The Energy Action Australia Ltd (ASX: EAX) share price is down 50% to 45 cents this morning after the energy trader warned investors to expect net profit for the first half of FY 2019 to be 50% lower than the prior corresponding half.

The company also reported that it expects "to generate positive operational cashflows before interest, tax, and significant items of $1.7 million in the first half of FY19". However, operational revenue and aforementioned net profit are expected to be "materially behind" the prior period.

The group blamed the weak result on a number of factors including the impact of a "strategic review", lower auction volumes and tenders, alongside "unexpected delays in project delivery for the project management and advisory (PAS) services business".

Energy Action Ltd firmly falls within the micro-cap category, with only $4,000 worth of shares traded today to collapse its value in half. The poor liquidity alone likely to put off many investors as it makes it harder to buy into or exit the stock and adds to the wild share price swings such as today's.

Energy Action reports that it has implemented a plan to cut costs and refocus strategy in response to the disappointing start to FY 2019.

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The Energy Action Ltd (ASX: EAX) share price ripped 25% higher to $0.84c this morning, following publication of its full year results. Company revenues fell 5% to $31.1 million, while net profit after tax (NPAT) jumped 46% to $2.6 million.

"Operating" profit after tax – underlying profit by any other name – rose 3% to $2.6 million.

Energy Action reported 9.7 cents in underlying earnings per share and declared 4 cents per share in full year dividends. The company ended the year with $1.1 million in cash and $5 million in debt, for a net debt position of approximately $3.9 million.

Revenues grew 5% due to strong growth in the Procurement business (+15%), offset by lower volumes in Contract Management & Environmental Reporting (CMER) (-9%) and Projects and Advisory Services (-15%). In recent years Energy Action has decided to focus more on high margin consulting work.

This should improve the company's profitability in time if it can add enough high-margin revenue to offset the decline in lower margin businesses. Energy Action also generates substantial cash flow and paid down just over half its debt during the year.

Management provided an outlook and list of priorities for 2019, including adding new products and value-add services, including facilitating corporate purchasing agreements between developers and clients, and extending several products to smaller clients.

The company also flagged the possibility of a merger, sale, or joint venture of parts of the business, with "significant interest" being recorded by PriceWaterhouseCoopers, which was hired to conduct a strategic review of the Energy Action business.

As a business/consultant that helps other businesses understand and reduce their electricity usage (reducing costs) there is likely to be substantial demand for Energy Action's services over the next few years.

A merger would potentially make sense as currently the company is quite small, although it is winning work from big-name clients. Despite the 15% rise in the share price today, Energy Action looks cheap to me, trading on around 10x earnings, at the same time as the business is improving. It is worthy of closer investigation.

The post Results: Why the Energy Action Ltd (ASX:EAX) share price roared higher today appeared first on The Motley Fool Australia.

What: Energy management consultancy group Energy Action Ltd (ASX: EAX) offers an appealing service to clients, whereby it looks for ways to reduce their energy costs.

Despite the seeming appeal of this service; the latest results from the company were disappointing…

Revenues grew primarily thanks to the acquisition of Energy Advice. Operating profits meanwhile fell 41% to $2.7 million with management citing a number of causes for the weak result including lower revenues from Activ8, Project and Advisory (PAS) product mix and bad debt write-offs. The lower result has led to a corresponding lower dividend with the full year payment reduced by 50% to 3.65 cents per share.

So What: While the results weren't great, arguably the future could be brighter. In May 2015 an organisational restructure was announced with the process fully implemented in July. This reorganisation is expected to deliver ongoing savings of approximately $1.5 million per annum.

Now What: One of the appealing aspects to Energy Action's operations is the future contracted revenues the group maintains. Having peaked in financial year (FY) 2013 after a number of years of growth these contracted revenues declined in FY 2014, but pleasingly contracted revenues were once again higher (albeit only slightly) in FY 2015.

