I visited with an old friend recently. He happens to be an electrical and materials engineer who served on a nuclear submarine in the Navy. So he knew a thing or two about why alternative energy is a joke that previously I couldn’t really put into words. He did, and here’s why you should be short alternative energy.
It’s the technology, stupid.
Let’s look at everyone’s favorite sector: solar power. Did you know that the sun jets out all sorts of photons, but only one — one — specific kind can be absorbed by a solar cell and be converted into energy? There’s a reason it’s called a semi-conductor and not just a conductor.
That’s why, even if you have photovoltaic cells sitting in direct sunlight for 20 or 30 years, they might — might — end up generating enough energy to have recouped what you paid for them.
Furthermore, photovoltaic cells degrade when hit with UV rays. You may know from your dermatologist that you don’t have to be in direct sunlight to be exposed to UV rays. So, the photovoltaic cells begin degrading the moment they come out of the package. They’ll never be as efficient as in that first moment and will degrade continually until they poop out 20 or 30 years later.
So, in fact, the money you’re saving actually declines over time (assuming energy costs remained flat).
Now, is it any wonder why governments must subsidize solar power?
And for everyone who believes that at least they’re saving the environment — if not money — by using solar power, you first must mine for silicon. That means using gigantic mining equipment, which runs on diesel fuel. Then you have to literally melt rock to create the actual panels. How much energy does that use? A lot.
Take a look at First Solar (NASDAQ:FSLR), which lost money in 2011. It lost $450 million in Q1, before making $200 million in Q2 and Q3. Revenue growth is stalling. It generated negative free cash flow of $764 million last year because it’s obviously a capital-intensive business. Trailing 12-month free cash flow is negative $14 million.
Other sucker plays include Jinko Solar (NYSE:JKS), which has had negative free cash flow every year since 2009, including negative $450 million last year. Oh, and because it’s based in China, you get only an annual report.
MEMC Electronic Materials (NYSE:WFR) lost $1.5 billion last year and has lost $140 million so far this year, with negative trailing 12-month free cash flow of $940 million. Short ’em all.
Electric vehicles? The batteries that go into cars electric cars and hybrids also use raw material that must be mined (again) and is toxic. And batteries are also notoriously inefficient.
What does this mean for stocks in this arena? Electro Energy no longer trades. Energy Conversion Devices (PINK:ENERQ), Enova Systems (PINK:ENVS) and Green Star Products (PINK:GSPI) are penny stocks. Inco Limited is gone. Here’s a list of other battery stocks.
My suggestion is to tread very carefully and make sure any alternative energy company you consider is diversified into traditional product lines.
Now, it’s possible that enough people who want to feel good about themselves — without realizing that creating these alternative energy sources requires an enormous expense of fossil fuel — will surprise me and buy lots of electric vehicles and homes with solar panels. But I doubt it.
The greater fool theory only goes so far, and when the economy is puttering along like this, people will balk at the additional expense.
On the flip side, there’s nuclear power. Terrified of it? You shouldn’t be. Uranium is a natural mineral that’s dangerous mainly if inhaled or ingested.
Did you know the nuclear reactor cell on a nuclear submarine is the size of a single 55-gallon drum? Did you know that even operating at only 1% efficiency, that sub can run for 15 years, which includes doing cool things like taking in seawater and extracting oxygen out of it for our sailors to breathe? And to filter it to create drinking water? And to run the whole darn thing?
And you know how much waste is made from it? One 55-gallon drum. And if you placed all the waste drums in the world onto a football field, they’d go from the goal line to the 15-yard line. And it’s all stored underground in a perfectly safe facility. So stop worrying.
Nuclear power is the answer to our energy problems. If you think people and the government are too stupid to rely on it, then you should short the PowerShares Global Nuclear Energy ETF (NYSE:PKN). Personally, I’d buy and hold for the long term because once the alternative energy jig is up, nuclear will be where the money ends up.
As of this writing, Lawrence Meyers has no position in any company mentioned.