The S&A Digest: ECO-Mania: Time to Short Clean Energy?

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/02/2013

Ian's "global warming" trade... Corn or condos?... Major gold discovery... Citigroup in Japan... Grab this dividend quickly... Another humble doctor... The Digest compared to Letterman?

Have you bought it yet? One of our best-performing gold stock recommendations (featured in both Sjuggerud Confidential and S&A Gold Report) confirmed that testing on its sites shows reserves of 13.1 million ounces of gold and 2.23 billion pounds of copper. According to S&A Gold Report editor Matt Badiali, the findings will double the company's inferred gold reserves.

Farmland all over the world is rising in price faster than apartments in Manhattan or London for the first time in 30 years. Last year, demand for corn caused the value of farmland in Indiana and Idaho to rise 16% and 35%, respectively. The price of a Soho loft gained only 12%.

The 12% Letter pick Citigroup (C) is planning on listing its shares on the Tokyo Stock Exchange. Why should you care? The move will allow Citigroup to make local acquisitions using its shares as currency. We expect the yen to strengthen over the next several years, which should make financial acquisitions particularly attractive because of the leverage found in these stocks.

True Wealth pick Anglo American (AAUK) is expected to announce a $4 billion share buyback program this week. This announcement would be in addition to a $6 billion buyback announced last year. Anglo has returned more than 58% since its December 2005 recommendation.

Here's another dividend grab... but only if you act fast. Scotts Miracle-Gro (SMG) declared an $8 dividend, payable March 5 to shareholders of record on February 26. The company is funding the dividend, along with a $250 million share buyback, by borrowing $2.15 billion. CEO Jim Hagedorn said that the company's actions are a sign of confidence in its continued performance. Barring any new announcements, the stock should trade ex-dividend starting February 22.

New highs: Consolidated Tomoka (CTO), McDonald's (MCD), POSCO (PKX), Sigma-Aldrich (SIAL).

In today's mailbag, you'll find the best letters we've received in weeks. There's an angry doctor from Harvard (the best kind), an indebted grandmother making it all back with dividend grabs, and a spirited defense of democracy. Send your angry rants here: feedback@stansberryresearch.com. I promise to read every e-mail, but I can't respond individually – there simply isn't time.

"You denigrate global warming as being a 'hoax.' You have absolutely no right to have an opinion on this issue... You clearly don't understand what the scientific method is. All your expertise, if there is any, in finance doesn't carry over into an understanding of the real world. Why do all reputable scientists believe that global warming is largely an effect of human activity? Why? Because they have studied the subject objectively and have no bias directing their thinking... You apparently do not possess the intellectual capacity for unbiased thought, which is a prerequisite for being a good scientist... I do not want a person who is unable to think rationally having anything to do with my finances..." – Paid-up subscriber Donald B. Roberts, BS in physics, Caltech, 1955 (with honors); one year at MIT in the PhD program in physics (one B and five As); MD, Harvard Medical School, 1963

"Here are some links to support your healthy skepticism of the global warming hype... This is an op-ed piece in the WSJ by Prof. Lindzen of MIT, the eminent climatologist and original global-warming skeptic. Prof. Lindzen's home page... has links to all his research and policy papers... [Here is a] point-by-point rebuttal of Al Gore's An Inconvenient Truth. It's detailed and technical with many cited references to scientific articles. Hope this helps. I went along with the media coverage of global warming until I read your opinion of it in The S&A Digest. Since then, I've been reading up on the issue in more depth and feel a lot more enlightened and less worried about the future of our planet. And kudos to your team in doing an outstanding job of investment research and advice. My portfolio is doing much better with your recommendations. Best Regards." – Paid-up subscriber Harry C.

"You can call it global warming, aligning of the planets, 100-year floods or any thing you want too [sic]. I am just glad there is some politician, science-smart enough to know there are changes happen [sic] to warn us to take notice. My recommendation to you is not to buy any property near the ocean. I wish you would be more clear about Democracy? You are not upset about Democracy, just the dome [sic] idiots that run it!"

Porter Comment: Steve Sjuggerud and I are building a beachfront home in Nicaragua. I guess that sums up our fears of global warming. The problem with democracy isn't the politicians. It's the voters, who are easily manipulated and are influenced by the asymmetrical structure of costs and benefits.

