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Schaefer says he “Mortgaged His House” to buy this “Solar Royalty” stock — what is it?

Looking at the stock Keith Schaefer says is "Being Pushed Up By an Unstoppable Force"

By Travis Johnson, Stock Gumshoe, January 28, 2016

Several readers have asked me about this pitch in the last few days, so I’m taking a look — it’s all about solar power, and about how the big surge in green energy interest will drive us to use much more solar energy… which, he thinks, will make him (and us, if we Subscribe Now!) rich from the company that he thinks is the best bet in the space.

And it’s not one of the widely-discussed solar stocks like SunEdison (SUNE) or First Solar (FSLR) — the ad is quite a bit less flamboyant than those Dr. Kent Moors ads for “unlimited power from sand” that caught the attention of so many Gumshoe readers last year. Apparently, we’re told, this one is more of a “royalty” on solar.

As you might be aware, I’m a sucker for royalties. Earning money without having to do the work is, of course, fantastic — a mining royalty means you get a little bit of each ounce that’s mined without having to worry about costs or operating hassles, a song royalty means you earn a few cents each time the song you wrote is played on the radio without having to sing it, an oil or gas royalty might earn you a dollar for each barrel they produce from your land, etc. etc. Royalties are lovely.

Is this really that kind of investment? Well, my guess is “not quite.” Let’s start off with a little taste from the ad:

“I Mortgaged My House to Buy This Stock Because It’s Being Pushed Up By an Unstoppable Force

“There is an unstoppable force that moves through every generation.

“Sometimes that force is social, sometimes it’s economic.

“As investors, our job is to be on the right side of these forces.

“Investing in one of these unstoppable forces can turn a small investment into a large amount of money….

“The Internet was one of the Great Unstoppable Forces—if not The Greatest….

“I know what The Next Unstoppable Force is. And I found the best stock to ride it for the next five years. It may even be 10 years.

“As I researched this stock…looking at the business model, the profit margins, management’s track record…I just kept wanting to own more stock.

“By the time I finished my research—I was certain this stock was in the right industry…with the highest margins, and the best risk-reward.

“So I literally mortgaged my house and bought the largest position of my life.”

Schaefer does a long spiel about the push for solar power, the need for it around the world (including the obligatory photos of horrific Chinese air pollution), and the rapid growth and almost unlimited growth ceiling for solar power … not least because it has gotten so much cheaper to make, and because subsidies and green energy-motivated societal pressures continue to provide value to those who do use green energy sources, both cash value and reputational value. I won’t go through the whole spiel here, but you can check out the ad on his site if you want to see more of the “solar is growing” argument.

Despite the great length and exposition about solar power, clues about the actual investment are very thin… so what do we have to work with as we feed the Mighty, Mighty Thinkolator? This is about it:

“The Solar Age is Here

“And it is going to make some investors a lot of money.

“Here is your chance to be on the ground floor of a generational change.

“A chance to place a modest bet and see it turn into something life changing.

“But you also need to be careful.

“Because solar isn’t going to make everyone who invests in the industry a lot of money. You can’t just blindly throw money at the dart board and expect results.

“This is a very competitive industry.

“There isn’t a lot that differentiates the product between solar panel providers.

“Margins are going to be razor thin.

“And profits hard to come by….

“What this company essentially is…

“Is a royalty on solar energy.

“Fittingly, this company pays part of that royalty to shareholders, every single month.

“I’m not chasing solar growth through an unprofitable ‘story stock’.

“I’m doing it through

☑ A rock solid dividend payer.

☑ that is truly just getting started…

☑ in which I own a lot of stock…

“In fact this is the largest stock purchase I’ve ever made.”

There’s some rewording of this general idea, but not a lot more in the way of specifics…

“The profits that this company generates are directly linked to the rate at which solar power is accepted in the United States.

“The bigger the role solar energy plays in United States power generation…

“The more money this company makes.

“And the more money this company makes, the bigger the dividend cheque I get every month.”

