November 17, 2021

To borrow a phrase usually deployed when tax cuts are rolled out, the infrastructure bill has “released the animal spirits” in Greentech. Our sector is bullish and appears to be working off of a strong base built since May.

This issue we have two new additions to our portfolios – one is an American company that suddenly has global market leadership in a crucial part of utility solar. The other is one of those companies long touted to be a game changer when in its start-up phase, so much so that Bill Gates backed it. It’s now public and fills an important energy niche with a delightfully simple approach.

ESS Tech Inc. (GWH)

Overview
Reliable, long-duration energy storage is an ideal for creating robust renewable energy grids, allowing maximal energy generation from wind, solar and other formats at any time, and holding to deploy at peak demand. Right now, long-term energy storage, which is defined differently by various parties but means (to the Department of Energy) being able to feed out power at a high level for more than 10 hours, is primarily in the form of pumped hydro – water pumped up to a higher elevation when demand is waning and the cost is cheap and deployed through a turbine when demand is greater and the price more expensive. It works, but it’s not very efficient. Plus, the view (of some) is that major economies, with the exception of China, have maxed out their potential hydro-power and reservoir storage for geographic and political reasons. Research into new forms of energy storage and battery technology is one of the most exciting – and hard to predict – areas in Greentech, with many exciting ideas that seem possible in the lab frequently failing to translate into commercial production. Demand for long-duration storage is growing at 33% annually and should reach $57 billion by 2027, according to reports by Guidehouse Insights and Navigant Research. This selection is for the Real Money Portfolio.

Business Model
ESS Tech (GWH) is an Oregon-based maker of longer-duration energy storage that is an iron-based system called an iron flow battery. Bill Gates, SoftBank, BASF and others are venture-round investors in it, and (not unexpectedly) believe ESS’s technology is a breakthrough needed for near-term energy storage: a simple, non-toxic medium robust enough to provide balance for solar and wind systems.

A flow battery is one where two chemical solutions are separated by a membrane and the exchange of ions across the membrane charges and discharges the battery. ESS’s battery uses iron, salt and water. The idea has been around since the 1930s, and using iron specifically was broached in the 1970s. The problem is that the membrane would effectively become clogged and the flow would cease. ESS solved the problem with a solution it calls a proton pump, which maintains balance between the sides by passively mixing hydrogen, created in the battery and which causes the cell failure, back into the solution to maintain the pH and states of charge needed by the battery.

ESS isn’t the only company pursuing flow batteries, but it has a few advantages. The primary one is its simplicity: the ingredients are so common supply will never be an issue, and safety issues are far fewer than with rare earth metal batteries (flow battery research frequently focuses on rare earths). The company somewhat oddly points out its environmental friendliness by saying the ingredients are “food grade” but, more importantly, it sidesteps many permitting issues, making it more rapidly deployed. Decommissioning is easy too.

ESS Tech plans two storage products.

The primary product right now is the Energy Warehouse. It’s a shipping container-sized box that holds the battery components (and like shipping containers, is stackable). It offers discharge of four-to-12-hour durations – so, more accurately, we should consider it medium-term storage. Still, it’s a duration that works well with solar and wind systems, which often have hours-long periods of non-production.

The simplicity of the ESS system means it should have a usable life of more than 20 years and 20,000 cycles without any capacity fade. They are sold with a 10-year performance guarantee underwritten by Munich Re. The product is shipped dry and the water is added onsite, and configurable from 50 kilowatts (kW) to 90 kW. It operates well in high temperatures, up to 122 degrees, though the cold operation seems somewhat limited at a low of 23 degrees. Elevation makes no difference in performance. The levelized cost of storage is 37% less than lithium-ion batteries for four hours, and 71% less for 12-hour duration. Response time at start-up is less than one second.

ESS’ other product is the Energy Center, which isn’t produced yet. It is planned to be a large energy storage facility intended to be for significant customers – utilities, independent power producers and industrial companies. The Energy Center will likely start at 3 megawatt (MW) and scale up, offering six-to-12-hour durations. The technology is essentially the same as the Energy Warehouse.

