Blessed by the Potato

I don’t usually get too crazy about growth stories and tech stocks — despite being a scientist and fairly technologically-minded myself, I get turned off by the hype and the projections to the moon. I also first started learning about stocks in the midst of the tech boom, and was wisely steered clear of that trainwreck by my dad, who doesn’t believe in negative/imaginary P/Es (negative for a few quarters is one thing, but massive valuations for a company that’s never turned a profit is another).

However, I’ve had my eye on First Solar (NASDAQ:FSLR) for some time. I never bought any before now because the valuations frightened me, but it’s starting to look a little more attractive now.

First Solar is a manufacturer of thin-film solar panels. Solar, green, alternative energy — all buzz words for a hot sector, something I like as an environmentalist, but which actually turns me off a bit as an investor. First Solar is not a pie-in-the-sky startup though: they actually have several plants up and running, some long-term contracts, and are actually turning a profit whilst still in that early “parabolic” growth phase.

On the positive side, they have had a phenomenal growth track record, and have managed to reduce their cost of production while expanding. According to their annual report, they have 2 more production lines that are coming online over the next year or so, to bring them to a total of 24 — so from a volume standpoint they should have at least another ~10% growth in them. They also have very modest debt levels, and a US government that believes in climate change might help subsidize solar plants there. They are the low-cost producer of solar panels, and have focused on improving their margins through the years.

Piling up on the negative side are a number of worrying factors: FSLR depends on a very small number of power companies, all(?) in the EU for the vast majority of their business. Any issues with even one of their customers could trickle down badly for them. Indeed, government subsidies for solar power (esp. in Germany) may be critical to them making sales, and those policies may be on track to be phased out sooner than expected. While there is some advantage in thin-film solar for many applications, large-scale power plants really isn’t one of them — it’s largely just a cost issue. So their main customers have really only been buying due to the low price relative to crystalline solar cells. Recently, those have come down in price as the cost of high-grade silicon crashed (used, as I understand it, in both solar cells and microchips).

So FSLR could be facing some increased competition, squeezing their margins going forward, and depending on how long silicon prices stay low, that pressure could stay on for a long time.

I played around with my spreadsheets for a little while on this one, there are a lot of places to guesstimate how future earnings will play out. I figure the stock is worth anywhere from $60-$160 depending on what assumptions I make, but it does definitely have some value. I figured the most realistic assumption was that their earnings could continue to grow at 10-25% per year for another few years as their production volumes ramped up (even if cost pressures prevent them from significantly improving their margins any further), and after that would settle into a long-term growth rate of 5-7%. I also believe (hope, really) that demand for solar energy will pick up in the US to more than offset any declines from the EU as their subsidies are phased out. From that I get a value of (from memory, since like a genius I closed my spreadsheet without saving) ~$110/share. It was at $116 today, which I figured was close enough to get my fingers into the alternative energy sector, so I bought a few shares. It’s not enough of a value that I can recommend it to anyone (not that I ever make recommendations!), but with the recent pullback it seems to have shed that “hot thing in the news” over-hyped smell.

What are your thoughts?

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I think the last time I watched TVO was when Today’s Special was on the air (right after Polka Dot Door), but I just noticed that they have some interesting videos on their site that you can go watch, including a recent interview* with David Suzuki. I like David Suzuki, and I hate to speak against him, because he might burst through my wall and throw a basketball at my head, but he says some downright silly things about hydrogen cars. It’s just a throwaway line though, so I’ll leave that comment at that. I also disagree a bit with his comments on nuclear: I still think it’s the only medium-term solution open to us. Demand management and renewables are going to be a vital component of managing our electrical grid, but we’re still in the hole from the shutdown of 2 reactors at Pickering and Bruce, and if we want to shut down the coal plants as well then some kind of massive capacity must be built soon. There are tricky issues with nuclear, since when it goes wrong it goes wrong in a big way — whether that’s leaks, waste management, cost overruns, or whatever. You have to make sure to have massive amounts of money and trained personnel at all times for up to a century into the future, and to keep reckless people like Stephen Harper far away. The crumbling of a country and its economy/infrastructure is no reason to let your nuclear reactors go unattended, and those costs (take out an annuity?) can be massive; higher perhaps than a straightforward massive renewables buildout in the final accounting.

