One question to ask yourself.

Now is the time to focus on one simple question.

What stocks do I want to own 5 years from now?

The question is more involved than it might sound. This recession will have structural impacts that go beyond this business cycle. Energy price volatility will increase because oil and gas companies are pulling back hard even when depletion rates on new wells are at their shortest. A overshoot on reduced supply is likely. We've transfered leverage from financial institutions to governments all over the world as debt soars. Consumers are executing the overdue pullback and may change fundamental habits. The list goes on.

Governments will make sure that conservation is here to stay. They have many tools to do that, but one is just to make sure that energy prices rise over time as the economy heals slowly. Legislation is another tool.

Enernoc is on target to be a profitable, 200 Million Dollar, marketshare and mindshare leader with a progressive attitude sometime in the next 18 to 24 months.

Forget the daily swings on price or even the overshoot expectations by a penny a share game, the real question is what is the chance they sustain momentum, and if they do how much are they worth long term.

From my vantage point, they are the odds on favorite and are distancing themselves from the competition. Pricing competition is probably the largest risk. They seem to be surviving hypergrowht operational risk well. Corporate Culture is great.

200 Million, 15% Net Profit and growing, Growing 30% a year, spinning off cash. As the economy stabilizes I would think that's a 20 to 30 multiple -- 600 Million to a Billion Market Cap. That seems to be the trajectory however I'm sure the path won't be a straight line.

Short Squeeze Possible?

Enernoc will report earnings next week. If it represents the 'inflection point' quarter that we suspect, things could get interesting because the short interest is reported to be 17% of Float.

What would happen if : the quarter's results illuminate the underlying business model and the open questions are answered (see below). What if the market 'gets it' that the company was investing for the opportunity they could clearly see in their internal annuity value spreadsheets -- not being the spendaholics they have been accused of. What if renewal revenue run rates provide a lot of confidence that the company will exit 2009 profitable for the year with revenues nearing a 200M run rate?

The recent relative strength of the stock might indicate that the shorts are getting nervous....

While we have no specific information, we do know that this will be the first full quarter of PJM revenues, and we know what PJM revenues/MW yeild (53K per MW/Yr) for the Emergency Program, added by Spinning Reserve revenues and other bennies. We know that COMV has created some confusion in the market about PJM revenues (their model seems to have been based on the old PJM plan). So the fact that the market might be confused is understandable.

Clarity should come next week. There are other risks to this developing company that could come into play, but we still think that Q3 will the inflection point and with each successive quarter the risks to the company decline.

This company could be in that sweet spot when growth companies put start hitting their stride. Don't give your stock to the shorts if the stock spikes, let this one run through this business cycle.

Third Quarter Coming

Enernoc (ENOC) will announce third quarter results in early November. 

This should be the 'inflection point' quarter for the company. Enernoc increased their investment (and expense line) to grab share as they saw the demand response market really develop. They knew that barriers to entry were not that high, so they wanted to create barriers to success for their competition by building brand and market position.

The third quarter will have three months of PJM revenues in it.  PJM has some of the'juciest' demand response revenues right now, however there is a significant time lag between when you invest in sales/marketing and when the revenues flow.  Q3 is the catchup quarter and will allow people to more accurately model forward seasonality and revenue.

Furthermore, ENOC has placed a few strategic bets for 'beyond demand response'.  The DR market will penetrate relatively quickly (i.e. within a decade).  However the customer relationships will allow for the continuous flow of new energy cost efficiency and environmental offerings such as procurement, and cap-and-trade management.

But back to Q3.  It should demonstrate that:

a)  the company has more than enough cash on hand to execute on their vision

b)  the company will generate cash from operations for the second half of this year

c)  the company continues to distance itself from its competitors

d) the company has a very realistic chance of being profitable for the full year 2009

e)  the company is not a 'spend at all costs' risk -- true it has made some youthfully bold bets with over 170Million invested to date, but the #1 market position in DR with a strategic foothold in the larger industrial/commercial energy management market will prove to be worth it.

Not sure how the stock will react in these markets, but investors should be heartened by the results.

Thank You, Thank You, The Spreadsheet over the Chart

Ever so often, Wall Street declares a blue light special.

Macro issues such as the credit crisis and the global economy cause money to move out of equities and a falling tide drops all boats.

Then it becomes a battle of the chart vs. the spreadsheet.  Let me explain.

