Energy Stocks Post-Japan: 3 to Avoid, 3 to Watch

Homer Simpson may have coined the term "crisitunity," but savvy investors have long known that crisis brings unusual opportunities. Predating Homer by more than a century, the axiom to buy "when there's blood in the streets" came from Baron de Rothschild's reported financial advice during the Paris Commune of 1871, when the city's streets literally ran bloody.

In the wake of the nuclear plant damage in Japan, we've seen stock markets veer crazily, as investors give in to waves of fear. Members of my Motley Fool Hidden Gems service have posed a natural question to me: "Where should we invest now?"

Panic and potential
Maybe we should back up a step. Before getting to where we should invest now, it's probably good to revisit whether or not we should at all. Is buying during panics really a recipe for investment success?

In my experience, the answer is, "Yes!" Especially if you choose your targets well. During last summer's BP oil spill, Gulf-based energy stocks sold off massively, as investors sold first and asked questions later – or not at all. No wonder: Reporters and pundits felt comfortable making blithe comments about companies involved being bankrupt within months, if not weeks.

I know it was difficult to buy in that climate of fear -- because I did it myself, sweaty palms, pounding pulse and all. But I was so convinced of the potential in the panic that I wanted to make sure as many Fools could profit as possible. That's why I had my team at Motley Fool Hidden Gems compile a special report with eight of our favorite picks from the sector.

The returns from that report have been astounding, with average gains of nearly 62% to date, and every single one of the stocks outrunning the S&P 500's 21% return over the same period:

Company

Stock Return

National Oilwell Varco

116.8%

ATP Oil & Gas

72.7%

Oceaneering International

72%

Dril-Quip

54.5%

Transocean

50.6%

Bristow Group

47.6%

Tidewater

44.7%

Noble

35.6%

Average Returns

61.8%

Returns dividend adjusted from special report date of July 8, 2010. Information from Capital IQ, a division of Standard & Poor's.

Not the same panic
Unfortunately for investors, I don't think today's situation is as clear-cut as last summer's oil sell-off. That panic punished a wide swath of already successful companies, backed by decades of profitable operations. In contrast, the biggest losers in the post-Japan nuclear panic have been junior miners and other uranium stocks such as Uranium Resources (Nasdaq: URRE  ) . Though these have bounced back from the worst of the panic pricing, they face long odds, even if other countries don't retreat from nuclear plants in the wake of the recent scare.

I expect winners in the energy space will be found not by bottom-feeding for speculative stocks that may or may not make it in the future nuclear business, but by thinking bigger, and looking toward companies that benefit from the changes in energy demand, policy, and delivery. Here are three energy themes I'm watching -- each with a stock to avoid, and one to watch.

Nuclear energy
Uranium stocks, like bell bottoms, go in and out of fashion, leaving those on the tail end of the trend wondering what they were ever thinking. There was a new craze for uranium from 2007 to 2008, as sky-high oil prices persuaded Mr. Market that nuclear would be the new new thing. Nuclear fuel-related stocks have bounced wildly since the Japanese reactor was damaged, making me wonder, along with many others, where the best investment play in the space might be.

One to avoid: I wanted to like USEC (NYSE: USU  ) . Contrary to most nuclear-fuel stock stories, which feature grizzled miners scraping around for a big strike, USEC enriches uranium for existing plants. Unfortunately, the track record for profits here has been bad -- and I'm not the only one to think so. Moreover, the balance sheet looks lousy to me. Net debt of $3.52 per share on a sub-$5 share price, to my mind, ups the risk here significantly, especially if there's long-term political posturing on nuclear power in the U.S. I'd bet on the latter, which is why I wouldn't bet money on USEC.

