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Stocks in This Sector Could Suddenly Double in Value

By Larsen Kusick, analyst, Phase 1 Investor
Monday, November 8, 2010

Less than two months ago, Canadian pipeline giant Enbridge did something strange.
The company announced it was spending $24 million to take a 20% stake in a modest, 35-megawatt project being developed by a company few investors have ever heard of: U.S. Geothermal (HTM).
The project is located at Oregon's Neal Hot Springs, where the Earth's heat literally shoots out of the ground. Companies like U.S. Geothermal build plants on top of these hot spots, providing clean, quiet energy for decades.
Don't be surprised if the Enbridge deal turns out to be the start of a string of new joint ventures or even acquisitions of geothermal companies. As large-cap energy companies and utilities move into this space, share prices are going to skyrocket. (U.S. Geothermal is up more than 40% since Enbridge announced the deal.)
It's easy to see why interest is brewing. Geothermal projects are capital intensive but low risk. The U.S. Department of Energy guarantees loans for up to 80% of a project's total cost. In addition, the government will subsidize up to 30% of expenditures.
Also, utilities and other energy companies that might be eying geothermal takeover targets have done extremely well in 2010. The utility sector fund (XLU) is trading near a two-year high while dishing out a dividend over 4%. Many of these companies are in a position to do some deals.
Finally, geothermal assets are on sale... Most geothermal stocks are down about 40% over the past year. It's one of the few areas in the energy space that isn't rocketing higher.
Take a look at Magma Energy (MXY on the Toronto Exchange), one of the biggest and best players in the industry. A lot of geothermal charts look similar...
These companies sign long-term power purchase agreements that ensure a predictable stream of revenue. So one way to value them is to figure out the present worth of that future revenue stream, taking into account potential bumps along the road, and add that to current assets. It's called "risk-adjusted net asset value."
By this measure, U.S. Geothermal is worth somewhere between $1.60 and $2 per share. With shares trading for around $1.10, you've got plenty of upside. I'm seeing similar valuations in other geothermal stocks.
In a market that offers few bargains, geothermal stocks stand out. The already-low valuations make these stocks likely to outperform even if the broader market pulls back.
If you're not sold yet... keep an eye out for more announcements similar to the Enbridge deal over the next few months. These could provide the signal this unloved sector is about to take off.
Good investing,

Further Reading:

We're big energy bulls right now. With China and India rapidly expanding their energy consumption... and with the dollars that denominate many energy commodities rapidly losing value... you've got two tailwinds pushing any energy bet higher over the next several decades.
Check out our recent essays on oil, coal, uranium, and the "contrarian's commodity," natural gas.

In The Daily Crux
Market Notes
Australian dollar jumps to 28-year high vs. U.S. dollar.
Silver prices explode to new high above $26.50… up almost 50% in three months.
Copper miners Freeport McMoRan and Southern Copper soar to two-year highs.
Uranium Resources and Uranerz Energy rocket more than 35% in a week.
Market Watch
Symbol Price
S&P 500 1223.25 -0.2% +14.4%
Oil 37.53 -0.3% -5.5%
Gold 137.78 +1.0% +28.3%
Silver 27.15 +3.6% +58.9%
US-Dollar 76.59 +0.9% +1.1%
Euro 1.39 -0.8% -6.3%
Volatility 18.29 +0.2% -24.4%
Gold Stocks 567.91 +3.3% +28.4%
10-Year Yield 2.56 +0.8% -26.9%

World ETFs
Symbol Price
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Canada 30.15 +0.5% +21.1%
Russia 20.77 -0.5% +15.4%
India 40.59 -0.6% +37.6%
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S. Korea 57.13 -0.5% +28.4%
S. Africa 72.06 +0.1% +34.1%
China 47.93 +0.2% +8.5%
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Sector ETFs
Symbol Price
Oil Service 127.64 +1.2% +5.6%
Big Pharma 65.46 -0.6% +4.4%
Internet 71.67 +0.5% +28.4%
Semis 15.35 +0.7% +34.5%
Utilities 31.87 -0.6% +10.2%
Defense 18.49 -0.6% +14.9%
Nanotech 9.98 +0.0% +0.8%
Alt. Energy 10.58 +0.9% +6.3%
Water 18.07 -0.3% +11.1%
Insurance 16.31 -0.8% +20.8%
Biotech 20.36 -0.1% +24.9%
Retail 18.68 -0.2% +24.4%
Software 24.49 +0.2% +25.7%
Big Tech 53.74 +0.1% +26.2%
Construction 12.80 +0.2% +9.7%
Media 13.34 -0.5% +24.2%
Consumer Svcs 66.09 -0.2% +25.3%
Financials 55.97 -0.7% +10.3%
Health Care 64.71 -0.4% +8.6%
Industrials 61.84 -0.3% +21.4%
Basic Mat 72.49 +0.6% +29.6%
Real Estate 57.34 -0.5% +41.1%
Transportation 88.98 +0.1% +29.1%
Telecom 22.51 -0.1% +27.3%