ESS Tech was founded in 2011 as Energy Storage Solutions. It won a federal grant in 2012 to develop the technology and shipped its first field storage system in 2015. The second version of the Energy Warehouse system, the S200 line, was put into production in 2019. The company went public by SPAC, a deal that closed last month.

Business Outlook
ESS has only started shipping Energy Warehouses to clients this quarter, which will provide its first revenue. For 2021, sales will be $2 million, projected by management to rise to $37 million next year (of which 20% is booked). 2023 sales are forecast by management to hit $300 million, of which 20% is awarded, none booked. To date, its biggest deal is a $300 million “framework,” to SB Energy, the clean energy arm of investor SoftBank. It’s a framework because there is no contracted obligation to buy storage from ESS in the future, but SB Energy says it intends to, for a total of 2 gigawatts (GW) of storage by 2026. The first battery was shipped to an SB project in southern California last month.

In a presentation to investors, ESS presented six user examples for its batteries, explaining that it won one contract in remote Chile to replace diesel power and another in Denmark to store renewable farm energy because of its operational robustness – no cycle degradation and no problems with how fast, often or for what duration it’s used. Other customers cited the inherent safety of the iron, salt and water system, and ease of permitting as a result, as key factors in choosing ESS, as well as lifetime payback of the product. In a recent “fireside chat” with a brokerage, ESS CEO Eric Dresselhuys said the payback for an Energy Warehouse in the Texas ice storm would have been two weeks given energy costs at the time.

As with all companies that have gone public by SPAC, long-term projections are impressive, if highly speculative. It’s a dilemma somewhat reminiscent of the early days of Internet stocks – what metrics do we watch and do we believe? The fact product is shipping now and the technology appears to be a simple solution that can find a market niche regardless of the eventual development of competitive storage solutions carries much weight for us. On the other hand, Bill Gates seems much more excited about other storage ideas (like molten salt) in his latest book. But none of them are ready for primetime like ESS seems to be.

By 2027, ESS believes it can be generating $3.5 billion in sales, the vast majority of which would be from the Energy Center offering and bolstered by planned expansion into Australia in 2023 and Europe in 2024. Positive ebitda should come in 2023 and start to get significant – over $100 million – in 2024.

The company anticipates offering related services and storage leasing options, in addition to outright sales, as part of its revenue mix in years to come.

Issues to Consider:

• The 10-year insurance plan with Munich Re is a big selling point with customers.
• ESS says it has enough capital to fund manufacturing expansion in Oregon and the addition of plants in Australia and Europe through 2025, which would raise capacity from 150 MWh of storage systems to 16 GWh in 2025.
• SPAC-derived stocks are volatile early in their public life. We are likely to see volatility as SPAC IPO and interim PIPE investors cycle out of the stock. There is a 150-day lockup period for about half of PIPE shares that will expire in March.
• ESS lost 16 cents per diluted share in the 6 months ending June. It lost $30.4 million in 2020 and $11.5 million in 2019. About one-third of the 2020 loss is an accounting restatement on the SPAC warrants, as required of SPACs by the SEC earlier this year.
• Long term, other forms of energy storage could make iron flow an also-ran. Primarily, hydrogen is a way to store excess energy for the long term.

Technical Analysis
The closing of the go-public merger with the SPAC, Acorn S2, spiked shares as high as 29 last month after the usual pre-deal plunge from 10 to 7.31 as arbitrage funds rolled out of shares. Shares have predictably backed off the spike and are trending downward to 15 recently. Technically, there should be support at 14 (the 40-day moving average) and down to 11, the top of the price gap.

Warrants, the way we have invested in other SPAC-derived companies, are trading in the 4 area, implying the share price should be around 16. SPAC warrants, however, are not a lockstep indicator of share prices, and the combination of the higher warrant price that narrows the window for profits before the 18 exercise price, as well as some early redemption clauses, have us hesitant to trade through warrants.