On the topic of demand reduction, an article about the real-world efficiency gains of CFLs is making the rounds, brought to my attention by Michael James. Because CFLs are more efficient, they produce less waste heat… but this leads to a secondary effect: when heat in your house is desirable (such as a Canadian winter) you have to replace that heat somehow, which reduces the real-world benefit of CFLs. Professor Peter Blunden at the University of Manitoba is credited with working out the math, but no news article cites a primary source other than that, so I haven’t had a chance to see how he figures it (and I’ve looked around for a primary source and can’t find one; I’m tempted to email the guy directly). After all, you will have to replace some of the lost waste heat with more efficient bulbs in the winter, but our houses are not perfectly insulated boxes at equilibrium, so heat generated (and trapped) near your ceiling is not as effective at making your house comfortable as systems designed for heat (baseboard heaters, forced air systems, etc). Plus making heat is generally quite efficient (since inefficiencies in most devices are represented as heat production!), but making cool air in the summer is nowhere near as efficient… The various news reports of this study (back of the envelope calculation?) are reporting different numbers too, with the CBC saying that “real energy saving for Winnipeggers using CFL bulbs is probably closer to 17 per cent” but the Winnipeg Free Press giving “Winnipeggers would end up with energy and cash savings of 17 per cent, similar to Manitoba Hydro’s findings. Those who use air conditioners would see savings of around 24 per cent, he said, while cash savings will be a little higher for people who heat with gas instead of electricity.” So what does that mean for someone in Toronto with less heating requirements in the winter and the A/C cranked to full for four and a half months out of the year? Seeing his work would go a long way to figuring out the real answer.

* – This interview with Allan Gregg was less of an interview than an opportunity for David Suzuki to speak. In fact, I’ve watched a number of these interviews and they were quite enjoyable because Allan Gregg is just there to help facilitate the interesting, articulate guest speaker in ranting for a half hour, it’s a great way to do an interview (since except for David Letterman or Conan O’Brien, who really cares what the interviewer has to say?). It’s a neat series to go back through the archives and watch over at TVO.

A final note: the forwarding and dynamic IP behind the scenes here look to be getting troublesome. I don’t have time in the next month or two to get around to moving hosts (and probably upgrading wordpress as well) and all that nonsense, so for now I’m just going to add a permalink to this post whenever I remember.

This is another of my irregular Potato Wedges guest post series over at The MoneyGardener, originally posted there.

Energy costs are crashing, and we’re probably going to be due for a credit/adjustment from Union Gas before the winter is out – but for the moment, we’re paying through the nose for our heat. Roughly 30% more than last year. So conservation is big in our minds at the Potato homestead, for both financial and environmental reasons.

Making changes to your home to make it more efficient are great steps to take. Since we’re renting here there’s a certain limit to what we can do: we’ve put plastic wrap over the windows and caulked the cracks we could find, and we have opened and closed registers so that most of the heat is flowing in to the kitchen and the bedrooms (where we spend most of our time).

The next step, and one that is sometimes overlooked, is to bundle up. Heat yourself, not the house… that actually reminds me of an amusing anecdote often shared at conferences: at one point shortly after the miracle of microwaves was discovered (and apparently more recently, too), it was proposed to use them to heat people. Yes, people — a microwave/millimeter beam would heat you up in your own living room, because as long as you were warm it wouldn’t matter how cold the room was. But I’m not here to talk about the mad science of the 1930’s.

As much fun as it is to run around the house in a T-shirt like I do at work (oh, they waste so much heat at work), I can turn the heat down a few degrees by just throwing on a sweater. Of course, even more important than a sweater are slippers. Keeping your feet warm is key to staying comfortable in what is otherwise a frigid house. Not just because they’re the furthest part of your body from your heart so they go numb and cold quickly, but also because they make direct physical contact with the cold floor.

The slippers I have right now are really crazy warm. They’re Darth Vader slippers, and his mighty head is pretty much solid stuffing which is just oh so toasty warm. Of course, I don’t know if it’s the fact that I tend to drag my feet when I’m wearing slippers or what, but they freak the hell out of the cat. Ah well, a small price to pay for energy savings (and though the cat doesn’t have slippers, she’s fluffy and doesn’t seem to mind the cold).

The next step for me is going to be hats and gloves. So far I’ve held off because I want the house to be warm enough that I can type without gloves, since I spend so much time on the computer, but a hat makes perfect sense. I mean, ok, it does seem kind of goofy to run around the house in a toque, but they do always say that a large part of your heat loss is through the head…

Well the opposition coalition seems to have lost its will to run the country, which is unfortunate because then it makes Stephen Harper’s whining to the GG and setting the country adrift work. The new version of the budget is out, and it doesn’t wow me.

