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Strategies for Investing In CleanTech Companies

Strategies for Investing In CleanTech Companies. Presentation to the Minneapolis CFA Society March 15 th , 2012. The Typical Clean-Energy Analyst’s Day…. About The Leuthold Group Overview of the Clean Technology sector Skeptical Approach to CleanTech Investing Oil Correlation Study

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Strategies for Investing In CleanTech Companies

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  1. Strategies for Investing In CleanTech Companies Presentation to the Minneapolis CFA Society March 15th, 2012

  2. The Typical Clean-Energy Analyst’s Day…

  3. About The Leuthold Group Overview of the Clean Technology sector Skeptical Approach to CleanTech Investing Oil Correlation Study It’s Not Easy Being Clean Understand What People Are Selling Understanding Wall Street’s Motivations Thinking Skeptically Renewables, Biofuels Agenda

  4. Research Group Leuthold Weeden Institutional Research Founded in 1981— Institutional investment research firm started by Steve Leuthold; conducted by a staff of 9 analysts Proprietary research includes: Technical & quantitative analysis Broad sector and industry group analysis Earnings momentum Supply/demand dynamics Valuation studies About The Leuthold Group • Capital Management • Leuthold Weeden Capital Management (LWCM), based in Minneapolis, MN, has managed assets since 1987. • AUM of $3.2B across 8 mutual funds & hundreds of separate accounts • Strategies include: • Tactical Asset Allocation (“TAA”) • Long-only, short-only, and long-short funds & accounts • Clean Technologies

  5. Research Group About The Leuthold Group (cont.) • Capital Management All performance presented reflects past performance. Past performance is no guarantee of future results. Investment returns and principal will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance quoted. For performance data current to the most recent month end, call Leuthold Shareholders Services, toll-free, 1-800-273-6886. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The Prospectus contains this and other information about the Funds. For current Prospectus, call toll-free, 1-800-273-6886, or download from our web site: www.LeutholdFunds.com. Please read the Prospectus carefully before you invest

  6. Any technology or service that reduces humans’ impact on the environment Most people think of Alternative Energy, but… CleanTech is very diverse Encompasses part of many existing industrial sectors, including transportation, energy transmission & storage, water treatment, pollution control, advanced materials, recycling, and many others Defining Clean Technology (“CleanTech”)

  7. It’s tough to make money in CleanTech…

  8. About The Leuthold Group (cont.) Why Develop A Long/Short Strategy? Because there will be winners and losers • Motivations to take CleanTech companies public aren’t always based upon wise business decisions • CleanTech companies have significant capital requirements • Public venture capital • V.C. exit mechanism • Bankers seeking underwriting fees • Investors get emotional when considering CleanTech • Excellent source of euphoria & despair; volatility of CleanTech stocks = Opportunities • Potential entry / exit points for patient investors

  9. About The Leuthold Group (cont.) Why Develop A Long/Short Strategy? Opportunity to generate uncorrelated returns and alpha with a low standard deviation

  10. About The Leuthold Group (cont.) Why Develop A Long/Short Strategy? CleanTech shares some of the same risks as other technology sectors • A long-only strategy misses half the investment opportunities • Technology companies are exposed to high risk of obsolescence • Benefit from impatient capital seeking quick returns • Some CleanTech strategies represent solutions looking for a problem • Investors often view Clean Technologies in a vacuum • Incumbent technologies often can be “cleaner” for less money and faster rates of adoption

  11. Guilt is not the only market driver at play…

  12. The basic laws of economics (drive for productivity & efficiency) Political motivation (multi-governmental; Obama) Consumer demand (is green the new “luxury” for the developed world?) Corporate agendas (green-colored glasses & “green washing”) Technological advancement (demand for energy; cost reductions) Social stimuli (rising living standards) Global climate change (socio-political consciousness; self-preservation) Water shortages Population growth Higher fossil fuel prices There Are Numerous Market Drivers

  13. Be Skeptical Don’t be in it to be green, be in it to make green Invest in common stocks, but watch the private companies Use sector & asset allocation strategies There may be a component of sub-sector rotation Be open to shorting stocks (humility pays dividends…) Most CleanTech companies will fail Public venture capital Strategies For CleanTech Investing

  14. Technologies that are dependent upon incentives Some technologies are, but it’s more complicated than that Most industries are dependent upon some form of government assistance, tax incentives, regulatory support, etc. Perpetually 5 to 10 years from commercialization Don’t focus on “solutions looking for a problem” Money-losing technologies Don’t invest in money-losing technologies We are “CleanTech Skeptics”

  15. The overall correlation between oil prices & CleanTech stocks is weak But we found something interesting… Correlation to Oil Prices? We’re Skeptical…

  16. Correlation to Oil Prices? (cont.) Correlation steadily increased from 2007 to mid-2008, peaking as the price of oil peaked, as a barrel of oil rose by 130%, from $61 to $140. Conclusions: 1) Investor psychology (“sentiment”) is at work, not economics; 2) The mere belief of a relationship can have a powerful (albeit limited) role in determining the correlation between these investments.