What to Do Now
GWH looks biased to slip a little further, based on price technicals. Because of the volatile nature of SPACs, we’re going to give shares a wide leeway on our usually tight sell-stops. BUY under 15.

ESS Tech Inc. (GWH)
Revenue (trailing twelve months): $0
Earnings per share (TTM): negative $0.02
All-time high (intraday): 28.92
Market cap: $2.04 billion
Recommendation: Buy under 15
Intended Portfolio: Real Money

Array Technologies (ARRY)

Overview
A year ago, the U.S. reached 50 gigawatts (GW) in installed solar. It took nine years to reach that level from a base of 1 GW, in 2011. The next 50 GW of solar will be installed by the end of 2023. By 2029, the annual volume of photovoltaic (PV) energy will surpass that of every other energy source combined (however, nuclear isn’t included in the projection). Some of that is accounted for in rooftop PV, but most of that annual volume will be utility-scale, of which the bulk will be using solar trackers: machinery that follow the sun’s movements to improve how much energy a panel generates in a day. Already, solar is the lowest cost source for utility-scale electrical generation, according to an annual survey by investment bank Lazard Freres. The continued price advantage of PV will go a long way to ensuring projections of growth are met. Solar, in the next two years, is seen growing 10% annually, with trackers growing faster, at 13%. Trackers right now are a $3.9 billion market. That should hit $6 billion by 2025, according to Credit Suisse. This selection is for the Real Money Portfolio.

Business Model
Array Technology (ARRY) is the largest pure-play solar tracker stock traded in the U.S. And thanks to a deal announced last week, it will be the largest solar tracker business in the world – and the leading provider in two of the top three PV tracker markets, the U.S. and Spain, numbers one and three (China is second). Array has a deal to buy Spain’s STI Norland for about $650 million (570 million euros) in cash and stock, closing in the second quarter of 2022. Prior to the deal, Array was the world’s second-largest tracker provider, and STI Norland the fifth. Combined, they’ll surpass NextTracker, a division of Flex Ltd (FLEX). The transaction will also put Array in a leading position in Brazil, where STI Norland is considered to have the inside track on much business there. Over the next two years, some 10GW of solar, nearly all tracker-based, is expected to be installed.

Let’s step back and take a look at Array’s product. Stationary solar farms pick the most optimal spot and angle to tilt a panel that then doesn’t move. Trackers move the panel to grab more of the sun during the day. It’s a simple idea that tends to improve electrical product at day’s end when demand is increasing from people returning home. Trackers add more upfront cost to installation, about 7%, but Array’s lower the levelized cost of production after the capital cost by 22%, compared to fixed-tilt. The company’s version has 190 fewer moving parts than the next-simpler competitor, according to the company. Most significantly, Array uses one motor to operate up to 32 rows of panels, which are connected to the motor by arms going from row to row. NextTracker locates a motor with each row. Array says the fewer parts it has means installation labor costs are a quarter less than competitors’ and maintenance costs are reduced by 30%. Since trackers are sold primarily to utilities for large scale projects, the total cost off lifetime operation is a heavier consideration than for a more price-sensitive customer like a homeowner.

Array also is expanding into add-on services that provide incremental improvement in solar field production for an additional fee: primarily, using machine learning software to tweak the rotation and adjust for cloudy days to maximize solar production, a process than can add 5% more production to a field just using the Array trackers.

Business Outlook
Before the STI Norland deal, Array had an order book of more than $1 billion in July and a sales record that was producing growth of 45% annually. Array brought in $856 million in revenue in 2020 and should fall somewhere close to that for 2021. That’s a drop in growth for the year, due to the rising cost of steel and supply-chain difficulties that affected earnings in the spring and subsequently hammered shares. With STI Norland, the business should vault next year to $1.6 billion in revenue, or $10.66 revenue per share, after account for 13.9 million shares to be issued as part of buying STI. 2022 earnings per share should be 80 cents. It’s likely Wall Street will raise its estimates for income as Array management suggests what efficiencies the combined organization should find.