When the chart looks bad (as many do right now) the perception of the current price incorrectly impacts peoples perception of the value of the company. The spreadsheet shows us that a company is undervalued, but the chart says stay away -- which do you trust?

A.  The spreadsheet.

As i write this ENOC is:

1)  Growing Revenue at a 100% clip, likely to slow to a 75% clip next year (our number)

2) Completely based on annuity (vs. new sales) revenues. Excellent forward visibility for those that have the right spreadsheet

3) Publicly committed to being cash positive in the second half of the year (we think they hit that or do better)

4) Likely to do over 100M this year (we think they do that or better)

5) Gaining in marketshare --rapidly becoming the industry leader

6) Well set in early stage investments for "encore" product offerings (Beyond Demand Response into Energy Procurement and Energy Efficiency)

7) Unmercifully whipsawed by the stock traders using this as an oil proxy (which it is not)

8) Priced at 200M while having over 50M in cash 

In terms of price action, the dynamic seems pretty clear (to us). Momentum players piled in on the way up to 25, the 'over bailed' on the way down to 10.

Chart readers and Ouija boards defined the price movement, but we see something better in the spreadsheet.

When the chart and the spreadsheet disagree, trust the chart for the 5 to 15 day day view, trust the spreadsheet if you are an investor. Our spreadsheet has an awful lot of green colored cells.

Didn't think it would get this low. Thanks that it did!

Q2: More evidence of the investment thesis

Q2: Revenues up 97%, Expenses up 53%. What's not to like.

PJM revenues started kicking in. The market cheered the raising of the revenue guidance and the stock took off to 18 again as the momentum players had a little fun. But then the momo's cashed out and the stock traded back down below 15.

Why? Probably because the company also raised expense guidance towards the high end of the range and said that the incremental revenue would end up being profit neutral.

Wall Street mistaken view: You (ENOC) are still too spend happy

Our View: Whippee -- zero cost investment in a great business!

What's the difference: Until you can calculate the NPV of a new customer or MegaWatt under contact you can't really tell if it is a good idea or a bad idea to invest incremental revenues or let them fall to the bottom line. The company can calculate that. Wall Street either can't, isn't, or is freaked by young guys spending money -- but this isn't that gig -- these guys know what they're doing.

Our thesis: Inflection point has moved out to about 160M- 170M level but returns after inflection point are near software levels. Marketshare matters as the industry is developing. The market is misunderstanding the near term pickup in PJM prices which ENOC will use to get to profitability faster. Q3 will be a positive surprise. Then the market will fret over seasonality. Volatility will continue with momentum players whipsawing this thing. By Q3 2009 it will all be understood and appreciated and the company will be worth 600M. (that's our view).

Traders vs. Investors

We've tried to think through who's buying right now and who's selling and we believe the traders are in control of the recent price action. Here's why.

1) Sharp up moves followed by slow declines have been the recent pattern, and there is a lot of juice in the options.

2) We believe momentum players and qunats have bid the stock up and then tried to slowly unwind their positions or are having stop losses trigger if they bought at the wrong part of the up cycle.

3) Option traders that have covered calls (note the high open interest in the Sept 15 calls) may be selling the underlying when it drops below 15 and putting in a program trade to unwind the call if the stock rises. This would be done to lock in an existing profit in the trade and get the benefit of the cash from selling the underlying.

4) Investors have no real news to alter their risk/reward views. The last quarter's earnings inspired some aggressive investors to come in, but it's clear that the September quarter will really be the pivotal one (full quarter of PJM revenues, should be cash positive, etc). So the brave investors have already taken a position, and are in a wait and see mode before increasing that position. Other investors may be waiting for the June (but probably the September quarter) to sound the all clear signal.

Net net: if you believe in the business model, and are comfortable with the risks that the utilities could exert undue influence over the regulators over time (which we are) then now is a great time to nibble at the dips. Profit from the transfer of stock from short term tranders to long term investors.

Con Ed's Favorable Terms

Con Edison announced expansion and extension of their existing Demand Response Program.

The new incentives take effect this summer. Size of the payment goes up and the minimum drops to a 50kw -- everyone in the pool! Now even smaller customers can make money while helping to avoid balckouts.

The monthly stipend stays.

All good for ENOC! I think the September or December quarter will really show the company moving past the inflection point. Then people will focus on the growth side of the story and not be spooked by the investment they are making in their future right now. This one just went public a bit early, and then saw the market open up more than they thought, and they had to invest for the opportunity.