While the outlook statement from management doesn't provide investors with any hard numbers with the stock trading on a price-to-earnings multiple (based on operating profit) of approximately 11x, there is the potential for upside in the stock if the business has indeed stabilised and returns to its growth trend.

The post Energy Action Ltd profits decline – Is now the time to buy? appeared first on The Motley Fool Australia.

The S&P/ASX 200 (INDEXASX: XJO) (ASX: XJO) has jumped, rising 0.9% in late afternoon trading. But it's been a rocky day, with mixed performances from the top 20 stocks – which represent a large percentage of the index.

Here are 4 ASX stocks sold off today.

Energy Action Ltd (ASX: EAX) shares have swan-dived, losing more than 36% to trade around $1.26, after showing so much promise a few years ago. In late 2013, shares traded above $4 for some time, but it's been all downhill since then. Today the company revised down its operating net profit to between $2.6 and $3 million – compared to $4.5 million last financial year. Sales revenues are lower than expected, and Energy Action has been forced to write off accounts receivable from its largest metering agent – not a great look for management.

Transpacific Industries Group Ltd (ASX: TPI) has dropped 9.6% to 70.5 cents after the company's CEO quit just 18 months into the job. Robert Boucher has resigned, "to allow him to return to the USA for personal reasons". Shareholders don't like losing a CEO, particularly one in a company trying to turn around its performance. Waste management company Transpacific recently noted that it was almost 12 months into a multi-year journey.

Oil explorer Far Ltd (ASX: FAR) has seen its shares drop 8.6%, after JV partner Cairn Energy released a presentation to the London Stock Exchange. Far has a 15% stake in the joint venture – drilling for oil offshore Senegal, Africa, and according to Cairn, the SNE-1 well is potentially the world's largest offshore oil discovery in 2014. But there's still a long way to go for Far shareholders. Profits are Far away perhaps?

Novogen Limited (ASX: NRT) has dropped 6.3% to 29.5 cents. It appears the 23% jump in the shares last week and excitement over the news that its experimental cancer drug candidate, TRXE-009 appeared to be effective killing brain cancer cells, is wearing off. But as colleague Ryan Newman wrote at the time, "there is still a long way to go…", and "Novogen is not one to consider for the more risk-averse investor."

The post 4 stocks sliding on the ASX today appeared first on The Motley Fool Australia.

If you want to supercharge your investment returns, investors need to bypass the usual blue-chip mega-market capital companies that make up a big percentage of the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and take a closer look at smaller market cap companies.

It's very difficult for companies like Telstra Corporation Ltd (ASX: TLS) or Wesfarmers Ltd (ASX: WES) to double their revenues and earnings in a short period of time, if at all, from where they are currently.

That's not the case with small caps, which can double, triple or quadruple earnings or more, taking their share prices along with them.

Here are three small cap stocks that have the potential to become the billion-dollar stars of the ASX in the future…

Nearmap Ltd (ASX: NEA)

The photomapping company has a market cap of just $176 million today, but expansion into the US (and potentially other countries), as well as domestic organic growth could see this company grow earnings at a rapid rate. Nearmap recently reported its maiden profit, with revenues growing 62% over the previous year.

Unilife Corporation (ASX: UNS)

Unlife develops injectable drug systems and expects to release a number of new products this year. With revenues growing at an astonishing 436% to US$14.7 million in the 2014 financial year, it may not be long before this company is reporting healthy profits. With a market cap of just $286 million, Unilife could be one of the ASX's blue chip stocks before long.

Energy Action Ltd (ASX: EAX)

Energy Action has a market cap of just $80 million today. The company runs the Australian Energy Exchange which allows clients to procure gas and electricity at the lowest possible prices. Energy Action is also an energy broker, securing best energy deals for government businesses and corporations. Energy Action disappointed shareholders with its most recent results, but that could just be a one off. With the share price down 25% since November 2013, this could be an opportunity.

The post These 3 small cap ASX stocks could be tomorrow's megastars appeared first on The Motley Fool Australia.