In the near term, at the end of the summer, management secured steel at a set price for the rest of 2021 from Posco, the Korean conglomerate, which should sidestep any more negative surprises for 2021 earnings.

Technical Analysis
We’ve been watching ARRY for some time – we were inclined to buy at the IPO in October 2020, but the price ran away from us at the start of trading – shares IPO’d at 20 but opened trading near 30 and ran to an all-time high near 55 in a matter of weeks. More recently, however, shares suffered a steep drop in May when management disclosed that steel prices and availability of the metal was hurting 2021 sales and income. Friday’s rally on the STI news vaulted through a confluence of resistance we wanted to see broken: the price gap created by May’s sell off and the 200-day moving average. Soon to follow will be a Golden Cross, of the 40- and 50-day moving averages crossing over the 200-day, which is a nicely predictive indicator of good sentiment to continue.

What to Do Now
The breaking of resistance is bullish. There is still a good bit of overhead selling that may come in. Buying was heavy around 30 early in the year, so sellers may come in there and then at 40, another high-volume buying mark. Volumes up toward the all-time high were lighter, and less likely to bring resistance. There should be good support down to 20. BUY

Array Technologies, Inc (ARRY)
Revenue (trailing twelve months): $768.76 million
Earnings per share (TTM): negative $0.11
All-time high (intraday): 54.78
Market cap: $3.6 billion
Recommendation: Buy
Intended Portfolio: Real Money

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. We screen top performers further to eliminate widely held companies we believe have clear environmental, social and/or governance problems. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

ProLogis Inc (PLD)
What is it?
A real estate investment trust.

Why is it ESG?
It has the largest green portfolio in its category at 169 million square feet. ESG funds own $470 million of shares.

Why now?
Shares are at an all-time high and present a very orderly long-term chart that suggests a continuing positive trend.

Costco Wholesale (COST)
What is it?
A big box retailer.

Why is it ESG?
Unlike competitor Wal-Mart (WMT), Costco hasn’t been tarred with anticompetitive practices and executive corruption, according to MSCI ESG Research. ESG funds own $319 million of shares.

Why now?
Shares are at all-time highs. Continued strength and private label brand sales (Kirkland) are so large it exceeds sales of brands like Coca-Cola and Campbell’s Soup.

Cloudflare (NET)
What is it?
A provider of content delivery services (CDS) – essentially a backbone services provider for Internet sites.

Why is it ESG?
Detailed anti-corruption policies and an independent lead director help with governance. Employee practices are fine, though mainly around retaining better performers than talent as a whole. ESG funds hold $28 million of shares.

Why now?
Compounded annual growth of more than 50% and gross margins above 75% suggest Cloudflare will one day hit scale that generates large profits. It loses money right now, but investors have pushed shares to fresh highs, up almost 100 since September.

Greentech Timer & Current Portfolio

Greentech Timer
Our Greentech Timer is bullish, with our benchmark index well over the 20- and 40-day moving averages, which are trending higher. That’s our base definition for gauging bullish sentiment. The index is also over its 200-day moving average, which continues to trend downward – it’s more significant to be over the line than its direction for our purposes. Like a big ship, it’ll take some time for the 200-day line to turn. Undoubtedly, the signing of the infrastructure bill has removed a lot of negative sentiment from the sector, and with decent timing too, since there have been increasing signs we bottomed in May and have been in a trading range since. Water and solar look very bullish, nuclear and metals both look primarily bullish, while fuel cells are mostly bullish, with some weakness.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving averages and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential).

Right now, the Timer suggests it’s a good time to be bullish, while anticipating some slowdown in the recent leg higher.

Current Portfolio

Real Money Portfolio

Excelsior Portfolio

Real Money Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. When the sector is bullish, we keep our cash in the ETF based on our benchmark index – the Wilderhill Clean Energy ETF (PBW). When the sector is bearish, we keep our cash in U.S. Treasury bills. The approach of this portfolio relies heavily on sell-stops, based on portfolio and gambling risk-of-ruin theory. This approach absorbs small losses, preserving capital for big winners we let run, and defending as much as possible against the statistical risk of a run of losses washing us out of the market. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows.

