Random Notes on Electrical Vehicles, EV Charging Networks, the Housing Market…

Random notes that caught our eye:

  • A JD Power & Associates study of electric vehicle ownership suggests sales are still hampered by their high cost and a disconnect between the car manufacturers and potential buyers on a return on investment in EVs, according to the Los Angeles Times (http://www.latimes.com/business/autos/la-fi-mo-autos-electric-vehicle-costs-20121108,0,4965785.story). Overall, sales of electric vehicles are an “almost immeasurable portion of auto sales,” the article notes. Nissan Leaf sales are down 16 percent this year, Tesla Motors has delivered “less than 300 vehicles,” Mitsubishi, which makes the i-MiEV mini-car, has sold less than 500; Honda has leased only 48 of its electric Fit and Coda is not commenting, according to the article. The crazy thing is the study suggests the potential savings from driving an electric car “could be significant.” The study shows that EV owners report an increase in their electricity bill of $18 a month to recharge their cars compared to $147 they typically pay for a month of gas.

    Coda EV photo courtest evworld.com

  • Californians will be the beneficiaries of the nation’s most comprehensive electric vehicle charging network. The Federal Energy Regulatory Commission (FERC) this week approved a $100 million, four-year proposal from NRG Energy (NYSE: ERG) that allows NRG’s subsidiary, eVgo, to build the network, which will also include fast chargers that give drivers 50 miles of range in 15 minutes. The network, called a “public-private partnership” by NRG, will be made up of at least 200 public charging stations stretching from the San Francisco Bay area, south to San Diego County. NRG will also guarantee that at least 20 percent of the stations are in low income areas. The project is expected to generate more than 1,500 jobs and a total economic benefit of $185 million.
  • Amid all the noise about the “fiscal cliff,” some interesting observations in the New York Times Nov. 11 (http://www.nytimes.com/2012/11/11/your-money/fiscal-impasse-now-takes-center-stage-for-investors.html?ref=business): Most forecasters don’t believe there will actually be a drastic tumble. The consenus among “Blue Chip Economic Indicators is that the economy will…grow modestly in 2013.” Also, James W. Paulsen, chief investment strategist at Wells Capital Management suggests that “like the European Debt crisis this year, the cliff might turn out to be a series of chronic problems that are dealt with sequentially, not as a single financial disaster.”
  • There’s good news from the labor markets (slowly but surely improving), consumer confidence (“at a five-year high”) and the housing market (“clear signs of a rebound”), according to the same NY Times story.
  • Also in the NYT, a report from the Organization for Economic Cooperation and Development (a 34-country group including every major industrial nation) titled “Looking to 2060: Long-Term Global Growth Prospects:” more old people proportionately to the overall population mean reduced growth over that term, particularly in China. As China’s population ages “India and Indonesia will overtake China’s growth rate in less than a decade.” GDP in China will grow at a rate of 2.3 percent a year from 2030-2060 (little more than the 2 percent expected in the US) while Indonesia will grow by 3.3 percent and India by 4 percent.
  • Another study, this one by the National Research Council and commissioned by the CIA, suggests that “climate change is accelerating” and Hurricane Sandy is just a taste of “what can be expected in the near future.” John H. Steinbruner, the study author, said, according to the New York Times’ John M. Broder, that “humans are pouring carbon dioxide and other climate-altering gases into the atmosphere at a rate never before seen.”

That Light at the End of the Recession: Who Is the Levi Strauss of the Recovery?

There are articles this morning with significant news for the economy as a whole and for the investment community in particular.  First of all, the job market improved more than expected, and is back on the curve it was on earlier this spring, with job creation in the private sector at 176,000 jobs, and new applications for unemployment well under the “magical” number of 400,000. 

Early gold miners wearing Levis. Photo courtesy of andrewhennigan.blogspot.com

Second, and possibly more important, the number of business bankruptcies has fallen and is on track to finish the year at its lowest level since prior to the beginning of the “Great Recession.”  The comes chockablock on top of a truly boffo month of June for consumers, especially people buying cars.

There are storm clouds — European and Chinese wobblies specifically, with interest rates dropping, which is likely to push the value of the US dollar up, making our goods more expensive overseas.  Actually though, two of our biggest trading partners are virtually (but not officially) pegged to the US dollar (Mexico & Canada), and many other economies, such as Australia — resource rich and recessionless — are fairly stable with regard to the greenback. 