"I don't mind self-proclaimed aristocrats – but dumb ones get my back up. You're not even smart enough to realize that a real aristocrat, FDR, saved your, my, and all of our capitalist asses." – Paid-up subscriber Paul Marcus

Porter Comment: It would take weeks to detail the crimes and frauds of FDR's administration, which was second only to Lincoln's administration in its apathy toward the Constitution. If you'd like to learn more, see Paul Johnson's excellent history, Modern Times.

"I think your personal newsletter and those in your 'stable' have a quality of analysis and integrity far above the average. Now that I hear you coming out against democracy, my opinion of you goes even higher. Your analysis is spot on. Keep on speaking the truth!" – Paid-up subscriber Bruce Plaut

"As an old lady, deeply in debt, and on a fixed income, I want to thank you for the 'Dividend Grabs.' I need to raise cash – as much as possible and as quickly and steadily as possible – and this has proved a way to do it, step by step. I bought IPSU and BKE (had to go on margin to do it) and got the dividend BKE split, and, after the dividend was paid, I sold the shares received in the split. Am doing the same with HMA – on a larger scale, made possible by the holdings in IPSU and BKE. Am also doing the same thing on Steinway... I am really grateful for learning about these opportunities. I would never be able to find them on my own in time to act. Keep it up, please. I have to do this about 10 more times to pay off credit-card balances. Bless you!" – Paid-up subscriber Phebe

"I would like to recommend that you stop the e-mail bag content on these updates... it offers nothing to us who read you for sage and sound investing advice. Thanks and keep up the otherwise great work." – Paid-up subscriber Paul Mc.

"Two of the best and boldest things to come out of the States – Letterman and the S&A Digest. This is the most entertaining thing in my e-mail, and you must be right on most points because I agree with you! Love this stuff, Democracy is a sham! Brilliant! Please keep writing what I'm thinking." – Paid-up subscriber Matt Moore

"Thank yoouuuuu for the Alliance gifts. I was only expecting books, but I got more than that. It's always nice to receive more than you expect. So, thanks again... I totally appreciate it." – Alliance member Juanita

Regards,

Porter Stansberry

Baltimore, Maryland

ECO-Mania: Time to Short Clean Energy?

By Ian Davis

When the hucksters start moving into an industry, you know it's late in the game.

Back in the 1990s, pitchmen transformed mining stocks into dot-com stocks. Nowadays, green energy is attracting their attention. According to this month's Forbes, "The penny-stock operators are converting failed Canadian mining outfits and Internet firms into green machines with names like Western Wind Energy and Hydrogen Power International."

Forbes isn't alone in covering the clean energy story. Last month, BusinessWeek featured a cover showing a person's hands cradling a small bonsai tree and the caption "Imagine a world."

Whether you love or hate green energy is beside the point. Global warming and our dependence on foreign oil have become part of cocktail party conversation. And when everybody's buzzing about a sector, the bull market is over.

We profit by investing in cheap and ignored sectors – not the sectors gracing the covers of our favorite magazines. So let's take a look at clean energy as an investment and see if it's time to toss it on the trash heap.

SENTIMENT:

As I've mentioned, clean energy is about as far from an ignored sector as you can get. Everyone has become a proponent of renewable fuels, from the diplomats to the environmentalists to the peak-oil theorists. When this many people get lined up on the same side of a trade, it's time to start looking for other places to invest.

VALUATION:

The clean energy sector is expensive right now. As you can see in the following chart, the average price-to-book value ratio of the stocks in the WilderHill Clean Energy Index (^ECO), barring the enormous spike caused by ethanol last year, is at its highest level since late 1999. This index is also expensive on a price-to-earnings basis (but, because the earnings of these companies are often nonexistent, average P/E value is erratic and less informative than average P/BV).

The Clean Energy Index Is Expensive

TREND:

ECO's short-term trend is up. As you can see in the chart above, the index has rallied by 5.9% since the beginning of the year. However, its longer-term trend is flat to down. The index is 24.6% below its May 2006 high, and I believe it still has more room to fall. If this index starts to decline again, we'll have everything we look for in a short: a loved, expensive, and falling stock.

CONCLUSION:

In the case of the WilderHill Clean Energy Index, two of our three indicators (sentiment, valuation, and trend) are telling us to go short. Right now, the sector is not ignored, and it is not cheap. The only thing going for it is its two-month trend, which is likely a short-term bounce. When this short-term trend breaks down, I'll recommend shorting this sector through a PowerShares ETF that returns the inverse of ECO.

Editor's note: Ian Davis, our resident quant, has been making recommendations in The Digest since November. Below, you'll find his track record.

Good investing,

Ian Davis

February 20, 2007

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