggers. During the fracking rush of our time, some of the biggest winners have been sand producers.

Fracking is a process of horizontal drilling for crude oil and natural gas. It requires thousand of tons of sand.

The three publicly traded sand companies have more than tripled in the past year – $HCLP, $SLCA and $EMES.

Screen Shot 2014-08-28 at 7.48.27 AM

I like the way HCLP is looking here. It is showing notable relative strength in a red tape as it is trying to break out from an eight-week base.


Google – When Expensive Is Cheap And Cheap Is Expensive


This week, Google marked 10 years since it became a public company. Here’s a quick reminder of the event from wikipedia:

In October 2003, while discussing a possible initial public offering of shares (IPO), Microsoft approached the company about a possible partnership or merger. The deal never materialized. In January 2004, Google announced the hiring of Morgan Stanley and Goldman Sachs Group to arrange an IPO. The IPO was projected to raise as much as $4 billion.

Google’s initial public offering took place on August 19, 2004. A total of 19,605,052 shares were offered at a price of $85 per share. Of that, 14,142,135 (another mathematical reference as √2 ≈ 1.4142135) were floated by Google and 5,462,917 by selling stockholders. The sale raised US$1.67 billion, and gave Google a market capitalization of more than $23 billion. Many of Google’s employees became instant paper millionaires. Yahoo!, a competitor of Google, also benefited from the IPO because it owns 2.7 million shares of Google.

For those that don’t remember how $GOOG traded, here’s a chart of the first couple months after its IPO.


10 years ago, Google was trading near $100 with a P/E of 130. Today, it is trading near $600 with a P/E of around 30. What is the lesson?

At the time of Google’s IPO, investors didn’t know about gmail, Youtube, Android and countless other cloud services, innovations and venture investments that Google was going to make. Most likely, Google’s management also had no idea that it will purchase and develop those services.

Some might make the valid argument that there’s no lesson at all. You cannot make statistically significant conclusions based on one case of a company that is everything but ordinary. If anything, there is evidence that buying a basket of the most expensive stocks in the market is a poor long-term investment.

And yet, if you study the history of most of the best performing stocks, you will realize that that had three things in common:

1) they spend a lot of time on the 52-week high list.
2) they were considered to be expensive at the beginning stages of their price ascent.
3) They managed to outgrow their high P/E ratios

Having a high P/E is not a guarantee of future success. On the contrary. It is a huge hurdle, because it signifies big expectations that need to be met. Market is forward-looking, but it is not naive. It might have big expectations for certain fast growing, innovative companies, but it also expects those companies to deliver at some point of time.

If you filter out all stocks with high P/E, you would have missed on almost every single winner in the stock market. Truth is that you would have missed on almost every single major loser too, but there is a very simple way to filter out the potential losers – price.