One to watch: EnergySolutions (NYSE: ES  ) While many companies aim to capitalize on a hoped-for demand for nuclear fuel, precious few can cope with the messes that nuclear facilities leave behind. EnergySolutions is one of them. It provides cleanup services for nuclear facilities, from small labs to entire plants. This one's not for the faint of heart, since it also features a highly leveraged balance sheet. However, it's producing free cash flow, and I like the moat here better. It owns its own disposal site. And no matter which way energy policy goes in the U.S. -- whether we build more plants or mothball existing facilities  -- EnergySolutions should remain an important part of the nuclear-energy ecosystem.

Smart grid and distributed power
We hear a lot about a smart grid, where power is quickly and automatically shifted to where it's needed, and where small producers or storage devices (such as that electric car in your garage) can feed power back in. But for the most part, our grid is pretty old-school, with large plants producing the power we need, and shipping it over lines to where it's needed. There's good economic reason for that: The turbines that produce our power work best when they're huge. Thus, we need to look for companies that address that reality.

One to avoid: The bigger = better principle hasn't stopped Capstone Turbine (Nasdaq: CPST  ) from captivating successive generations of distributed-power dreamers, including some press post-Japan. The company may even have indulged in what looks like some recent paid pumping by a "research firm" that takes money to write about stocks. I first warned investors about this perennial money-burner way back in 2005, pointing out that Capstone was a likely loser no matter how clean or green it claimed its engine was. Capstone is simply solving a problem that doesn't exist. Economically, thousands of small turbines can't compete with a few huge ones, and as sources of backup or off-grid power, reciprocating-engine-driven generators of the kind you can get from Caterpillar have been in use for decades.

One to watch: If you're interested in capitalizing on a smarter, greener grid, take a look instead at EnerNOC (Nasdaq: ENOC  ) . We purchased shares of this small company in Hidden Gems because it addresses the problems of grid demand in novel ways. EnerNOC enlists businesses, installing equipment and compensating them for reducing their electricity demand. EnerNOC then sells that demand reduction to the power companies, which spares them from having to add capacity or struggle to balance an overtaxed grid. EnerNOC's business model is simple in theory -- though complex in process -- but there's little doubt that it will be an important part of our future energy policy worldwide. Our electrical grid is already overstressed during hot weather, and any growth in solar or wind energy will require this kind of demand-balancing. Despite its youth, EnerNOC has become leader in this field, and a couple of recent, favorable regulatory rulings have greatly diminished its surrounding uncertainty.

Solar energy
Everyone seems to realize that the U.S. needs to curb its appetite for foreign oil, but there's no agreement at all about how to accomplish the task. As a woods-and-clean-air type, I love the idea of alternative energy sources like solar. But as an investor, I see precious few good opportunities in the space. There's a lot of money chasing returns in this industry, which tends to depress the opportunities for all players. But if you feel like you must own a solar stock, consider the following.

One to avoid: Suntech Power (NYSE: STP  ) was a Chinese superstar a few years back. The stock has dropped from $90 a share to $9, but believe it or not, there are even better reasons to avoid it. Its margins have continually declined, even as sales have ramped up, and the balance sheet groans under a pile of debt, giving Suntech an added anchor to pull in what is already a difficult race.

One to watch: First Solar (Nasdaq: FSLR  ) has also burned investors since its highs a few years back, but its 50% haircut has been a lot less extreme. Although the company has also seen margins contract since 2008, it operates at a much higher level of profitability than Suntech Power does. First Solar's gross margin is 30 percentage points higher than Suntech's, and First Solar's operating margin remains higher than 30% of revenue. That, coupled with a balance sheet featuring a nice load of net cash, gives me more confidence that First Solar is one of the best bets in the solar farm.

Foolish final thought
Not all energy crises are created equal. We might even argue that what we've got today isn't so much a crisis as a fear-inspired reevaluation of one of the most important industries in the world economy. While I don't see the same kind of forehead-slapping values today that I did in the wake of the Gulf oil spill, I do see significant opportunities in the smaller energy players highlighted above. But these are longer-term plays, and investors shouldn't expect the same kind of reversal that rewarded opportunistic buyers of depressed oil patch stocks last summer.

