Clean energy is poised to grow quickly. But as in most new industries, its not easy to identify the companies that will succeed. Within the clean energy space, companies with seemingly bright futures, like Sun Power or First Solar, have destroyed an enormous amount of value. After researching the industry, I’ve identified three high-growth companies that might be building strong businesses
Let’s review Solazyme Inc (NASDAQ:SZYM), SolarCity Corp (NASDAQ:SCTY) and KiOR Inc(NASDAQ:KIOR)and decide if any of them could constitute a good investment idea going forward.
Jet fuel and snack foods
Solazyme’s technology converts sugar into high-value tailored oils, biofuels, and low-cholesterol and healthy nutritional ingredients. The company is partnered with companies like Unilever, ADM and Bunge, and with institutions like the US Navy.
Solazyme’s first large plant is expected to come on line in Brazil as soon as Q4 2013. The new plant is expected to be the first out of many steps into the company’s continued value creation process.
Solazyme Inc (NASDAQ:SZYM) is still losing money, but the reason is simple: The company is investing for growth. Its joint ventures (JVs) with top global enterprises assure not only revenues, but also fair profit margins.
Sales in 2012 were $44 million; they’re expected to grow to $55 million in 2013, and jump to more than $250 million by the end of 2014. With plenty of cash in its balance sheet to develop its plans, I think Solazyme Inc (NASDAQ:SZYM) is the best bet in the biofuels space.
Here comes the sun
SolarCity Corp (NASDAQ:SCTY) is a rapidly growing energy service provider in the distributed solar generation market. Lower panel prices, rising retail electricity prices, and stable federal incentives have enabled a new class of downstream companies such as SolarCity to become viable.
This fast-growing company installs its solar panel devices onto your home, office or corporate roof free of charge. It then makes back the cost of installation by charging you very cheaply for the energy you use. If your roof produces more energy than you actually use, you get a credit into your next bill. The system runs smoothly, saving money for consumers and emissions for the whole community!
SolarCity Corp (NASDAQ:SCTY) is still losing money under GAAP accounting rules, but it’s also in its heavy investment cycle, and its revenue is gaining traction. While 2012 revenue landed just below $130 million, the company is expecting $150 million for this year, and more than $220 million for 2014.
When looking at SolarCity’s results, remember that GAAP numbers could be misleading. Lease revenues are recognized over 20 years, and the cost of goods sold over 30 years — but most of the operating expenses are recognized in the period incurred. This means that GAAP losses can be substantial, as long as the company shows strong growth.
Knowing some accounting is key when looking at this new company. SolarCity Corp (NASDAQ:SCTY) is incredibly-well managed, and an intriguing pick among U.S.-related solar energy investments.
Turning wood and waste into fuel
KiOR Inc (NASDAQ:KIOR) is another high-growth company that’s incredibly well managed and poised to benefit from current trends in the clean energy market. The company has a thermochemical process to turn low-value non-food wood and waste agricultural residues into valuable non-ethanol biofuels.
This means that KiOR has managed to produce a renewable crude oil substitute. Even without subsidies, KiOR can turn a profit as long as oil stays at or above $70 a barrel. The first large commercial plant has started producing renewable oil, and it’s currently being optimized to reach targeted yields and utilization rates. As the commercial economics are proven at scale, I think KiOR will end up being a profitable enterprise after 2015. The company should be considered a start-up.
KiOR Inc (NASDAQ:KIOR) had revenues of $1.2 million in 2012, and expects just under $18 million for 2013.
A tidy profit from clean energy?
As an amateur on clean energy, I think that Solazyme Inc (NASDAQ:SZYM) and SolarCity Corp (NASDAQ:SCTY) are compelling investments. I am sure they have the chance to convert themselves into great companies given their market positioning, the quality of their management, and the quality of their business partners. KiOR Inc (NASDAQ:KIOR) also looks like an interesting proposition, but it’s way too soon to tell how the renewable oil market will develop in the US.
If you liked these companies, go and research further into their respective markets. You might even conclude (as I did) that this three stocks are the best in their class.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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