Does Smart Grid Index Reveal Winners?

Posted on January 14th, 2010 by admin in Smart Grid

We were wondering yet again about all the Smart Grid hype, this time thinking about who the “winners” might be, by some reasonable definition. Then it occurred to us that our own Rocketcap Smart Grid Stock Index might hold some clues. Well, it does.

We think the stock market is a good system for measuring value. We also know our RSGSI includes both power utility companies publicly committed to smart grid investing, and also vendors to those utilities. But we thought there might be a difference between utility and vendor valuations, reflecting a market estimate of who will “win” in future. So we refined our index into two component indexes to dive deeper. We now have these indexes to compare:

  • RSGSI     = Rocketcap Smart Grid Stock Index
  • RSGSI_U= Rocketcap Smart Grid Stock Index of utility companies
  • RSGSI_V= Rocketcap Smart Grid Stock Index of vendor companies to the utilities

The utility and vendor indexes are simply comprised of the utilities and vendors which make up the RSGSI, so that

RSGSI=(9/21)*RSGSI_U  + (12/21)*RSGSI_V

  • ^GSPC   = S&P 500 Index ETF
  • PUI= PowerShares Dynamic Utilities ETF consisting of power utility firms. The top 10 holdings of this ETF, which comprise 46% of it’s whole market value, has only one utility from our own RSGSI (SRE-Sempra Energy). Those top 10 holdings range from 3.02% to 5.33%, with SRE at 5.25%.

Consider this graph, which shows the annualized returns for each of these indexes since 3-13-09, a 206 day time period.

Comparing Value Indexes for Smart Grid

The beginning of this time period corresponds with the market bottom last March (would we have invested then!). The graph shows the wild volatility of returns for the three months ending in June. The returns settled down after June 09. Now let’s consider the various cross correlations:

Correlations Among Five Market Measures of Value

From the graph of returns and the correlation matrix, we can make these informal conclusions:

  • RSGSI is highly correlated with S&P500, and their ROIs have tracked well.
  • RSGSI_U and PUI are highly correlated and RSGSI_U has had superior ROI
  • RSGSI_V and PUI are weakly correlated and RSGSI_V has had superior ROI to PUI
  • RSGSI_V has best overall ROI of all the indexes, particularly superior to the utility indexes, RSGS_U and PUI

These vendors have so far gotten the greatest market valuations, yet have minimal implementations (sales) of Smart Grid systems! Thus, this value may reflect the market’s future valuation, including that of the vendors’ Smart Grid intellectual property.

This is not rigorous analysis, but it is suggestive. The innovation value of the Smart Grid vendors may be key to Smart Grid evolution.

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