"Regulation" is a dirty word among most investors, but for speculators like Rodney Stevens, portfolio manager at Wolverton Securities Ltd. and author of The Disciplined Speculator newsletter, state-mandated emissions caps and renewable energy goals present an extraordinary opportunity for growth. In this interview with The Energy Report, Stevens makes a bullish case for solar stocks and offers several names for traders playing offense or defense. But whatever your strategy, Stevens says get the heck out of bonds and into equities.
The Energy Report: What can retail investors learn from the speculator's perspective and methods?
Rodney Stevens: "Investing" is one of the most misused terms in finance. When you're an investor, the typical strategy would be to buy cash-cow businesses at low prices and hold them forever, like the Warren Buffett strategy. Most of us don't have that time horizon. Very few companies actually fit that particular definition of an investment. Our main strategy is to buy speculative companies, but if you apply the Warren Buffett strategy to speculative stocks, that scenario is fraught with danger. But you can speculate with a process that puts the odds in your favor. The first thing to determine is whether you are indeed speculating.
Another approach to stock speculation is to integrate short selling into your strategy. A lot of people view short selling as more risky, but when you combine a long and short portfolio, it actually serves to reduce the overall portfolio risk.
TER: Why do you advise getting out of bonds and into equities?
RS: The U.S. bond market—the treasuries—has recently turned bearish. The cause is the perception of growth in the U.S. economy combined with the potential for Federal Reserve Chairman Ben Bernanke to begin reducing his stimulus. If he does reduce his stimulus, interest rates should rise. A rising interest rate is going to negatively impact bonds. We certainly view those as underperformers going forward.
TER: What conditions would justify a Fed decision to reduce stimulus?
RS: Ben Bernanke has always said that he would reduce stimulus if the economic growth in the U.S. could support that. His key metrics are the unemployment rate and, more important, the inflation rate. So long as Bernanke is supporting U.S. growth, U.S. stocks are the most favorable place to be right now.
TER: Why do you think "offensive" stocks and sectors that include energy will outperform utilities and other "defensive" stocks?
RS: Defensive stocks refer to the bond-like stocks, such as utilities, which might have consistent dividends and marginal growth, but essentially trade like bonds. In the face of rising interest rates, these assets should underperform. The more offensive stocks, which are more impacted by growth in the U.S. economy, can support low rates or small increases in rates, but also have the growth potential to outperform.
TER: How will President Obama's climate change program affect the solar energy industry?
RS: The key takeaway is that Obama would like to double renewable electricity generation by 2020. This could be beneficial for nuclear energy, which doesn't have carbon emissions, but I think the prime beneficiary would be the solar space, because right now solar is the cheapest form of green energy to install and maintain. Solar energy, with its lower upfront cost and low energy rates, is positioned to be one of the prime beneficiaries.
TER: You say it has lower costs. Is that in the materials? The construction?
RS: That's the upfront cost for materials and installation, and those costs are much lower compared to wind power or geothermal. In terms of upfront costs and ongoing costs, solar is in the position to benefit most for political incentives towards clean energy or renewable energy.
TER: Is the solar industry threatened by the low price of natural gas?
RS: Typically, in the past, solar companies' equities would trade inversely to natural gas, but it's becoming less of an impact now because the technology in the solar space has improved so significantly that it's almost economic without government subsidies. The natural gas price, if it declines, can of course result in lower utility costs assuming the utility companies transfer that reduction to the customers.