Alternative Energy Storage: Cheap Continues to Outperform Cool

The next couple months are shaping up as a time of extraordinary change in the energy storage sector. Events that will drive the change include:

• Press reports indicate that the Department of Energy will be ready to announce it's preliminary decisions on the allocation of $2 billion in ARRA battery manufacturing grants sometime this week;
• We've seen numerous reports on automaker's plans to begin manufacturing PHEVs and EVs in limited volumes for testing and demonstration purposes;
• New tailpipe emission standards in Europe and accelerated CAFE standards in the U.S. will effectively compel the widespread adoption and rapid roll-out of stop-start and mild hybrid technologies by all major automakers;
• Advanced Battery (ABAT) acquired manufacturing facilities for electric two-wheeled (E2W) vehicles and is diversifying its operations with a sharper focus on the Chinese market;
• Beacon Power (BCON) received a conditional commitment for a $43 million DOE loan guarantee that will be used to complete a 20 MW flywheel energy storage project in New York; and
• A123 Systems filed another amendment to its SEC registration statement, which indicates that they're still on track for an IPO sometime in September.

So now seems like a good time to update the relative performance of the individual energy storage stocks I've been writing about for the last year.

The following table provides comparative price data for the short-list of pure play energy storage companies I track. It shows closing prices on November 14, 2008 and July 31, 2009, calculates the percentage of change over the last eight months, and calculates current market capitalizations based on recent SEC reports.

		14-Nov	31-Jul	Percent	Market
Cool Emerging	Symbol	Close	Close	Change	Cap
Ener1	HEV	$6.75	$6.38	-5.48%	$723.96
Valence Technology	VLNC	$1.88	$1.83	-2.66%	$228.58
Altair Nanotechnologies	ALTI	$0.87	$0.97	12.14%	$90.36
Beacon Power	BCON	$0.82	$0.76	-7.32%	$90.62
Cool Sustainable
Maxwell Technologies	MXWL	$6.50	$14.16	117.85%	$328.26
Advanced Battery	ABAT	$2.13	$4.28	100.94%	$247.47
Ultralife	ULBI	$9.08	$6.42	-29.30%	$108.88
China BAK	CBAK	$1.99	$3.31	66.33%	$190.95
Hong Kong Highpower	HPJ	$3.50	$1.41	-59.71%	$19.12
Cheap Emerging
Axion Power International	AXPW.OB	$1.30	$1.25	-3.85%	$44.53
ZBB Energy	ZBB	$0.93	$1.30	39.78%	$13.80
Cheap Sustainable
Enersys	ENS	$6.86	$19.79	188.48%	$951.70
Exide Technologies	XIDE	$3.38	$4.87	44.08%	$367.78
C&D Technologies	CHP	$1.94	$2.00	3.09%	$52.59
Active Power	ACPW	$0.40	$0.74	83.75%	$48.85

Between November 14, 2008 and July 31, 2009, a $1,000 index investment in the Dow Jones Average, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 17.2%. The following table summarizes the portfolio gain or (loss) that would have resulted from an investment of $1,000 per company in each of my four groups.

Tracking	Percentage
Category	Gain (Loss)
Cool Emerging	(0.8%)
Cool Sustainable	39.2%
Cheap Emerging	18.0%
Cheap Sustainable	79.9%

Equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last eight months are any indication, the pendulum is moving back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.

		Shares	Price/	Price/	Price/	Book Value
Cool Emerging Group	Symbol	(000s)	Earnings	Book	Sales	Per Share
Ener1	HEV	113,474		8.63	48.38	$0.74
Valence Technology	VLNC	124,905			8.39	-$0.55
Altair Nanotechnologies	ALTI	93,153		2.48	16.39	$0.39
Beacon Power	BCON	119,239		3.67	519.28	$0.20
Group Average				4.93	148.11	$0.20
Cool Sustainable Group
Maxwell Technologies	MXWL	23,182		5.41	3.79	$2.65
Advanced Battery	ABAT	57,821	14.31	2.88	5.04	$1.47
Ultralife Batteries	ULBI	16,959	12.64	1.19	0.41	$4.92
China BAK	CBAK	57,688		1.19	0.82	$2.74
Hong Kong Highpower	HPJ	13,563	10.85	1.14	0.28	$1.23
Group Average			12.60	2.36	2.07	$2.60
Cheap Emerging Group
Axion Power International	AXPW.OB	35,625		7.25	42.09	$0.17
ZBB Energy	ZBB	10,618		1.74	15.24	$0.74
Group Average				4.50	28.67	$0.46
Cheap Sustainable Group
Enersys	ENS	48,090	11.56	1.49	0.49	$13.43
Exide Technologies	XIDE	75,519	7.49	1.09	0.11	$4.37
C&D Technologies	CHP	26,296		1.11	0.15	$1.81
Active Power	ACPW	66,458		2.24	0.91	$0.30
Group Average		54,091	9.53	1.48	0.42	$4.98

I have long argued that every energy storage decision boils down to a cost-benefit analysis and the bulk of the incremental sales revenue will flow to companies that serve the mundane needs of the average user, rather than the extreme needs of "power users." Based on his recent statement thatlithium-ion batteries are overhyped, it appears that Vinod Khosla, one of Silicon Valley's most active cleantech investors, agrees with me.

While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I will continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap groups instead of the cool groups.

DISCLOSURE: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE), Enersys (ENS) Active Power (ACPW) and ZBB Energy (ZBB).