Aemetis (AMTX)
Aemetis missed estimates on earnings last week, losing 55 cents a share on $49.9 million sales compared to consensus for a loss of 39 cents a share on revenue of $56.5 million. That didn’t really affect shares, given some longer-term positives from earnings: The company expects to announce a further $3.5 billion of off-take agreements for sustainable jet fuel in coming weeks, on top of Delta Air Lines’ $1 billion deal. The company also continues to add more Central Valley, California, dairy farmers to its methane gathering project. Perhaps most intriguing, if the Build Back Better program being hashed out in Congress gets through, there is some expectation the biodiesel tax credit could be further extended into the next decade (it expires in 2022). That could add hundreds of millions of dollars to the company’s bottom line. Follow-through on at least two of these three is very important for shares to continue to rise. Shares are holding in the range established this year, with support at 19, 15.50 and 14.92. The high-water mark for shares, 26, is resistance. Our stop-loss is around 17.50 to take about a 20% profit if shares tumble. With earnings past us, we’re switching our rating back to Buy from Hold, seeing a good chance of advances ahead. BUY

Aptiv (APTV)
Shares are still near highs, having backed off only a bit on disappointing earnings stemming from supply-chain issues. APTV is moving up off near-term support and appears to be a buy. The expectation here is Aptiv will be a slower grower. We’re moving from Watch to Buy. BUY

Aspen Aerogels (ASPN)
Technically ASPN looks great. There’s little news of late and management is making the rounds of various brokerage “fireside chats”– less formal talks where managers discuss the industry. Our sell-stop is “under 48,” which would be a notable break of the 40-day moving average. BUY

Centrus Energy (LEU)
The uranium refiner was hammered Monday by a downgrade by a Wall Street analyst. As a technicals-first analyst, the rating change, by Roth Capital, is an example of the inherent problems of mainline analysis – shares were bumped down from ‘Buy’ to ‘Neutral’ while at the same time the price target was raised 30 points to 57 – so Roth thought Centrus was a buy when it was vastly ahead of its “target.” Setting that tangent aside, we’re more than double our investment right now. Let’s take half of our position off the table, booking a more than 100% gain on what we’re selling and a 50% gain over our total investment. For the remaining half, we’re going to extend our sell-stop down to the 40-day moving average, where chart support also sits, or, “near 51.” SELL HALF, HOLD HALF

Enphase Energy (ENPH)
ENPH slipped into our buy range of under 230 with the open on November 10, triggering our standing buy order at 228.73. Technically, the signals to buy are all very good, with ENPH looking like it has broken out of the 2021-long range and simply blowing off an oversold condition now. Three weeks ago, the company started selling its IQ8 inverter, which can utilize sunlight to produce backup power during power outages without a battery – contrary to popular belief, rooftop solar panels (without a battery system) can’t produce electricity with a grid failure today. In the long term the IQ8 “microgrid” ability should be a winner. Shares may step back some more – there’s about 30 points down from here before technically we’d be concerned. We’re going to give shares a big berth here, with an initial sell-stop “around 182.” BUY

KraneShares China Green Energy (KGRN)
The mostly China-listed Greentech stock fund is pushing against a recent top of 49. Shares hint they’ve reversed the weakening momentum, but there are mixed signals overall. WATCH

Onsemi (ON)
In the charts ON has a breakaway gap and a runaway gap, and is seeing little selling pressure, signaling we’re in the midst of a good bull run. We see two factors supporting Onsemi. One is its transition away from producing commodity-like semiconductors– which has long made the stock trade at a valuation discount to peers–to larger, premium semiconductors at a nearly finished New York factory. We also see demand from EVs buoying demand. We’re raising our sell-stop to “under 50” (avoid a sell-stop right on this price) from “around 48.” BUY