Even if you're not ready to take the plunge into any of these stocks, it pays to keep track of them. In fact, a good watchlist is one of the most powerful tools in investing. Use the links below to start a free, no-hassle watchlist that will deliver up-to-date news on any of the stocks discussed above.

EnerNOC and First Solar are Motley Fool Rule Breakers recommendations. The Fool owns shares of EnerNOC, and EnergySolutions. Try any of our Foolish newsletter services free for 30 days.

At the time of publication, Seth Jayson owned shares of the following: BP, Dril-Quip, Oceaneering International, and Transocean. He had no position in any other company mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (29) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2011, at 2:19 PM, gregory38 wrote:

    I worked for cat on these gen sets and I changed 30 qts of oil on these every 3 mths. The piston engine is dead if you dont believe that look at plaines a turbine last 10 times as long as a piston engine. Cat gens are used as back up only because they are to expensive to use as a main sorce. So you change the oil every three mths for a back up.

  • Report this Comment On March 23, 2011, at 2:21 PM, rockettt wrote:

    Dear Seth, I think you might want to reevaluate your position on Capstone. It is now producing turbines up to 1 megawatt. Having worked in nuke plants as a utility employee I can attest to the fact that standby diesels are enormously loud, cranky,maintenance intensive,an heavy polluters of surrounding air spaces. Capstone on the other hand has the ability to bank 1 megawatt units up to the size of a plant's generater. They run for years without appreciable down time. They operate on every kind of fuel with emissions below every EPA standard out today. They are already in buses ,cars, trucks, and they are testing a unit with Cummins Engine. They have the potential to replace or build out engines of all types with their turbines. I think people should take a real close look at their performance data and their future potential.

  • Report this Comment On March 23, 2011, at 2:23 PM, TMFBent wrote:

    Small turbines are also too expensive to use as a main source when they are matched against turbines at real plants. How often the oil needs to be changed is the least of the problems.

    The idea that the future is in everyone generating their own energy from small turbines ignores well-known economic realities. The idea that turbines are better as backup power ignores the lack of success in CPST's own products. If they are so much better, why aren't they selling more? They've been on the market for years.

  • Report this Comment On March 23, 2011, at 2:28 PM, gregory38 wrote:

    ps Cat gens havent been in use for years they have been on stanby for years get it right!

  • Report this Comment On March 23, 2011, at 2:37 PM, gregory38 wrote:

    bent There are companys that have to have gen for backup and these are costly beasts that just sit there and need oil every 3mths and look at yhe news capstone is selling more and more.

  • Report this Comment On March 23, 2011, at 2:41 PM, Patrickstar99 wrote:

    PS...CPST will be making money either this quarter or the next and they are getting a lot of business in the Shale Play. Somebody must have a short interest.

  • Report this Comment On March 23, 2011, at 2:43 PM, TMFBent wrote:

    ... And the reason Capstone doesn't have all the backup gen business in the world is what then? And even if turbines did make better backup generators, why would Capstone be the company to supply them? Last I checked, turbines had been around for decades and companies like GE know them in and out. In order to believe the Capstone story, you not only have to disbelieve some pretty simple axioms of the physical and economic universe, you have to believe that companies like GE are willing to leave a fortune sitting on the table.

  • Report this Comment On March 23, 2011, at 2:44 PM, TMFBent wrote:

    @ Patrick. Prove that accusation, and you can have my job. Care to step up?

  • Report this Comment On March 23, 2011, at 2:55 PM, gregory38 wrote:

    bent GE dosent own the air baring pat.If this was 1900 you wood be pushing buggy wips because these cars only get stuck in the mud.bent dont buy cpst they dont need you

  • Report this Comment On March 23, 2011, at 3:04 PM, eqwitty wrote:

    GE by way of acquisition is actually working with CPST so i would say that GE is not leaving money on the table. it seems you're basing your "recommendation" on your knowledge of the company in 2005. management is ridding itself of the stocks warrant overhang in preparation for PROFITABILITY.

    your investment thesis may have had significance in the past, but do an ounce of current due diligence and your one paragraph bash will certainly feel FOOLish.

