If you paid close attention during last week's presidential debate, then you may have been tipped on a big investment opportunity and not even realized it.
I'm talking about Governor Mitt Romney's barb about government-subsidized corporations, when he told President Barack Obama that the government doesn't pick "winners and losers," it just picks losers.
The comment was clearly meant as a shot against the President, but on a deeper level, Romney made a valid point about private companies that benefit from government grants or subsidies. Regardless of which political party has controlled the White House or Congress, the federal government has a horrible record of subsidizing companies.
And you don't have to look far to find government-subsidized companies that have gone horribly wrong, particularly if we look into the renewable energy sector.
Let's start with solar-panel maker Solyndra. The private company went bankrupt last fall after getting more than $500 million in grants and subsidies in 2010 from the U.S. Department of Energy to build a manufacturing plant and spur growth, as part of the American Recovery and Reinvestment Act of 2009 -- otherwise known as the stimulus package.
Ener1 is another government-subsidized alternative energy company that has gone belly-up. In spite of a $118 million grant in stimulus money, the company filed for Chapter 11 bankruptcy protection in January.
Then there's A123 Systems Inc. (Nasdaq: AONE). The lithium-ion battery maker also received a hefty $249 million grant from the DOE before it went public. Less than two years after its hyped IPO, the company had to absorb a liquidity injection from a Chinese firm in order to stay alive. The result: The share price has plummeted from $27 to 26 cents -- an incredible 99% nosedive.
Take a look at the chart below. It's the visualization of a complete and total financial meltdown.
AONE Daily Chart-Post IPO
It's clear the government doesn't have a lot of success "investing" in the private market. And there is a very good reason for this.
If these were strong companies with viable business models, then they would be flooded with capital from private investors. Individuals and companies are far more effective at allocating capital because of the hard work involved in actually acquiring that capital. When the government doles out a big grant or subsidy, it has no skin in the game. The drive for profit is simply not there. And profiting is the most powerful and No.1 reason for investing in anything. With the government missing this key trait, the venture is doomed to fail.
Here's something else to consider: As a lender of last resort by nature, the federal government only gets to look at the deals the private sector has rejected. So if the private sector is turning down these possible ventures, then it's very unlikely they will ever succeed.
The good news is that regular investors like you and me can actually profit from the "losers" the government invests in by short-selling their stocks. In fact, you could start with any of these three companies...
1. Tesla (Nasdaq: TSLA)
Tesla is an electric-car maker that received a $465 million low-interest loan from the DOE in late 2010. After reports of 13,000 pre-orders for its Model S vehicle, some are pointing to Tesla as a sign of success in the government-subsidized alternative energy bonanza. But a look at the company's earnings tells a far different story.
In spite of the stock's $28 share price, the company is projected to post a loss of $3.27 a share this year. And with its loan payment coming due on no earnings to support cash flow, the company is being forced to issue more shares. Not only is this is a major sign of financial distress, but it's an indication that Tesla is a long way from being profitable enough to find growth organically.
2. General Motors (NYSE: GM)
There's no doubt you are going to hear a lot of spin in the alternative energy and corporate welfare space. At the pinnacle of the discussion, politicians refer to GM as a big success story. But all that short-term injection of liquidity by the federal government did was temporarily mask longer-term structural problems.
Yes, GM is in better shape than it was, but it continues to struggle with the same problems as before -- a shrinking market share and high labor costs from steep concessions to the unions. GM still benefits from its partial government ownership, lower borrowing costs and special tax breaks. When these three factors go away, then General Motors could easily revert into bankruptcy.
3. First Solar Inc. (Nasdaq: FSLR)
The solar industry has been a favorite of government subsidies and as such, First Solar is an easy target. In 2010, the company pocketed $16.3 million from the Obama administration to expand a factory in Ohio. It also pocketed another $1 million grant that same year for job training.
The list doesn't stop there: The Ohio Department of Development has also lent First Solar $5 million, while the state's Air Quality Development Authority chipped in with another $10 million loan. Then, last fall, the Export-Import Bank of the United States guaranteed a $456 million loan to the company after it was unable to secure other private financing.
The math is simple: If the company defaults on the loan, then taxpayers will be burdened with a half billion-dollar loss. If the company is so great and potentially profitable, then why didn't First Solar find any private lenders?
The stock has already been hammered, falling 65% to a recent $21 in the past 12 months. With the solar industry in a virtual free-fall, I fully expect this stock to plunge to zero and the company to file for bankruptcy.
Risks to Consider: Alternative energy stocks are popular with investors looking for "the next big thing." This can lead to higher valuations in spite of little to no earnings.
Action to Take --> Shorting these three stocks could be a very effective method of betting against the federal government's terrible record of capital allocation and ability to pick winners in the market. If you can't stomach short investments, yet own any of these stocks, then you should sell them now.