Regular readers will know that I've long followed the fortunes of an energy broker and energy efficiency company called Energy Action Limited (ASX: EAX). It has, in the past, attracted smart-money hoping to profit from the ongoing electricity price inflation.

The attractions are obvious: the company's reverse auction platform called the Australian Energy Exchange (AEX) allows clients to procure gas and electricity at the lowest possible prices. The company's high margin monitoring business helps those customers ensure that they abide by their low-cost energy contract, and keeps tabs on the energy retailers. Finally, when a customer was motivated to reduce energy bills further, Energy Action could provide energy efficiency solutions for them.

The first line of business, the AEX, is fairly low margin, but it provides a clear selling point because it immediately saves customers money. It also gives the company an in, and makes it easier to sell the high margin monitoring services, which cost little extra to replicate. Indeed, both these lines of business require relatively little capital expenditure. Best of all, they provide sticky recurring revenue.

The third line of business – energy efficiency solutions – is a different beast. Because improving energy efficiency usually requires actual hardware, as well as case-by-case analysis, it's relatively capital intensive. There are no real barriers to entry, and competition is fierce. For example, another ASX-listed company called Ecosave Holdings Ltd (ASX: ECV) also offers somewhat similar services. That company recently informed the market of adverse changes to Victorian government energy efficiency programs. Unlike Energy Action, Ecosave earns revenue from the USA as well as Australia.

The contract-based nature of energy efficiency businesses mean that margins can quickly come under pressure when demand falls. Worse still, a lot of demand has been spurred by government measures, which are being aggressively wound back since falling electricity demand is hurting the interest of powerful players like Origin Energy Limited (ASX: ORG), who are seeing energy retailing profits fall away.

In December 2013 and then again in May 2014, Energy Action forecast that operating NPAT would be approximately in line with FY 2013 operating NPAT of $4.9 million. As it turns out, operating NPAT was down 8% to $4.5 million, and statutory NPAT was down 20% to $3.5 million. The dividend was cut 15%.

The company managed to grow revenue in its low margin "projects & advisory services" energy efficiency business, thanks in part to the acquisition of Energex. In fact, further expansion by acquisition into the low margin project business is on the cards, as the company announced it would take on debt to fund the acquisition of EnergyAdvice for the bargain price of 9x the average EBIT of FY2012 – FY2014. No word on what EBIT was for FY 2014.

This move makes a lot of sense for CEO Scott Wooldridge, because 75% of his performance bonus is awarded if the actual operating earnings per share are higher than the budgeted operating earnings per share, whatever that is.

As speculators who lost all their money invested in Forge Group will know, it's pretty easy for a CEO to grow earnings per share, especially if they inherit a strong balance sheet. Simply by spending that cash and taking on a little debt, earnings will be boosted. The sad irony is that this performance hurdle will be achieved even if it is contrary to the long-term interest of shareholders and substantially weakens the company.

I sold my last few Energy Action shares on August 19 as soon as the market opened, having disposed of most of my holding last year. Unfortunately, I wasn't as clever as the various members of the board who have sold almost 5 million shares between them over the last two years. On the other hand, long-term focussed fund managers IOOF Holdings Limited (ASX: IFL) are still buying shares.

Energy Action does have the right ingredients to be a really great investment, but I question whether it has the right leadership. Despite the fact that the company is paying more and more to its executive level managers as well as lining the pockets of various consultants, results are getting worse.

Now that the share price has dropped below $2.80, it's arguable that the company deserves a spot on your watchlist. In fact, one analyst I admire thinks this may be the low-ebb for the company.

For now, I'm going to follow Warren Buffett's advice to only invest in shareholder-friendly management of the highest quality. However, Energy Action will remain on my watchlist. After all, I might be underestimating the acquisition strategy.

The post Energy Action Limited results disappoint: Should you buy? appeared first on The Motley Fool Australia.

These days, Warren E Buffett needs to go "elephant hunting," as he calls it, in order to find investments that are big enough to make a difference to Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B), but Buffett's process can still be applied to smaller companies.

