Really, it all should be so much simpler that it is. Small companies should be easier to understand, and they are, but even a small NASDAQ company involves big numbers, intricate deals, and confusing accounting. Real Goods Solar announced earnings this week, and even though they are making millions the market is not treating them richly. The trick for the individual investor is to figure out if the stock price is down because the company is doing poorly, or because no one appreciates them.
Like most companies, Real Goods Solar has an About page on their web site, and like most companies they skip over massive pieces of their history. They claim a heritage that goes back to 1978. I think I knew them back then as Real Goods Trading Company. They were a mail-order catalog business for people wanting to live off the grid, possibly before off-the-grid became a popular term. Back then, way back when I was in college it was probably considered back-to-nature – with a hefty dose of expensive technology. I fantasy-shopped their catalog while living in apartments and suburbia. They grew, went online, and decided to become a publicly traded company under the symbol RGTC as I recall. About the time I decided to buy them, the entire company was bought by Gaiam (GAIA), an alternative lifestyle and healthy living catalog company that also did videos. It was an interesting match that included Steve Case, the ex-AOL CEO. I’d owned AOL stock and sold it for about a 2,400% gain. I bought a bit of GAIA. A short while later, GAIA segregates and then spun off the more hardware aspects of alternative energy and off-the-grid products into a company called Real Goods Solar. In, out and back to the beginning? Not quite. Real Goods Solar had a catalog that mimicked Gaiam’s, but it also had a service business installing solar cells arrays on buildings in a few states that subsidized solar power. Gaiam de-emphasized their catalog. I sold GAIA. Now, I can’t find Real Goods’ catalog either. Maybe they are concentrating on the service sector. The name has barely changed but the business appears dramatically different. From self-empowerment to construction contractor is a big switch.
Maybe I got the story wrong, despite watching it for 34 years. Whatever they are doing, they are making money. Net revenues jumped over 40% from $77,000,000 to over $109,000,000. This sounds great, and looks like a vindication for solar power. The areas where solar power made sense 30 years ago were dots on the map. The technology was inefficient and expensive, so it was only cost effective for places very far from the grid. As the technology improved the dots grew to splotches. As power rates went up, the splotches expanded. As non-renewable energy becomes more expensive, and as technology improves and subsidies rise, large portions of the map become more ruled by solar. Real Goods’ wholesale approach evidently finds enough business from big projects to make $100,000,000. Hard to complain about that.
Small companies are supposed to have simpler stories, and they usually do. Diagramming a similarly long history for something like Microsoft is a tome, not a blog post. And yet complexities exist. Real Goods is expanding. They bought Alteris, another company, which is a sign of optimism, but also the very sort of thing that clouds financial reports. Gaiam also continues to own a major fraction of the company, so as it trades shares the financial statements cloud further.
At times like these I retreat to fundamental fundamentals. Merger and Acquisitions (M&A) throw data into wild swings, but only for a few quarters. Fundamentally, the company operates to make money. I buy stocks like RSOL for the positive impact of their work and because they make money. Why not do both at the same time? That’s one of the things I like about my investing strategy. It is possible to champion a cause and fund a lifestyle simultaneously. (See my book Dream. Invest. Live. for details.) Real Goods made about $100,000,000. Their market cap is about $24,000,000 (according to Yahoo) or $40,000,000 according to Google. (I suspect the difference is in the number of shares used for the calculation.) In either case, RSOL adds up to less than what Real Goods makes in a year. The good news is that they expect to make even more in 2012, $145,000,000. The bad news is that the analysts expected them to make $193,000,000.
In an irrational market, like the one we are coming out of, companies are downgraded for any bad news, even if the bad news is still good news. In a normal market, my rule of thumb for a regular company is a price to sales (revenues) of about 6. Construction operates on tighter margins, so I understand a lower multiple (how about 3.0?). According to Yahoo, RSOL is trading at a P/S = 0.30. A ten times higher valuation seems reasonable from that point of view. And the book value is similarly low: P/B = 0.50, so even getting the stock up to an dollar of the company equaling a dollar of the stock would be a doubling of the stock price. And then they are expecting to make $145,000,000 in 2012.
No wonder I shake my head at the market, my portfolio, and the media. There are some serious disconnects between price and value, perception and reality. But fear sells, and one solar power company became a political pawn. Maybe that hurt the rest of the industry.
In the long term there will probably more need for solar power, not less. The systems will become more efficient, not less. The subsidies may go away, but they may also increase if as oil and power plant construction remains expensive. De-centralized power may become as popular as de-centralized communications. Fewer people have landlines in their homes. Imagine a suburban house efficient enough that it doesn’t have to be tied into the local phone or power grid. Those dots on the map are making great progress. Even here in the historically grey Pacific Northwet (yep I spelled that right), there is a solar power p-patch. Of course, I want to be invested in the solar market. If I had spare cash I’d probably invest in Whidbey’s solar plant.
Investing can be complicated. Anything can be complicated, if you decide to make it complicated. Ask a writer. Choosing the right words for one sentence can be the most complex task of a complex week. So, as a writer I’ve learned how to stick to fundamentals. A good story with good enough words is better than a dull story with exquisite words. And as a blogger I’ve learned to trust to first drafts. In the end, consistent voice and the long story will prevail. As an investor, whenever a company’s story becomes too complicated, I retreat to fundamentals. Real Goods Solar is doing good work and making good money. They may not be exquisite, but in a rational market, and given enough time their story and their value will shine through. That would be, and will be, really good.