  • Report this Comment On March 23, 2011, at 3:07 PM, globalex wrote:

    You have got the solar play backwards. FSLR is loosing to STP and thin film will prove to be unreliable as many studies have proved. STP is the worlds largest and the Pluto technology the most efficient.

    Income from operations was $90.2 million for the fourth quarter of 2010, an increase of 44.2% compared to $62.6 million in the third quarter of 2010.

  • Report this Comment On March 23, 2011, at 3:15 PM, gregory38 wrote:

    The President didnt mention GE in his speach but did mention CPST so this can only help the company with goverment help

  • Report this Comment On March 23, 2011, at 3:25 PM, Redeyesurfer wrote:

    Undoubtedly one of the most uninformed articles I've ever seen re Capstone Turbine. It's like you stopped educating yourself in 2005! Do a little current reading man. CPST is worth FAR more than today's price for what they're doing in the shale oil and gas plays alone. That's an area wher neither GE nor anyones elses huge power plant turbines have any chance at all to compete.

  • Report this Comment On March 23, 2011, at 3:33 PM, gregory38 wrote:

    bent needed go go back to his punch card IBM computer to figure this out. Like he said in the 70s even if people needed a home computer IBM wood be the play because they have been making them for years so dont by this little company called apple

  • Report this Comment On March 23, 2011, at 3:44 PM, logojaz wrote:

    Bent...IMHO your postings are out of date. Are you a paid basher? You don't know Capstones current market, cash flow or growth! Do a more thorough research. They are selling to a customer base that is using the product in continuous use - petroleum industry, waste gas conversion to green energy, etc.

    The microturbines have a nitch market that is overtaking diesel generators, and they don't compete in GE's giant turbine market. They recently resold to a customer that has over a million hours of use on the Capstone microturbines they already had.

  • Report this Comment On March 23, 2011, at 4:08 PM, FRANKOK2014 wrote:

    And pray tell what is wrong with Capstone's Earnings/Growth rates?

    http://caps.fool.com/Ticker/CPST/EarningsGrowthRates.aspx?so...

  • Report this Comment On March 23, 2011, at 4:15 PM, TMFBent wrote:

    Ah yes, the paid basher line. That alone gives readers some insight into the quality of the research done by some Capstone fans.

    Let's note, for the record once again (I already did above) that Capstone has this week been the subject of "analyst" coverage by an admitted pay-for-play shop. The Bedford Report is compensated by other third party organizations for advertising services. "

    Let's also note that as opposed to paid pumpers, which definitely do exist, there's really no such thing as a "paid basher." That particular mythological creature was created as documented here.

    http://www.thestreet.com/tech/internet/1165692.html

  • Report this Comment On March 23, 2011, at 4:25 PM, cleopatches777 wrote:

    I don't know how you "fools" sleep at night. Some people probably don't know that they should do the opposite of what you advise.

    You say people shouldn't buy Capstone Turbine (CPST) and some people that don't know you, will not buy it. But many of us know that means you are shorting it.

    A good rule to follow: ALWAYS do the OPPOSITE of what motley fools recommends. You're bound to make money that way!

  • Report this Comment On March 23, 2011, at 4:28 PM, gregory38 wrote:

    I guess everyone here is more informed than the president me ill just sit and wait

  • Report this Comment On March 23, 2011, at 6:00 PM, bottomfisherman wrote:

    I love MF article writes you are wrong more then you are correct, my Capstone shares are up 27 percent this year and I am going to cash in here in a day or two!!!! Keep it up not only is it a thrill to go counter the views here in CAPS but when I do it with real money I make money!!!

  • Report this Comment On March 23, 2011, at 7:03 PM, xetn wrote:
  • Report this Comment On March 23, 2011, at 7:04 PM, xetn wrote:

    I forgot to mention that they have been accused of "cooking the books" by double posting sales. So, the SVP and COO resigned.

