When politicians from Al Gore to T. Boone Pickens push for an issue such as alternative energy, you might think the sector is a bright spot in the struggling stock market.
When politicians from Al Gore to T. Boone Pickens push for an issue such as alternative energy, you might think the sector is a bright spot in the struggling stock market.
But you would be wrong.
In fact, year-to-date through Sept. 15, the Market Vectors Global Alternative Energy ETF (GEX), from Van Eck Securities Corp. of New York, fell more than 30%, versus an almost 20% drop for the Standard & Poor's 500 stock index.
What ails the alternative-energy sector? High valuations, dashed expectations and a dose of flip-flopping public policy have stung investors this year.
Let's take them in turn:
• The 125 renewable-power stocks that we track globally trade at an average price of about 20 times earnings, versus the 15 times earnings of the S&P 500 — a big premium, though they have underperformed this year.
• Subsidy cuts for solar energy in Germany and Spain, as well as deteriorating spreads for ethanol producers and high costs for materials, have caused alternative-energy companies to disappoint investors this year.
• Beyond the subsidy cuts in Europe, the seeming inability of Congress to agree on renewal of incentives for solar and wind power slowed orders and dampened investor interest in those sectors.
The importance of public policy to this sector underscores a key risk: Most of these technologies aren't cost-competitive with oil and coal, as well as other traditional energy sources.
However, with both presidential candidates endorsing alternative energy, though with slightly different approaches, the time is right to invest in the sector.
We believe that notwithstanding the policy vacillations, there is widespread support for some type of carbon cap and emissions-trading scheme. Putting a price on carbon will help level the playing field for renewable stocks, making this a good time to consider investing in alternative energy.
For advisers who consider solar, wind and biofuel stocks — or the exchange traded funds that track them — too risky, there are many ways to participate in the sector and reduce the volatility associated with the pure-play stocks.
Most famously, Fairfield, Conn.-based General Electric Co. (GE), which isn't a holding of the American Trust Energy Alternatives Fund (ATEAX), from the American Trust Co. of Lebanon, N.H. which I co-manage, has built an image campaign around its "ecomagination initiatives."
But don't overlook the vibrant underlying business encompassing wind turbines, solar panels and more-fuel-efficient engine technology that accounts for 8% of its business.
Less obviously, Owens Corning (OC), which is about 1% of fund holdings, is a maker of insulation, and roofing and flooring materials. In addition, it has a growing fiberglass composites business that benefits from growth in wind turbines. At six tons of fiberglass per blade, or 18 tons per turbine system, the wind market already makes up 10% of market demand.
We estimate that at current growth rates, the fiberglass composites division, now one-third of Owens Corning's revenue, could increase by 50% in 10 years. The Pickens plan calls for wind power to generate more than 20% of U.S. power by 2030 or sooner, which could mean that Owens Corning's composites business would grow even faster.
The key to buying stocks that benefit from alternative energy is to buy into good companies at reasonable valuations. A company in which growth in this sector is a bonus for an attractive stock is GE at less than $30.
If its ecological initiative results in outsized growth, as we predict, that is the "icing on the cake."
If you think Toledo, Ohio-based Owens Corning is a solid company in a depressed market that will surely spring back, incremental growth from wind turbine demand is just one more solid reason to own the stock.
We are fans of this indirect, "beyond-pure-play" approach to the sector because we believe we can reduce risk and find some undiscovered gems in the process.
At the same time, there are pure-play stocks such as Suntech Power Holdings Co. Ltd. (STP), of New District, Wuxi, China, which represents about 3.8% of the portfolio.
In the area of resource-based investments, we cast a wide net for asset-intensive companies such as utilities and even auto-makers, which deploy renewable technologies.
Carey Callaghan is chief investment officer of American Trust Co. of Lebanon, N.H., and co-portfolio manager of the American Trust Energy Alternatives Fund.
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