I reluctantly agree that a monumental stimulus package is probably needed to keep this recession from snowballing into a depression, and that going into deficit, temporarily, is probably needed. However, I can’t wrap my head around the amount of money we’re forecasted to miss out on. A lot of it is due to lack of tax revenue (you don’t pay taxes if you don’t make any money) rather than spending, but still, where’s the grand stimulus?

Where’s the reintroduction of the green car feebate to stimulate auto sales? Instead we get some vague restructuring of car loans. Where’s the grand vision, the infrastructure spending to not only get bodies working, but also to lay the roots of a better society when we come out of this? In short, where’s my Windsor-Quebec Shinkansen???

Universities, never exactly rolling in the dough even in good times, are finding things are seriously tight as their endowments have been decimated by the stock market (and real estate) crash. PhD comics pointed out that academia is often a refuge for those who would otherwise go into engineering or business or the real world in general: spend a few years in grad school below the poverty line (but at least with some kind of income) and wait the recession out. However, this time there doesn’t look to be the capacity there. I’m pretty sure our department is shrinking, and will shrink more next year as many supervisors seem to not have the funds to take on students. The US is throwing more money at this, specifically towards graduate fellowships, so why nothing from our government?

I did like seeing the duration of EI benefits increase. To my thinking, EI should be automatically scaled to the unemployment rate: as the job market gets tougher EI should automatically extend a few weeks/months to reflect the fact that people need the extra support and that finding a new job is just plain harder; likewise in a hot market EI benefits should be scaled back slightly. Another step I’d like to see is flexibility added to RRSPs: they can continue to tax withdrawls, but the contribution room should be given back, though I don’t think many people in the situation of both having RRSPs and needing to tap them in hard times are terribly worried about losing their tax shelter for future years.

There’s a small rejigging of income tax brackets, leading to a small savings for most Canadians (most of which was already planned to account for inflation), arguably where the previous frittering of the surplus (yes, there was a surplus just a year ago) should have gone, rather than to cutting the GST, though I would have argued it should have all gone to paying the debt from the last recession. The problem with broad-based stimulus packages like this is that the dollars very quickly become diluted: $40 billion spread out amongst 30 million-some Canadians comes out to something like $1300 each. That’s not something I’d sneeze at… but it is easy enough to have that disappear in a family budget, especially after a summer of record high gas and food prices, or to vanish into savings*. To get the economy rolling again a big kick is needed to specific areas that will, hopefully, get those going and lead the way for the economy as a whole, rather than spreading a small amount of love around everywhere. Of course, this isn’t a video game and the recession monster’s weak point isn’t flashing neon orange telling us where to hit it. The banking and auto sectors might be good ones to try to prop up/nationalize — banks in particular are needed to supply credit to grease the wheels of the recovery. However the budget also contains a lot of measures targetting home ownership: renovation credits (which might be as much about getting contractors to issue receipts and file taxes), and changes to help get first-time homebuyers into the market with a modest increase to the HBP and a tax savings of up to $750 for a purchase. I don’t think trying to prop up the housing bubble here is going to help the economy. In fact, more money sunk into houses/mortgages by first-time buyers is less money out there circulating in the economy. These are also poor measures because they can’t even focus spending in one area in a focused way: there are at least 3 different ways of trying to stimulate housing rather than that one big kick.

I’m also a fan of the targetted big kick for infrastructure because then the country gets something it might need/want anyway at rock-bottom recession make-work prices. Take $40B, heck raise the GST back to 7% while at it and make it $60B or whatever, and build a shinkansen in Ontario, a few hospitals in BC, some nuclear plants in Alberta, some wind farms in Saskatchewan, carve a whole new riverbed and hydro project through Manitoba, create a shinkansen network in Ontario and Quebec, covered bridges for NB, some tidal energy projects for NS, and a teaching hospital for NFL, then have PEI build a 50-storey phallic fucking tower just because they can. You know, at least that way you get something to show for your stimulus money.

* – Savings are great things to have on an individual level. However, as a country as a whole we should be doing our saving during the boom years, and then tapping the savings during downturns to help stabilize everything — stimulus packages that just go straight to savings just make recessions worse. I’ve seen some recommendations that stimulus gift cards be sent out: something that you have to spend (though that wouldn’t necessarily stop people from then saving the equivalent amount somewhere else).