  • Report this Comment On March 23, 2011, at 8:47 PM, mrimpulsive wrote:

    Hey Seth, I have made a couple hundred thousand and admit I left a couple hundred on the table by listening and overly considering what you guys had to say regarding SIRI & CPST from the .40 cent range all the way to where they are today. Lets see you are supposed to buy stocks to make money. A few of the best returns have been on stocks you have trashed and they went up several hundred percent. Motley fool and its writers whom used to be considered relevant... Obviously when you look at "the Motley fool effect" as witnessed today,well you aren't relevant. I was a hidden gems member "lost money" . You guys and your foolish opinions are now considered so irrelevant that the market seems to go almost opposite of your opinions. So please trash PLUG some more... So I can make a few bucks on the upside:)

  • Report this Comment On March 24, 2011, at 2:47 PM, fennecfoxen wrote:

    All the solar energy stocks have way too much political risk for my taste. It's basically investing in government subsidies.

  • Report this Comment On March 24, 2011, at 6:47 PM, GreenPhotog wrote:

    Somebody please clue me in: did CPST drop over 8% today (day after Seth's article) because of his article?! I tend to doubt it but I need a little guidance here. I bought into CPST at the end of the day near its low.

  • Report this Comment On March 25, 2011, at 8:00 AM, jargonific wrote:

    During a recent NPR report a New York Times reporter described his latest story. It involved payoffs demanded by Qaddafi from various US and other oil industries, money to pay reparations for Pan Am 103, a shocking story. One company mentioned was Caterpillar. In this piece you say CAT could provide the same kind of turbines that CAPSTONE TURBINE CORP offers, and would limit their profits therefore. Maybe that should be revisited? Since oil money helped Qaddafi to amass a tremendous fortune and buy support to fight the opposition the US and coalition are supporting now, one has to consider that CAT and others who paid bribes to Qaddafi could face some loss of stock value. They could even face charges based on the documents in the NYT story. If Capstone can provide smaller power sources for various industries, maybe even nuclear down the road? I'd say they have a chance. Full disclosure, I too invested at the $2.10 level (high) and am now worried about my investment. It's probably less than what the drinks cost at the dinner to discuss the kickbacks though.

  • Report this Comment On March 25, 2011, at 11:21 AM, rotorheadrescue wrote:

    Who is this guy Seth Jayson anyway? He has no idea what he is talking about. There are many reasons for CPST slow growth and he is responsible to be more knowledgeable on this company before blowing it out of the water. I realized the benefit of air bearings in a turbine generator in November 2000 when I bought 100 shares as an IPO. Since then I have accumulated over 10,000 shares. I don't need Mr Jayson or the Motley Fools to "help" me with tthier advice anymore Bye Bye

  • Report this Comment On March 25, 2011, at 6:19 PM, jargonific wrote:

    I think the author of this analysis is probably more astute than I am in some areas. However, this smaller company appears to be welcome to people in Latin America who may not want to deal with larger companies like GE or CAT. All you have to do is think about the impact these mega corporations have had on the world and it makes sense to think developing countries will prefer smaller companies. As to investing in solar being political? I think its far more the case that it is all about the big cash from the oil and nuclear industry. These companies set about killing oceans and endangering the planet. Not an over statement at all given the core breach at Plant 7 in Japan. Then THEY are the ones that get the big tax breaks and subsidies. Solar has had very little compared to Exxon, the co. that gave money to PR companies for a liar campaign.

    Stop serving the big multinational companies, serve the people, and be a real fool.

  • Report this Comment On March 26, 2011, at 3:58 PM, wireboy57 wrote:

    After reading the article it's pretty clear Seth doesn't completely understand CPST's business model. Shale play efficiencies? Data Centers? Waste water treatment plants? Impending Fortune 500 auto deal(s) according to last conference call? Marine applications? Designline? NYC and Bejing C-1000's? What didn't he leave out?

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