So the question is, if we are seeing all these lights at the end of the tunnel — what should we be doing as investors?  We at SmallCapWorld have no answers, no recommendations, because we are not financial advisors,  but we are finding some areas more interesting than others.  Infrastructure continues to be a big agenda item, for instance.  For those with a longer horizon and some patience, homebuilders are looking more interesting.  And an intriguing article in the New York Times last weekend theorized that the electric vehicle market, in spite of the highly publicized obituaries of the lithium-ion battery companies,  may not be dead in the water: http://www.nytimes.com/2012/07/01/automobiles/evs-are-merging-into-californias-traffic.html?_r=1&ref=automobiles.

Many investors look at sectors like these when economic reports are positive, hoping to find bargains like four-leaf clovers.  An article this morning in Motley Fool may be a case in point, for instance: http://beta.fool.com/jonathanyates13/2012/07/05/it-time-togo-sir-john-templeton-european-stocks/6140/?source=eogyholnk0000001.  Heck, even Warren Buffett is out in the weeds looking for something special, buying up newspapers (talk about last century!). 

I’d like to suggest that there is a larger pond to splash about in, and it is not sector-specific: cross-border companies, especially those trading in the USA as ADRs (American Depositary Receipts).  It seems as though ADRs tend to trade at a significant discount to the valuations given their peers on US markets.  That is less true of largecap ADRs, a fast-growing group, by the way, but largely controlled in valuation by trading in their home exchanges.   But it seems to be increasingly true across the board in smallcap ADRs.  After all, what was the biggest success story of the California Gold Rush?  I think it was Levi Strauss, which did nothing more than invent blue jeans for the miners.  Facilitators tend to be ignored at times.

Why would this be so?  Well, maybe it is that they are farther away than US-headquartered companies; they use currencies that may be more volatile these days; they tend not to market themselves well to US investors; they seldom trade on Nasdaq or the NYSE.  In fact, most of them trade in the regulatory twilight zone that used to be universally referred to as The Pink Sheets.  However that may be, there are some very big, very prosperous, very well-known companies now trading on the “pinks” after having delisted from the big exchanges when Congress started tightening the regulatory screws a couple of financial bubbles and several Ponzi schemes ago.

If there are bargains in the ADR world, they will be found eventually — at least that is the theory behind the “if you build it they will come” philosophy that used to be called “build a better mousetrap” or “stick to your knitting.”  And for the Sherlock Holmes types among us, there are all kinds of companies worth looking on the upgraded “pink sheets” listings called OTCQX and OTCQB.  With the not-so-slow decline of the Bulletin Board, these listings may look like the Wild West, but they are not the typical old “pennystocks” that many investors remember.  And the JOBS Act is breathing new life into these small newcomers by suspending a lot of the draconian rules that govern fund-raising for larger companies:  http://www.forbes.com/sites/alanhall/2012/06/28/hearings-on-jobs-prepare-the-u-s-for-expanded-crowdfunding-accelerating-startup-activity-creation-of-jobs/

Anyway, the point of this article is not to pick out stocks in the pink sheets, it is to look for stocks that could benefit from a gold rush pointed at the pink sheets.  The first and most obvious is OTC Markets Group itself (OTCQX: OTCM), the proprietor of the Pinks, the OTCQX and OTCQB.  OTCM, headquartered in New York City (http://www.otcmarkets.com/home) , is chugging along at an increasing revenue rate that looks to be in the range of at least $32 million to $35 million this year, and bringing about 15%  (or $0.12 per share) to the bottom line in the most recently reported quarter.  Just to put this in perspective, the market cap is around $73 million and OTCM is handling 10,000 over-the-counter securities.  The volume of trading in OTCM is under 1,000 shares per day, which puts a bit of a technical barrier up for some people — but it is hard to imagine this part of the market NOT growing.

