Clean Energy Portfolio Q2 Results Beat SP 500

Selectivity Pays Off for the Odyssey Clean Energy Portfolio in Q2 2008

In the second quarter of 2008, broad stock market averages were down as investors struggled with high energy and food prices, a meltdown in real estate, and declining corporate profits. As a result, most broad measures of the stock market showed a decline during the quarter. However, higher oil prices also focused attention on the need for alternatives and investors targeted the segments of alternative energy most likely to play a major role in solving this problem.

While the shotgun approach to alternative energy investing produced a flat quarter, a more selective approach was again rewarded. Investors know that some segments of alternative energy will never become economically viable while others will change how we live by offering a cheaper and cleaner solution than fossil fuels. These technologies are the focus of the Odyssey Clean Energy Portfolio.

The Track Record


Investors know that quarterly returns can fluctuate and a longer performance record is more important. From this perspective, the Odyssey Clean Energy Portfolio is establishing a track record that has few rivals. It was one of the first portfolios to be invested entirely in clean energy stocks traded on the major exchanges and was opened to investors on 12/31/05.

From inception, early investors in this portfolio have more than doubled their money while a broad stock market index such as the S&P 500 produced a compound return of just under 3% during the same period. As you can see from the above, the Odyssey Clean Energy Portfolio has also dramatically outperformed its benchmark. It was the top performing equity portfolio in 2007 in the eVestment Alliance database, which was the largest database of investment advisors in the U.S at the time.

Fire Sale in Clean Energy?

Is the Stock Market Over-
looking the Fundamentals?

After scorching the stock market in 2007, clean energy stocks are currently on sale. The WilderHill Clean Energy Index (symbol ECO) produced a return of 58.87% in 2007. However, in the first five months of 2008, investors have taken profits. Through 5/31/08, this index is down 18.68% for the year and it’s hard to find a group of stocks that have done any worse. Is this a buying opportunity, or were these stocks just a flash in the pan last year?

The Next Big Thing?

In the 1980s it was biotech. In the 1990s, it was the Internet. This decade, there’s a very good chance it will be alternative energy.

Clean energy stocks have the problem of being small and speculative in a declining market that usually makes investors gravitate to quality. However, the most attractive companies in this area have continued to grow while their stock price has declined. Some companies have several years’ worth of orders and their biggest problem is keeping up with demand. When it comes to finding companies that will benefit from oil over $100 per barrel and will also be helped by a likely turn to the left in national politics in 2008, clean energy stocks are at the top of a short list of companies.

The Two Main Catalysts:

Fossil fuel production will be unable to keep up with demand. Oil prices continue to break records and the rise in prices comes back to basic supply and demand. There have been no major oil fields brought into production for decades, while demand continues to rise. As older oil fields begin to show their age, it becomes increasingly difficult to produce the same amount of oil. World oil production will peak in the not too distant future, if it hasn’t already while demand for oil will continue to grow. Energy alternatives will be the only way to make up the shortfall.

Rising oil prices have done what government programs were unable to. Alternative energy is becoming competitive. The increasing demand for wind and solar is bringing down the price of those technologies while fossil fuel prices continue to increase. Wind technology already produces electricity for a price that’s competitive with a utility burning fossil fuel. According to First Solar, the current low cost producer of electricity from sunshine, they will be competitive in two years. Once the need for government subsidies is eliminated a huge potential market opens up. Many countries have chronic power shortages and would prefer to satisfy their needs with a technology that doesn’t leave them dependent on others.

Breaking the Conundrum

In the past, clean energy technologies could do little to impact the demand for oil from the Middle East. The problem was that wind and solar technologies produce electricity, while world oil supplies are primarily used as a transportation fuel. As long as the U.S. needs gasoline and diesel to power its vehicles, we’re dependent on the countries that control world oil supplies.

Without much fanfare, this problem is in the process of being solved Electricity is likely to become the next transportation fuel, and two types of vehicles that can be powered by electrons instead of gasoline are going from concept to reality. This year (2008) will mark a watershed for this technology as Tesla Motors will begin shipping the first electric vehicle that’s fun to drive in first half of this year. It’s a sleek roadster that will turn heads and perform like a high end sports car.


Watch the video to learn more about the Tesla electric roadster.

However, electric cars still have limitations including range and the lack of charging stations. Until something like a recent breakthrough by a Stanford scientist extends the range of EVs, plug-in hybrids appear poised to become the next major market in the auto industry. The switch from nickel to lithium batteries will allow plug-in hybrids to go 50 miles before requiring a drop of gasoline. Once the battery power is exhausted, these will have the range of any other gasoline powered car. What makes these compelling is the vast majority of Americans drive less than 50 miles per day, and consumers can benefit from very low electricity prices that will result in driving costs of pennies per mile if they plug in their vehicle overnight.

Electric cars and plug-in hybrids will also increase the demand for solar panels, as these will allow consumers to make their own fuel. It’s one thing for a homeowner to install solar panels on the roof and reduce or eliminate their electricity bill. However, if that same homeowner can eliminate their electricity bill and produce a lifetime supply of fuel for a vehicle, the economics of solar become much more compelling.

Too Much Money, Too Few Stocks

I believe these technologies will become the next big thing because of economics and not because of doomsday forecasts about global warming. However, concerns over the impact of climate change appear to be the primary driver of the first initiative to invest public retirement plans in clean energy technologies. California, New York, Pennsylvania, and Oregon are the first, but almost certainly not the last, to announce plans to invest more than $1 billion in clean energy companies.

Odyssey Advisors maintains a database of publicly traded companies that derive most or all of their revenues from clean energy. At present, there are fewer than 100 companies, including ADRs. Eliminating companies that are the equivalent of the Roach Motel (you can check in, but you can’t check out) because of their small size reduces the list to less than forty. Of what’s remaining, three qualify as large companies. Right now, that’s the clean energy universe for banks, trust companies, and other institutional investors that limit their investments to the large cap segment of the stock market. Value investors that aren’t fussy about company size currently have five to choose from, one of which is an ADR.

Ultimately, what caused internet stocks to skyrocket in the 1990s was too much investor money chasing too few investment quality companies. It wouldn’t be too surprising to see the same thing happen with clean energy. With state retirement plans and institutional investors now starting to line up to invest in clean energy, there are far fewer stocks available.