The trick is to identify good businesses before buying – at a great price (you may have to be patient). Here's what to look for in a business as well as a short update on three stocks that display the following highly desirable characteristics:

1) Consistent, preferably growing, free cash flow. Free cash flow is a better metric than profit, because profit is often distorted by accounting fictions. One such example of that was the low earnings reported by fibre optic telco Vocus Communications Limited (ASX: VOC) due to depreciation of their fibre-optic assets. Never-mind that the fibre will last more than 25 years, some investors thought little of the company because of relatively low earnings per share growth (especially prior to 2014). In the last two years, the Vocus share price is up over 165%, compared to a return of about 34% for the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

2) Low debt levels. Debt can cause a company's share price to fall off a cliff edge, so to speak. Just ask shareholders in iron ore miner Arrium Ltd (ASX: ARI) – a company trading on a P/E of 3, partly because of its high debt levels.

3) A sustainable competitive advantage. Again, a sustainable competitive advantage helps a company survive when times are tough and excel when times are good. For example, dentistry group 1300 Smiles Limited (ASX: ONT) is building a sustainable competitive advantage by signing patients up to a program called Improving Smiles which provides access to discounted treatments, as well as interest-free financing for major procedures. Energy broker Energy Action Limited (ASX: EAX) has a sustainable competitive advantage because its reverse-auction Australian Energy Exchange benefits from a network effect. The more customers Energy Action has, the more important it is for energy retailers to win the auction. A recent auction yielded savings of up to 20% for customers, making the incentive to employ Energy Action as a broker even greater!

4) Honest and competent shareholder-friendly management is perhaps the most persistently underrated criteria for a good long term investment, despite the fact that everyone acknowledges its importance. If they make poor decisions, disastrous capital loss can result, and if they don't care a lot about shareholders, they can easily benefit at our expense. One of the reasons I bought 1300 Smiles is that the managing director, Dr Daryl Holmes, is also the founder and major shareholder and has never disadvantaged minor shareholders to my knowledge. Hardworking, honest and ethical leaders add value that doesn't show up on the balance sheet.

1300 Smiles recently made its largest acquisition so far, so it is highly likely the company will deliver earnings per share growth in the second half of 2014, and in FY 2015. On top of that, the new practice has a good reputation for prosthodontics, so the group's ability to provide dentures and the like will be strengthened. 

Vocus has seen its share price come down to a more realistic level of late, and it belongs on your watchlist because of its ability to surprise the markets. On two occasions in the past, I bought Vocus shares right after (very positive) results were released, just in time to enjoy subsequent share price rises. There may be an opportunity to do so again.

Energy Action has itself recently acquired energy efficiency company, Exergy, which is unfortunate timing, given state and federal governments are cutting energy efficiency programs. Results are forecast to be flat for FY 2014, but the company deserves a spot on your watchlist because if it disappoints the market, there may be a chance to pick up shares of this high-quality business cheaply.

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In 1931, Thomas Edison famously said: "I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that." It's fair to say that he was ahead of his time by about a century, but what do you expect from a man like that?

A rational long term view is essential to successful investing and it surprises me how many professional investors keep missing the point when it comes to energy trends. Transitions beget opportunity for investors who can predict outcomes better than others. The rise of the telcos, such as Telstra Corporation Ltd (ASX: TLS) and Vocus Communications Limited (ASX: VOC) in the last couple of years are testament to this fact. Going back a little further, the rise of disruptive internet advertisers such as SEEK Limited (ASX: SEK), Carsales.com Limited (ASX: CRZ) and REA Group Limited (ASX: REA) is another example of how new technologies create new winners.

An opportunity arises for investors because there are plenty of fund managers (though diminishing in number) who believe that renewable energy is too expensive and cannot replace coal. While coal is required for making steel, that's just a small part of demand. Many investors overestimate the need for base-load power, underestimating both smart grid and electricity storage technology. While these technologies will need to improve before all base-load generation is removed, it is a joke to suggest grids are unable to reduce reliance on base-load power in the short-term. 