Another you-never-heard-of-it company that stands to benefit is one of the Fortune 500: INTL FCStone Inc (Nasdaq: INTL).  One of the busiest traders in the market, INTL is said to be the largest marketmaker of cross-border stocks in the US, and they are an increasingly prominent advisor to OTCQX and OTCQB companies under the “PAL” or Principal American Liaison designation.  They are also one of the largest buyers of gold in the world.    The shares are trading at $19.61, not far off their lows; the market cap is $375 million, and the average daily trading volume is 84,000 shares.  This article in SeekingAlpha addresses the value that might be there: http://seekingalpha.com/article/667071-4-undervalued-small-cap-financials-with-analyst-love?source=yahoo

There are some very small dark horses, like San Francisco-based Merriman Holdings (OTC: MERR; http://www.merrimanco.com), which claims to be the largest PAL operation with regard to OTCQX companies.  MERR is quite small and has a recent history of management change and financial distress, but their newswires are busy virtually every day with new OTCQX clients. 

And there are some much larger companies that stand to benefit, like the Australian whiz-kid, Computershare Ltd (OTCQX: CMSQY and ASX: CPU).  Their market cap is well out of our ballpark at $4+ billion, but they have come out of the pack like Secretariat at the Derby, recently taking over the stock servicing portfolio at Bank of New York Mellon.

We own none of the securities discussed in this article.

Q/A with John O’Dell, Senior Editor, Green Car/Alternative Fuels and Powertrains Specialist for Edmunds’ AutoObserver.com

John O’Dell, a longtime reporter and editor, has written about automobiles for more than 10 years. A former longtime staff writer at the Los Angeles Times, where he covered a variety of beats and was a member of several investigative political journalism teams, he co-founded and wrote for the Times’ premier automotive feature section, Highway 1. In 2007, O’Dell started Edmunds.com’s Green Car Advisor news and features blog on advanced technologies for cleaner, more efficient cars. The blog has now been merged into Edmunds’ AutoObserver.com industry news site.

O’Dell is currently senior editor and green car/alternative fuels and powertrains specialist for Edmunds’ AutoObserver.com.

Smallcapworld: Will Americans pay up for electric or hybrid vehicles after the early adopters?

O’Dell: Yes. The move from early adopters to the broad, general market will take a big longer than many in the green movement had hoped for, however. We don’t see market penetration of electric-drive vehicles of all types — conventional and plug-in hybrids, battery electric and fuel cell electric — topping 5 percent much before 2025 unless there is a significant and permanent increase in the price of gasoline, perhaps as much as $7-8 a gallon.

Q: How long will it take and how much will it cost to get a charging infrastructure in place?

A: Decades and a couple of billion dollars for the kind of network I think would be necessary to end range anxiety as an issue. A lot less and much more rapidly — perhaps just one decade — if the goal is simply to provide a mix of Level 2 and Level 3 chargers along the major transportation corridors and let people use home charging and a handful of strategically located commercial and public Level 2 chargers in city centers. If the idea is to get plug-in vehicles to actually start replacing conventional ICEs and hybrids in people’s garages, rather than serving as 2nd and 3rd cars for commuter purposes only, then we’ll need Level 3 charging locations just about everyplace there are gas stations in this country, and we’ll need to have multiple chargers at many locations. Either that or batteries that can take 80 percent charges in 3 or 4 minutes and/or a national network of battery exchange stations such as those proposed by Better Place. But if the proper roles of pure electric vehicles is to handle short-distance driving for people who can afford to have two or more vehicles in their garages and can afford to use a fairly high-priced EV as a second car, then we probably only need home charging and a few public chargers and the infrastructure needs are minimal and will occur naturally as people buy EVs.

Q: Do pure EVs actually save energy?

A: Yes. They are far more efficient than gasoline or diesel engines. Granted, it takes energy to produce electricity, but everything I’ve seen leads me to understand that on a generation-to-wheels basis, electric vehicles are more efficient than petroleum-burning conventional vehicles. Greenhouse gas production is another issue altogether — electric cars are only significantly cleaner than gas cars if we can decarbonize our electric grid. Otherwise, we are just relocating the emissions from the tailpipe to the generating plant.

Q: What is the real payback period on pure EVs and/or full hybrids?

