Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always follow what the big money does, we can often glean an idea or two by tracing their footsteps.
Kyle Bass, founder of Hayman Capital Management, is best known for shorting the subprime mortgage securities that nearly crippled the economy, effectively "calling" the economic recession and making a boatload of money at the same time. Hayman Capital only manages around $1.1 billion -- relatively small by some standards -- but his track record on subprime mortgages and history as a real-estate expert makes it worthwhile to have a look at Hayman Capital's quarterly trading activity. Can we learn anything from Bass' latest moves? Let's take a closer look at one that could be a play on a major trend in energy production.
Not real estate, but tied to it?
While Bass' area of expertise may be real estate, he's surely aware of the massive expansion of solar installations across the U.S., both in residential and commercial applications. And while companies like SolarCity (NASDAQ: SCTY ) and SunPower (NASDAQ: SPWR ) have seen their stocks rocket up over the past year, one of Hayman's latest investments, 1.1 million shares of NRG Energy (NYSE: NRG ) bought in the third quarter, has performed more in line with the overall market:
What makes NRG an attractive investment? After all, it's mostly just a power generation and electric company, not really comparable to either SunPower or SolarCity. Yet it's worth noting that NRG is heavily investing in expanding its solar footprint, with more than 420 megawatts deployed in California and Arizona, plus 253 megawatts owned by NRG Yield (NYSE: NYLD ) , which is managed by majority owner NRG Energy.
Additionally, NRG Solar and NRG Residential Solar Solutions offer business and residential consumers ways to shift away from NRG's largely coal and natural-gas power-generation and toward cleaner (and in some cases, less costly) renewable solar energy. eVgo's network of electric-vehicle charging stations, which are located in many familiar places like Walgreens and Whole Foods parking lots, is another example of how the company is aggressively thinking outside the grid and not just trying to play defense.
Why not just invest in SolarCity or SunPower?
While I'll not pretend to know what Kyle Bass was thinking, this investment is a good chance to consider the advantages of diversity and downside protection. SolarCity shares have simply skyrocketed this year on a combination of massive sales growth, projections to almost double total deployed power capacity in 2014, and a partnership with Tesla Motors. Yet there is more downside risk if the company doesn't meet its lofty expectations. SolarCity is still very young, and despite being the largest in its segment, it's a relatively small company without the massive scale and scope of NRG's long-term contracts and utility network to protect its growth from the inevitable bumps in the road.
SunPower is also richly valued, and it's more specialized as a manufacturer of solar components. It does have a solar leasing business a la SolarCity and NRG RSS, but its core business is building, selling, and maintaining solar systems, which unfortunately carries the risk of another Chinese government-driven price war, such as the one that nearly crippled the domestic solar industry over the past couple of years. And while this is less likely today than it was in the past, it's something that would be completely out of the control of management at SunPower -- and potentially devastating for investors.
Final thoughts: Remember your risk management
Again, not trying to be Kyle Bass here, but it's also worth noting that Hayman's portfolio (as of Sept. 30) was comprised of 14 holdings, 11 of which made up more than 98% of the total. When investing in a more focused way, taking a large bet (NRG accounts for 7.5% of the portfolio) on companies that potentially have more downside sometimes isn't worth the risk. However, for individual investors who are willing to spread their money out a little more and have a time horizon measured in five years or more, taking a small position in SolarCity or SunPower could be worth the downside risk. Investing in NRG to protect your downside may not be a bad idea, either. Just remember that Hayman's goals and priorities may not be the same as yours. Invest accordingly.
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