  17. What are Wall Street’s motivations?

  18. Tesla, the electric car company, makes a very nice car… Understanding Wall Street’s Motivations Source; Tesla Motors

  19. In fact, last year Morgan Stanley called Tesla “America’s Fourth Automaker” and gave the stock a $70 target price Understanding…Motivations (cont.) Source; Morgan Stanley reports

  20. To generate a $70 valuation required some fancy financial modeling…and a lot of disclaimers! Understanding…Motivations (cont.) Source; Morgan Stanley reports

  21. What could be the motivation for a huge target price based upon such far-reaching projections??? Using the 6% rule of thumb, this could be worth up to $9 million in underwriting fees for the banks involved Understanding…Motivations (cont.)

  22. Don’t believe everything you read…particularly if it comes from investment bankers… How To Be A Skeptic (“Contrarian”) Source: http://www.zimbio.com/member/malikharis/articles/734928/Funny+UK+Signboard

  23. Renewables will continue to have a tough time Pricing is going against them, margins are coming down Incentives are on the cutting block: Conservatives are questioning the integrity of incentives and loan guarantees (think: Solyndra) “Austerity” & “Deficit Reduction” are the new catchphrases Single-digit multiples are likely to become the norm (except during periods of euphoria) How much would you pay for a 10-20% revenue grower with flat or falling earnings? Thinking Skeptically: Renewables

  24. Risks facing biofuel investors: “Non-correlation” Risk Ethanol producers understand this very well Particularly prevalent when the input, such as corn, has other uses and/or is subject to supply constraints that have little or nothing in common with the demand for the output, such as fuel ethanol ~39% of corn will be converted into fuel ethanol or exported to other nations (largely Brazil) Our single largest use of corn Animal feed/residual uses: ~37% The rest is consumed, planted in future years or exported Thinking Skeptically: Biofuels

  25. The ethanol producers’ quandary Corn represents 75% to 85% of the cost of ethanol Corn price is subject supply, which is subject to numerous market dynamics that have nothing to do with the price of ethanol Adverse weather patterns (heat waves, hurricanes, tornadoes, etc.) Export demand Availability and cost of fertilizers Economic cycle The difference between razor-thin margins or losing money Thinking Skeptically: Biofuels (cont.)

  26. Risks facing biofuel investors: “Radius” Risk Biomass lacks density, so supply usually must be secured within a 40- or 50-mile radius Sourcing biomass a very local, highly logistical effort, one that can lead to increasingly intense competition and rising feedstock prices Advanced biofuel producers generally argue that their feedstock protects their business models from “Radius” risk Suggest that biomass feedstock prices are stable and characterized by long-term availability We’re skeptical: demand for industrial quantities of feedstock can dominate a local market Biodiesel: razor-thin margins, government incentives might expire = biodiesel is quite a gamble Thinking Skeptically: Biofuels (cont.)

  27. Risks facing biofuel investors: “Technology” Risk Pre-commercial technologies Not aware of a cellulosic, biomass, or algae technology that is cost effective without government subsidies, incentives, or mandates Not aware of an operating and profitable industrial-scale facility in the western world So why where there some many biofuel IPOs recently? Timing was right for venture capitalists to seek their initial exits Their good timing isn’t necessarily our good timing VC’s interests are not aligned with that of the public company investor Thinking Skeptically: Biofuels (cont.)

  28. Risks facing biofuel investors: “Technology” Risk (cont.) Most will require substantial additional capital, probably dilutive equity Many of the technologies have only been operated at “pilot-scale” facilities It’s a science fair project on steroids Substantial R&D still required to achieve cost-effective production….if they reach cost-effective production at all They probably wouldn’t even win the science fair contest Thinking Skeptically: Biofuels (cont.)

  29. Thanks. Q&A (difficult questions please) David Kurzman dkurzman@lwcm.com

  30. Investing in foreign securities presents risks that may be greater than U.S. securities. These risks include, but are not limited to, currency rate fluctuations, regulatory differences, accounting standards, higher trading costs, and political risks. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The Prospectus contains this and other information about the Funds. For current Prospectus, call toll-free 1-800-273-6886, or go to www.LeutholdFunds.com. Please read the Prospectus carefully before you invest. Not FDIC Insured ~ No Bank Guarantee ~ May Lose Value Distributor: Rafferty Capital Markets, LLC, Garden City, NY 11530 Disclaimers

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