Financial aftershock: Portfolio managers focus on energy stocks

Mar 20, 2011 @ 12:01 am

By Jessica Toonkel

Steam rises from the No. 3 reactor at Tokyo Electric Power Co.'s Fukushima Dai-Ichi nuclear power plant in Okuma town, Fukushima prefecture, Japan, on Thursday, March 17, 2011. (Photo: Bloomberg)
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Steam rises from the No. 3 reactor at Tokyo Electric Power Co.'s Fukushima Dai-Ichi nuclear power plant in Okuma town, Fukushima prefecture, Japan, on Thursday, March 17, 2011. (Photo: Bloomberg)

Energy, pharmaceuticals and infrastructure are the sectors that U.S. portfolio managers are watching most closely in the wake of the devastation in Japan.

In the long term, the disaster in Japan may force other countries, including the United States, to create policies that favor renewable energy, said Tom Lydon, president of Global Trends Investments.

“Maybe one of the benefits of all of this is that the importance of clean energy will come to the forefront,” he said.

Mr. Lydon is waiting for some of the uncertainty around the situation in Japan to dissipate before buying any alternative-energy exchange-traded funds, but he is keeping a close eye on the sector. Two alternative-energy ETFs he is watching are Guggenheim Partners LLC's Solar ETF Ticker:(TAN) and Van Eck Global's Market Vectors Global Alternative Energy ETF Ticker:(GEX).

Companies that create parts for solar panels already are seeing a rise in their share prices, according to Matthew Page, co-portfolio manager of the Global Alternative Energy Fund from Guinness Atkinson Asset Management Inc. Ten percent of the world's production of polysilicon, a key raw material in solar-panel production, comes from Japan, and with production in Japan down, companies in other countries are starting to reap the rewards of increased demand, he said.

Mr. Page owns polysilicon providers MEMC Electronics Materials Inc. Ticker:(WFR) and ReneSola Ltd. Ticker:(SOL) and is closely watching the situation in Japan before deciding whether to buy more of either stock.

Even if Japan averts a nuclear crisis, the cost of nuclear power will rise worldwide as a result of this incident, experts said.

“It will raise the cost of nuclear energy because any new plants will require an extra layer of security,” said Ivka Kalus-Bystricky, portfolio manager of the Pax World International Fund. “That means that at the margin, alternative energy becomes more attractive.”

Over the past week, Germany, China and Switzerland have announced moratoriums on plans to build and replace nuclear plants, while officials in France, Spain and the United States said that they are examining the situation.

Even if all nuclear-plant construction and planning is halted, existing plants will have to be supported, said David Kurzman, co-portfolio manager for the Leuthold Global Clean Technology Fund.

“There are over 400 nuclear plants worldwide and they all need uranium oxide or a derivative of it to run,” he said. “The demand for uranium is going to remain high, even if prices are now going down as a result of investor overreaction toward nuclear power.”

Mr. Kurzman is closely watching Cameco (CCJ), the world's largest uranium producer.

NATURAL GAS

As Japan starts to rebuild, managers and advisers said that they expect a rally by infrastructure companies and natural-gas producers.

“It looks like this has taken out at least 10% of Japan's electricity capacity, if not more, and the reality is that their only alternative is liquefied natural gas,” said Jeffrey D. Saut, a managing director at Raymond James & Associates Inc.

“Japan and South Korea are already two of the world's biggest users of liquefied natural, so there is an opportunity here,” he said.

Last week, Mr. Saut bought more stock in Teekay LNG Partners LP Ticker:(TGP), a major provider of liquefied natural gas.

He also is holding on to his stock in Japanese construction company Komatsu Ltd. (Ticker:KMTUY.PK).

Another group of companies that Mr. Saut is keeping an eye on are those that are developing radiation sickness drugs, such as Cleveland BioLabs Inc. Ticker:(CBLI)

Many advisers and managers are placing bigger bets on Japan itself in the wake of the crisis.

Mr. Lydon, for one, is keeping a close eye on ETFs that invest in the Japanese yen, such as the Currency Shares Japanese Yen Trust Ticker:(FXY) and WisdomTree Dreyfus Japanese Yen Ticker:(JYF).

“The Japanese government is going to need more money to build and will sell U.S. dollars to buy yen to do that,” he said. “As that happens, along with the economic development that will occur, the yen should do well.”

Robert Taylor, portfolio manager of the Oakmark International Fund, Oakmark Global Fund and director of international research at Oakmark Funds, has been buying more Japanese stocks as prices have fallen after the quake.

In Tokyo when the earthquake hit, he said that the situation was “really scary.”

“But if you visited Tokyo now, you'd see that there's really no damage. You wouldn't know” a quake had struck, Mr. Taylor said.

“It's amazing how well the city held up,” he said.

'SOCIAL STRENGTH'

Neil Hennessy, chief investment officer and portfolio manager at Hennessy Funds, which include the Hennessy Select SPARX Japan Fund and the Hennessy Select SPARX Japan Smaller Companies Fund, also is bullish on Japan.

Although Japan was hit with a quake and a tsunami, it wasn't “hit with less demand for their products,” he said. “Everyone still wants their products.”

The chaos has brought Japanese political factions together, Mr. Hennessy said, and the country's “social strength will get them through” the tragedy.

Dan Jamieson contributed to this story.

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.

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