Wolfspeed (WOLF)
WOLF hasn’t dipped into our “buy under 130” range. Shares are overbought (a condition that can be sustained in a bullish market) and are volatile enough that we could see a 15-point move and not see much damage technically. A Golden Cross is just starting (the 40-day moving average is crossing over the 200-day; the 50-day, which most analysts prefer to follow, is imminently going to cross). That means we want to be careful not to let shares get away from us, so buying here wouldn’t be a problem in the long run. Still, we’re going to continue to wait for some easing to enter a position seeing initial support at 128. BUY under 130

Excelsior Portfolio
European Sustainable Growth SPAC / ADS-Tec Energy (EUSGW)
The German-based EV charging company ADS-Tec Energy, which uses a battery system to provide on-demand ultra-fast EV charging (much faster than a Tesla Supercharger), just inked its first U.S. deal, selling 20 units to Miami-Dade County with a letter of intent for 180 more. The quick traction in the U.S. market is good to see. The SPAC deal has yet to close, so the warrants are likely still a good way to trade this company’s debut. BUY

Li-Cycle (LICY.WS)
Warrants are performing well along with shares (LICY is near 14) and we’re up about 75% on the position. Little news this week. As noted previously, the warrants became exercisable on October 23 – one year from the SPAC IPO. The company has the option to initiate a cashless redemption if shares trade at $10 or greater for 20 of 30 days. For that reason, we don’t recommend buying the warrants any longer. We likely are sellers when the redemption is announced. HOLD

Navitas Semiconductor (NVTSW)
Like most SPAC-based warrants, Navitas’ are redeemable at 18 by the company and exercisable by investors at 11.50. That means we have a theoretical maximum value of 6.50 for the warrants. Our holdings closed over that maker, at 6.68, Monday and we recommended selling “most” yesterday in a special bulletin. We consider “most” selling 75% of holdings, so overall we’ve booked at least an 89% gain on the total position by taking out 160% gain on three-quarters. The remainder we should be quick to pull the trigger on if they dip as well as if they get too far above fair value. Like every SPAC holding in the Excelsior portfolio (but Origin), there is an early redemption clause for warrants when shares are trading over the price of 10 for 20 of 30 days, which makes the company eligible to issue a redemption notice. MOST SOLD; HOLD REMAINDER

Origin Materials (ORGNW)
Origin, which plans to make recyclable plastic from carbon-neutral/negative, non-fossil fuel feedstock, reported Q3 results last week. Though the company doesn’t sell anything, it reported $23.9 million net income, from Canadian grant programs and accounting procedures for interest on convertible notes and a change in warrant values. The construction of Origin 1, the first plastic plant, is on schedule to open the end of next year. If customers take all the product they have told Origin they want, in non-binding agreements, there is $4.2 billion of plastics on order, up 20% in the quarter. HOLD

Ree Automotive (REEAW)
Ree reported Q3 results yesterday, posting an adjusted net loss of $0.03 compared to consensus of negative $0.10. On a GAAP, basis, the loss was $1.57, resulting from share-based compensation accounting for more than $400 million of costs – a very high number which management says will be lower this quarter at what strikes us as a still-high $60 million as the company loads up on engineering talent. On a fully diluted basis today, the company says there are 364 million shares, which puts the market cap of the business at $1.53 billion. HOLD

ReNew Energy Global (RNWWW)
ReNew announces its Q2 results after the market closes today, with a consensus expectation of 5 cents a share earnings. At the recent meeting of world leaders on climate, India insisted on language calling for the phasing out of coal being softened to a phasing down, which naturally crimps expectations that renewables will fill all electricity demand there. ReNew remains India’s largest clean energy company, and renewables are still expected to grow very rapidly in India. HOLD

Volta Inc (VLTA.WS)
Little news from Volta, other than being discussed in Barron’s this week in a round-up of EV charging stocks. We’re up about 75% on our warrants. HOLD

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday, December 1. Our regular weekly update is next Wednesday, November 24. We will send a special bulletin with any interim recommendations.

Contact me anytime with questions or comments at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on December 1, 2021.