The controversial Abbot Point coal export terminal project has been reinvigorated by Clive Palmer's private company, Waratah Coal, which hopes to take over the development that BHP Billiton Limited (ASX: BHP) abandoned last year. The project has huge ramifications for rail operator Aurizon Limited (ASX: AZJ), which plans to build the expansion, along with rail lines linking it to new coal mines slated for the Galilee Basin and Bowen Basin in Queensland. This project may end up stranded if, as Citibank predicts "thermal coal demand is in structural decline."

The evidence is mounting that future coal demand might not justify this project. Tim Buckley an analyst from the Institute of Energy, Economics and Financial Analysis appeared on Lateline recently, arguing that "the cost of renewables is coming down so fast, that it is now at parity with imported coal [for India]." Projections of soaring coal exports to India have been central to coal miners' justification for new mines, and if they are wrong, the Abbot Point project will be stranded.

The reality is that China is closing coal fired power plants, American coal mines (and power plants) are closing, and the vast majority of nations have stopped building new coal plants. Energy systems (with a few notable exceptions) are constantly becoming cleaner, greener and less reliant on coal.

Yet this is not translating to profits for Australian renewable energy companies. For example, Australian wind farm company Infigen Energy Ltd (ASX: IFN) is down 25% since January, probably because of fears that the government will harm the industry with changes to the Renewable Energy Target. It is a highly risky game to invest in Australian renewable energy companies because they have powerful enemies here.

Energy industry investors can still profit by investing in natural gas and oil producers such as Santos Limited (ASX: STO) and Oil Search Limited (ASX: OSH). These companies have relatively bright financial prospects, because gas and oil are far more useful than coal. These fuels are not the main obstacle to a safe climate and do not cause the most dangerous particulate air pollution, although fracking can contaminate aquifers.

Foolish takeaway

I believe an investment in Energy Action Limited (ASX: EAX) is a reasonable way to get exposure to higher gas prices and new energy technologies. In my opinion, the safest way to get exposure to renewable energy is to invest in Warren Buffett's Berkshire Hathaway Inc (NYSE: BRK.A, NYSE: BRK.B), though there are other options, such as First Solar Inc (NYSE: FSLR). First Solar just announced strong results for Q1, improving revenue by 25% and almost doubling earnings per share. While the company does have lumpy earnings, the results bode well for the company, which, after all, sells 21st-Century technology.

The post Thomas Edison had the right ideas about energy: do you? appeared first on The Motley Fool Australia.

If you're investing for a two-year-old, you're looking at the likely return in 15 – 20 years. In my view, such long-term investors should seek a business that has a very low risk of resulting in capital loss, and is likely to be much more profitable in 15 – 20 years. Therefore, it's particularly important to look for a diverse bunch of high quality businesses that have plenty of room to grow. Here are my five favourite picks for a 20-year time horizon.

CSL Limited (ASX: CSL)

CSL is my preferred blue-chip stock and it's the only blue-chip I'll be picking for this buy-and-hold portfolio. That's because I have a high degree of confidence that the company's products will still be in high demand in 20 years. In fact, because of the ageing population, I think CSL will be selling more than ever. For example, one of its newer products, Kcentra, is specifically designed for those taking the anti-coagulant Warfarin. Generally speaking the company's (global) size is a competitive advantage, but because the world has so many sick people in it, it still has plenty of room to grow.

1300 Smiles Limited (ASX: ONT)

The vast majority of professional investors I speak to are of the opinion that 1300 Smiles is too expensive. Indeed, since I first bought the stock in 2012, it has arguably  been consistently expensive. Unusually, the company has remained "expensive" even despite a significant drop in profits, caused by the closure of the Chronic Dental Disease Scheme. Usually when growth companies go backwards, the market punishes the stock price viciously.