And then this…

“This company simply sells solar power—and gets paid richly to do it…

“More richly than ANY other company.

“It is that simple.

“As solar power use grows.

“This company’s earnings will grow.

“Yes, that’s right—

“This company not only has revenue…

“It not only has positive cash flow…

“…it has earnings.

“That’s because it has high profit margins.

“And honestly, from all my research, it has the highest margins of any part of the solar value chain that I see.”

And finally…

“Today this highly profitable junior company isn’t covered by anyone in the solar analyst community.

“Mainstream analysts aren’t aware of the highly profitable leverage the business has to solar power growth….

“It is not only the single largest investment I’ve made in the last year—it’s my largest ever.”

So who is this?

Well, it’s hard to be definitive given the squishiness of those clues … but since he similarly teased this stock as his “biggest investment ever” last Fall, and the clues match, this is very likely still Crius Energy Trust (KWH-UN.TO in Canada, CRIUF OTC in the US).

And yes, this is one I own as well — here’s what I wrote about it in the Annual Review that I shared with the Irregulars earlier in the week:

“Crius Energy Trust (CRIUF) $6 (C$8.50), added to watchlist and bought personally at $5.60 (C$8). Sentiment: Hold
“This is an energy marketer that pays a strong yield, and has invested in a series of acquisitions that brought them new customer lists and some growth potential. There’s a lot of churn in the business, they have to re-sell a lot of their customers on their power deals each year — big growth depends on either getting a lot of solar installs, which have large up-front commissions, or substantially increasing their customer base thanks to their still pretty new marketing/bundling deal with Comcast (still rolling out). I’m holding because the yield is fine (8%+ now) and I’m willing to sit through a fair amount of volatility (and a weakening Canadian dollar, to some extent) while I wait to see how these growth projects are doing. I don’t expect to learn anything more until they release earnings, which will likely be late March.”

Schaefer was using this same pick to market his newsletter back in July and in October last year, back then us used the spiel that this was a way to get rich from the “Most hated company” in America, a play on the fact that one of their growth prospects is their partnership with Comcast. That partnership is rolling out to more Comcast subscribers, so there’s some potential, but the urgency he used in those ads three and six months ago was, of course, overstated and entirely for marketing effect — Crius did not become a dramatically more valuable company after their most recent couple earnings reports. It pays an 8%+ yield, so there has been some return for investors (including me), but the share price is roughly where it was back when he first started promoting this “secret” stock over the Summer.

Crius is a marketing company — they sell mostly energy to consumers and businesses, which for the most part means providing the electricity and natural gas those customers use in a slightly different way or at a slightly different price than the existing utilities, whether that’s because they can hedge commodity prices or offer prepayment deals or bundling deals (like with Comcast) or whatever. In many states energy marketing is separate from energy delivery, so (as is the case with us in Massachusetts) you might pay one fee on your electricity bill for transmission and another one for power generation, and it might well be that the utility company is only selling you the transmission, it’s another vendor selling you the actual electricity. It seems absurd, but that’s how it works as utilities have been somewhat deregulated in an attempt to create competition.

And one of the more lucrative things they sell is solar power — not directly, but they have large customer lists of folks who buy gas or electricity from their many different businesses, and they can pitch those customers on solar power installation through their solar power partner, Sungevity (they were also selling for Solar City, but apparently this business has switched over to Sungevity now — partly, as I read between the lines, because Solar City was having trouble keeping up with demand for timely installations — which I guess is a good problem for the industry to have). While the returns from gas and electric customers are decent, particularly if they’re able to roll those customers over for multiple years to amortize the cost of customer acquisition, the returns from solar installation are much larger and more immediate: They get a fat commission on new installations. So in some ways, that’s kind of like a royalty — more demand for new installations (mostly rooftop for single family homes) means more commissions.