A: Depends on the intial purchase price and how you are using the vehicles. It will be different for everyone and depends on the premium you pay for the hybrid or EV. Those premiums can range from $3,000 to $10,000, roughly, so it’s not really possible to say that there’s one magic number — 6.8 years or some such — that will get you to payback. If you drive then a lot, they will earn back their costs sooner — particularly if you don’t need any expensive off-warranty repairs. If gas prices continue to rise they will reach payback sooner than if gas prices stagnate or roll back. My wife and I lease a 2011 Nissan Leaf and with all the bells and whistles they hit you with, the lease, including taxes, is $483 a month. That’s ridiculously high in my mind. But we also have a 3 kilowatt solar system on our roof and take advantage of our electrical utility’s special EV owners rate system. The upshot is what we save on household electrical costs and gasoline each month pretty much pays for two-thirds of the lease and makes the whole thing affordable. But that’s our scenario. To figure the real payback period you’ve got to compute the fuel savings along with the maintenance and repair costs — and there’s not a history yet for EV repair costs. Ford has made estimates that its electric Focus would save in maintenance and parts replacement costs for a five-year period. You’ve also got to figure in the social value of reducing national oil consumption and greenhouse gas emissions — that’s important for at least some part of the consumer base.

Q: Can auto manufacturers cut carbon and increase mpg with micro-hybrids, or do they have to put a lot of pure EVs on the road to get their fleet numbers down?

A:  To hit the 2025 CAFE and GHG reduction numbers that administration is proposing we’ll need a lot of micro-hybrids, a lot of conventional hybrids, a lot more improvement in conventional ICE efficiency — which is definitely doable — and some small percentage of battery and/or fuel cell EVs.

Q: Will the EC postpone its upcoming carbon mandates so that auto manufacturers can have more time to comply?

A: I have no inside knowledge, but I suspect that will be the case. I suspect that will happen here as well, when the 2025 CAFE plan comes up for its midterm review. If the auto industry is adamant that it can’t make the goals in the time stated — and if the consuming public continues to resist the advanced technology vehicles that are necessary to hit the goals, there’s not much else governments can do.

Q: With Ener1 virtually gone, A123 staggering and Johnson Controls/Saft torn apart, who will supply the lithium-ion batteries for cars?

A: The Japanese and South Korean giants will be a big source initially; Chinese suppliers will come into the market and I’d expect some of the U.S. and European ventures to gain strength and market share, perhaps through consolidation over the next few years. I’m not sure we’ll ever be at a point where 100 percent of the advanced chemistry batteries we need for electric-drive vehicles will be 100 percent U.S. sourced and manufactured, but I don’t think we’ll be entirely dependent on foreign-sourced batteries, either.

Q: When will lithium-ion batteries be fully recyclable?

A: That’s not my field of expertise, but from what I’ve heard, I expect full recyclability to come hand-in-hand with broad market acceptance of the vehicles that use them. Another decade or so.

Q: Will lithium-ion batteries come down enough in price that they will not have to be leased and then sold after a couple of years for other uses?

A: Never say never, but probably not for a long time.

Q: The assets of Beacon Power were just bought out of bankruptcy by a NY-based energy investor. Do you think that technology is viable in cars?

A: Yes, for some applications. Perhaps as power boosters in ICE, hybrid or all-electric sports cars or as the energy storage device in a range-extended plug-in.

Q: Is there a real market for advanced batteries in hybrids and EVs, or is it just a limited niche market?

A: The market is real, but it will take time to develop. We’re just at the starting gate.

Q: The big distributors have yet to commit to anything more advanced than AGM and glass-mat lead-acid batteries. What will break through that stalemate?

A: Demonstrated public acceptance of conventional hybrids and plug-in vehicles. Once the market grows beyond the early adopters, I think the big companies will have to start providing advanced batteries, unless they are willing to simply abandon that market.

Q: What do you think of PbC batteries or other lead-acid batteries with carbon additives?

A: I like the idea, but I simply don’t know enough about the progress that’s been made to have an informed opinion. I’ll have to wait and see. But I’m for any battery that advances us beyond what we’ve got. And I’m chemistry neutral.

Oikovest Newsletter — Try it, you’ll like it

Gerard Reid’s weekly posts on the Berlin-based Oikovest Newsletter regarding greentech, cleantech, and alternative energy never fail to be interesting.  This week there is a leading post on an expectation that EVs will dominate the vehicle marketplace by 2030.  But there is also a post on Pope Benedict XVI inaugurating an array of 2400 photovoltaic cells on the roof of the Papal audience hall in the Vatican (!).  Have a look at www.oikovest.com and click on “Newsletter.”  You will have to subscribe, but there is no charge and you can cancel with a single click if you don’t like it.  I have been reading it for a year, and have gotten ZERO spam from having subscribed.