The holding has not been the star of my portfolio, but I'm happy to hold for the dividend. I expect the shares will yield 2.1% – 2.5%, fully franked for FY 2014, and I expect this dividend to grow over time. The downturn in the dental industry seems likely to encourage high-quality operators to sell their practices to the company, in order to get an edge over the competition.

Fortunately for shareholders, the company has just bought a practice in the lower north shore of Sydney. To quote the managing director Dr Daryl Holmes: "The practice was established 60 years ago by the father of the principal dentist, and was relocated to its current location in the early 1980s. The practice has recently been fully renovated, and is now a modern, beautifully appointed, fully computerised and almost paperless practice." My reading of the situation is that 1300 Smiles will free up the principal to focus on what he does best (and provide him with some upfront figure). 1300 Smiles gets the benefit of a top dentist and the opportunity to increase revenues coming into the practice. I expect this kind of transaction to be repeated consistently for the next 20 years (and I wouldn't be surprised if the company gets even better at it, over time.)

Energy Action Limited (ASX: EAX)

Energy Action is an energy efficiency company and an energy broker that also sells energy-use-monitoring services. The company's results for the first half of FY 2014 disappointed, sending the share price down to recent lows of around $3.10 (I sold some of my shares after those results, at around $3.40).

The key reason that the results disappointed was that the company was unable to grow revenues from the energy solutions division at the expected rate. Having worked in the rooftop solar and energy efficiency industry, I have to say that I think management's projections were extremely unrealistic; energy efficiency businesses are quite vulnerable to regulatory changes, given that grants programs are one of the main drivers of demand. I also believe the company wasted money on a review of its energy efficiency business, and changing the name of that business.

Having said all that, the current CEO, Scott Wooldridge, is new to the job, and deserves a decent period of time before being judged. One of the first moves shareholders have seen from him is the acquisition of Exergy, which has sent the share price back up to around $3.40. The announcement makes much of the fact that the founder of Exergy, Dr Paul Bannister, will be joining the team.

According to Mr Wooldridge, "Dr. Paul Bannister will lead the Sustainability Solutions division. Paul is well known in the energy management sector and was the original technical developer of the NABERS Energy and Water Ratings. The intellectual property that Paul and his team bring to EAX gives us a major competitive advantage." I like Energy Action because as gas prices rise, I expect demand for energy brokers to increase. In the long term, the energy efficiency expertise should also pay off. 

Bentham IMF Limited (ASX: IMF)

Bentham IMF is one of the most enjoyable stocks to own, because the litigation funder generates constant chuckles for the long-term shareholder. When the company announces a settlement or win, the stock price usually goes up, and whenever it announces a potential or real loss, the stock price goes down. This kind of erratic market pricing is quite amusing, because no single result defines the value of the company.

Rather, long-term shareholders are relying on the continuation of proven risk management abilities. While there is some risk that the company's processes and risk management will not translate to the US, where operations have begun recently, I think that it's fairly likely that the Australian business will grow over the long term. This limits the downside, in my opinion.

Foolish takeaway

These four stocks are companies that I think will grow their businesses quite significantly over the next 20 years. I also believe that the chances that the businesses will decline are quite low. However, each one of these companies are quite expensive, so there is a significant amount of growth already priced in. Importantly, each of these companies has plenty of room to grow. If I wanted to buy (more) shares in any of these companies, I'd try to buy on share price weakness – no need to rush. If you're saving for a little one, dividends should go into a "high interest" bank account, until they are sufficient to be reinvested.

Personally, my average buying price for Bentham IMF was around $1.70, I wouldn't pay more than about $3.25 for Energy Action, I think 1300 Smiles shares might well go as low as $5.80 in the near term, and I'd want CSL to drop to around $65, before I'd buy shares. However, I actively manage my portfolio. For someone looking to "set and forget" for 20 years, I think these companies are top-notch options. Indeed, these companies are quite established compared to some of my favourite speculative stocks.

The post 4 great growth stocks to buy for a lucky little one today appeared first on The Motley Fool Australia.