Here’s the CEO’s quote from the most recent quarterly report:

“Our third quarter results delivered strong cash flow and growth in Adjusted EBITDA which allowed us to fully repay the working capital facility used primarily to acquire TriEagle Energy in April 2015. We will continue to make investments in the successful roll-out of the Comcast partnership, expansion of our commercial business, transition to Sungevity as our solar partner, enhancements in the network marketing channel, and our expansion into the state of Texas. These investments are expected to positively impact long-term unit holder value through increased scale and diversity of our business.”

Basically, this is a selling business with a pretty substantial amount of churn — so they buy new customer lists, they try to keep those customers, and they lose a large number each year so have to buy new ones, and each customer provides some level of profitability as long as they manage their costs well (they have to buy the electricity or gas from the producer or generation facility before they can resell it to the end customer, so forward contracts and hedging and cost management are important endeavors for them)… but the solar stuff does add a possibility for immediate gratification, particularly given the optimism they have about their new Sungevity partnership that will provide long-term profit sharing from those customers and, presumably, more of the cross-selling opportunities that seem to be really what drive success for Crius.

Is this a certain match? No, but Schaefer has talked about this company a few times as the biggest investment he’s ever made with his own money, and you can spin it with a relatively straight face as a “royalty” on solar power sales, at least for part of the business.

Does that mean this will make you rich because of the unstoppable force that is green energy investing? Well, I tend to agree with Schaefer on the general principle, I agree that it’s likely that alternative energy will be more of a social requirement and assumption going forward thanks to the need to reduce emissions and pollution… but that does not, of course, mean that this single energy marketer is a sure thing. They have to do a consistently good job finding customers, serving customers, and upselling customers in order to be successful, so there are a large number of ways that you can probably imagine in which this business could fail. Or, at least, fail to grow. There are no underlying assets aside from the customer lists, so there’s little to hold up the stock if those customers don’t “perform” as expected.

They do pay a nice monthly dividend, they are currently growing, but it’s a pretty young company and the success of their new solar partnership is not yet certain… and the Comcast partnership, though promising and expanding as of last quarter, is still also small and has an uncertain future (Comcast has done this before, tested “bundling” of energy services with their TV, internet, home security and telephone offerings, and that prior test was discontinued and the partnership dissolved). I think it’s a decent risk, given the dividend and their ability, so far, to replace the customers who drop off each year and build new partnerships that appear to have lucrative potential, but I’m not making it a huge “bet” in my portfolio. I’ll continue to hold it for the dividend as long as the business seems otherwise relatively stable, and probably just re-evaluate each quarter as we get an idea of how their growth prospects are developing. They do have what looks like a levered-up balance sheet, but that’s mostly because they don’t actually own all of Crius — the publicly traded unit trust has been buying more of the operating company, but the part that they don’t own is reflected on the balance sheet as minority interest ownership, which is technically a liability. They do not have any long-term debt as of last quarter.

Oh, and yes, they did just raise their dividend — by 2%. The first increase since 2014, when they cut the dividend (and the stock cratered). Unfortunately, for US investors, the dividend is actually shrinking in US$ terms — they report in Canadian dollars and pay a dividend in Canadian dollars, but the Canadian dollar has fallen so sharply against the greenback that what was effectively 60 cents a year in dividends a year ago is now 50 cents a year.

So that’s what I think we’re dealing with here — the return of an idea from last year, repackaged as a solar power play (which it is, to some degree). Think it will make you rich from this “unstoppable force” of green energy? Have a better idea of what Schaefer might be teasing? Let us know with a comment below.

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7 years ago

Hannon Armstrong (HASI) is a larger, more diversified play in this space. Currently yielding 7%. They have been on my watchlist for a while, but I don’t hold shares of either company at this juncture.

👍 137
👍 15112
7 years ago

EPS growth of 18% in latest quarter
Dividend growth of 15%

👍 137
7 years ago

Travis this is the kind of time-saving info that motivated me to re-subscribe recently – and next time it will be a lifetime subscription. I expect you to lead a very long and healthy life and keep this site going just as long, since you admitted you shop at Whole Foods. So I hope I don’t rob you of too many years of ongoing subscription $ by going lifetime. All my gain, and your loss, since I plan to live a few more decades myself.