5/10/2009

Disclaimer: I will not be held liable for investment decisions that are influenced from the reading of this article. Any investment decision you make you make at your own risk. Information provided on the companies are provided “as is” for informational purposes only and subject to change over time. Many strong political and financial opinions are made in this article which should be taken as opinions, not facts. Do not continue if you are sensitive to political statements. Invest at your own risk.

We’re all tired of being held hostage by gas prices; the problem is not all of us have $25,000 to buy a new hybrid, diesel, or hydrogen car. We all want to answer President Obama’s call to American Energy Independence but not all of us want to spend time and money protesting outside the Exxon refinery and sign petitions and receive nothing in return. Guess what: You can still make a difference! You don’t need $25,000 to buy a new car! You can promote Energy Independence and profit from Energy Independence. How?

Alternative Energy Stocks, that’s how.

1. Sign up for a discount online brokerage firm like TradeKing or Zecco. The beauty with these brokerage firms is that no minimum deposit is required and it costs less then $5 to make a single trade. They are God’s gift to the common man looking to invest.

2. Go to altenergystocks.com and on the top menu click on “All Stocks.” We’re going to use this site as a reference point to disect and analyze alternative energy stocks.

3. Let’s start at the beginning. Click on the first company listed which is 5N Plus Inc. Their ticker symbol is FPLSF.PK

When you analyze a stock these are the questions you should ask in this order: How much? What kind of money do they earn? What do they do? Who owns it? Who runs it?

In the case of 5N Plus Inc. all the relevant information that we need to disect this company is unavailable. That is an immediate red flag to dump this stock and move on to the next option.

4. Go back to altenergystocks.com/comm/stocks.jsp and take a look at the second option. “A-Power Energy Generation Systems” ticker symbol: APWR.

5. How much? As of this writing this stock is trading at $10.75/share. What is infinitely more important than the share price and what I really meant by “How much” is how much the stock is worth in respect to its earnings. We can derive this value from the P/E ratio which is [(share price)/(earnings per share)]. Through research we can see that the price-to-earnings ratio is 9.93 which is good. Generally in the stock market, anything less than 15 are considered cheap while anything over 15 is considered expensive.

6. What kind of money do they earn? Through research I have obtained that A-Power reported a profit of approximately $15,214,000 which was reported in December 31, 2007. This is a big red flag because its earnings since that date are mostly unavailable or difficult to obtain and December 31, 2007 is the first time that this company released their earnings as a publically traded company. It has only been public for 2 years which implies great risk and volatility. This company does not have a proven track record, it’s a gamble.

7. What do they do? Their company summary is as follows:

“A-Power Energy Generation Systems, Ltd. (A-Power), formerly China Energy Technology Limited, is engaged in designing, constructing, installing and testing distributed power generation and micro power grids for various customers in the steel, chemical, ethanol, cement and food industries. The Company conducts its operations through two Chinese companies: Liaoning GaoKe Energy Group Company Limited (GaoKe Energy), a wholly owned subsidiary of Head Dragon Holdings, and Liaoning High-Tech Energy Saving and Thermoelectricity Design Research Institute (GaoKe Design), 51% of which is owned by GaoKe Energy. Both operating companies are based in Shenyang. These two operating companies are collectively referred to as GaoKe. On January 18, 2008, A-Power acquired Head Dragon Holdings, gaining control of GaoKe. As of December 31, 2007, Head Dragon Holdings was a wholly owned subsidiary of A-Power.”

Red flags are everywhere. First off, this company is based in China. Too often investors are quick to rush to foreign investments as the next big thing when they have no clue about the culture, laws, or standard practices of a country, and many American investors are guilty of this with Chinese stocks. I really know nothing about China and what I do know I don’t like. It’s lead by a corrupt communist government which through violent and suppressive military action forces its country to stick together which results in a much more bitterly divided country than what may appear. Their accounting and auditing practices are shaky and that summary I presented doesn’t tell you anything about the company at all. Warren Buffett warns against investing in companies with complex business models and encourages investment in companies that have simple business models with a competitive edge. A-Power does not appear to be that case.

8. We already know to avoid APWR is a terrible buy but we’re going to finish the steps I’ve outlined so you have a good idea of how to disect a stock. Who owns it? In all publically traded companies ownership is scattered all over the place in a million different directions. The key is to focus on the top majority shareholders. As Mel Gibson said in Payback “You go high enough you always come to one man.”

It’s important to know who the majority shareholders are because well.. it’s their company. They have the largest voting rights in electing the board of directors who elects the CEO who’s in charge of the day-to-day operations of the company. The perfect situation to be in is a company where the majority shareholders are also board of director members with top management positions. This shows you that the people running the company have a personal financial interest in creating and sustaining profitability. So, who owns APWR?

Through research I’ve obtained that 32% of the company is held by insiders and 5% owners. That’s the type of company you want to invest in (albeit not this one). This shows you that the management care because their personal livelihoods are on the line; management isn’t infected with a bunch of freeloaders that can care less if the company goes under. Yeah, stay away from these types of companies.

JLF Offshore Fund LTD has the single biggest block of ownership. The problem is, it’s hard to put faces to the name. Not being able to easily determine the identities of the majority shareholders is another red flag.

9. Who runs it? Fortunately this is much easier to determine.

Jinxiang Lu is the chairman of the board and chief executive officer. I have no idea who this dude is, but it’s good when companies have someone that is both CEO and Chairman of the Board. Power is more centralized and there is less bureaucracy and the company very much can become one person’s visions. This is a good thing if that man is a superstar CEO this is a disaster if that man is an idiot.

A basic google search doesn’t reveal much about Jin. Red flag. In the company web site there is much information on his autobiography. Basic sugarcoating, but he does seem like a smart guy and an accomplished and decorated engineer. That doesn’t necessarily make you a good person to run a company when so many of your problems as CEO have more to do with psychology, management, and risk-assessment than pure mathematical problems.

Maybe he’s a great guy, maybe he isn’t, but there just isn’t enough information on this guy or this company readily available for me to suggest this stock as a good buy.

And there you have it, the steps and mentality you ought to go through in analyzing alternative energy stocks. This article got majorly sidetracked from energy independence to security analysis. If you get nothing else out of this article get this: You don’t need $25,000 to buy a Toyota Prius to be a supporter of Energy Independence, and you can promote energy independence as well as profit from it.