I am continually amazed at the lack of critical thinking in the general population and the media. I know that I’m a scientist and am therefore, you know, a perfect human being, blessed with capabilities mathematical and analytical in addition to citation searchical. Ok, maybe not quite perfect, but I will acknowledge that I perhaps possess a leg up in the critical analysis department due to inclination, training, and experience. Nonetheless, I’m amazed at some of the nonsense that floats around there in the ether.

For instance, the CNW “study” that just. won’t. die. Here’s where the big disconnect between common sense and reason lead to a meme that endures. The “study” in question claimed that a Hummer used less “energy” in its total lifetime (from design to daily driving to disposal) than Prius. That is something that goes against our common sense, kind of makes us sit up and take notice. Now, what’s supposed to happen is that one’s critical thinking and reason is supposed to kick in and say “hey, this really goes against our common sense: how does a vehicle that costs more money and uses more materials up front, and also uses more gas in an ongoing fashion, possibly use less total energy? I should check this out to see if it’s a neat factoid or total bullshit.” Then a quick fact-checking mission demonstrates that this is, in fact, total and complete bullshit and the thing dies there, and anyone who brings it up is mocked as a rube. Instead, the rubes pass it on without questioning it, and the illogic only serves to help draw attention to it. “Wow, Prius sucks, I’ve got to alert the Intertubes!” Whatever happened to extraordinary claims requiring extraordinary evidence?

I can forgive people for reading too much into patterns sometimes. For instance, nearly anyone who bothers to know anything about fuel economy knows that cars (regular cars — not talking hybrids here) are more efficient on the highway than in the city. But they have real trouble believing that driving slower on the highway saves fuel. After all, doesn’t going faster, like on the highway, save gas compared to going slower, like in the city? Ah, you point out, but there’s a point where the car is most efficient: 90 km/h, say. Going faster than that actually uses more gas. They think for a second, and the light goes on behind their eyes “Oh,” they say in a condescending way “I’ve heard that before, that’s why the speed limit was 55 in the States during the energy crisis. But that was for old cars. New cars are much better and can go faster.” Which, I have to admit, is exactly the right thought process, just the wrong result.

Likewise, for about 4 years there, housing was the best investment one could have: better than the stock market, briefly better even than oil. So you could forgive someone for lusting after a house, repeating nonsense like “priced out forever” and “renting is throwing your money away” or “real estate never goes down”. You might even forgive the same person who scoffed at the “payback period” for a hybrid car not running the same calculation for a house. The media didn’t even surprise me with their house porn and almost exclusively positive coverage of the bubble. I was, however, taken aback by the actions of our government, especially by easing the “margin requirement” (down payment) for a house. I know that they’re dumb promise-breaking neocons [ok, I won’t go there just now] and all, but still, someone should have known better. Then, as the real estate slowdown looks to finally be under way, a study comes out about the most over priced markets from UBC… and the markets it says are over-priced are not the ones people would think are over-priced. This is because of how they did their analysis: they included in their valuation a measure of how much a market has gone up since the last cycle: markets that went up more are not considered to be “bubblier”, but rather, more fairly priced in their estimation since they’re counting on further rapid increases. So the cities with the most rapid increase in prices are supposedly the ones that are less overvalued…

I recently chewed into Netbug about a post of his on environmentalism. He was arguing that man couldn’t cause global warming because, as a documentary that aired on BBC4 argued, we can’t compete with the sun. That’s just the sort of thing that’s great at misleading people (even otherwise smart people capable of Googling, like Netbug) — it has just enough ring of truth to it to make you believe it. This documentary makes a number of points which are true, but not important or worse, wrong-headed. Then it sprinkles in some minority opinions, a fair helping of conspiracy theory (global warming is a conspiracy by Maggie Thatcher to break the unions! Scientists take the dirty british money, but not the money of oil companies — no, if they did, they’d be richer and wouldn’t be doing some slumdog documentary film!) and some selective editing to sucker people in. Then Netbug finished off his post with a statement about how stupid the environmentalism movement has gotten with a clip from Penn & Teller about circulating a petition to ban water at some green rally, and all the people who signed it. Of course, that says less about the environmental movement in general, and more about people’s willingness to sign something they didn’t fully read or understand while at a rally.