Markets

Green Energy Rising

But investors should brace for a bumpy ride.

By Bob Frick, Senior Editor

From Kiplinger's Personal Finance magazine, June 2009

Utilities build and own most of the grid, and they've stepped up funding. However, experts say the federal government may have to step in with a "national transmission policy" to spur grid development if it expects solar and wind generation to thrive.

These problems make the timing of a renewable-energy boom tough to call. Investors say they're ready when it does come, though. According to a study by Allianz Global Investors, 78% of investors believe green technology could be the "next great American industry," and nearly all investors (97%) say exploring alternative fuel sources will remain important even if oil prices remain low. Says Steven Berexa, managing director of research for RCM Informed, an Allianz subsidiary: "Alternative energy's rise isn't going to be smooth, but it's going to be one of the great new growth industries."

Stocks that will survive

Renewable-energy bulls like to say that if you think the dot-com boom was big, just wait for the watt-com explosion. That may be wishful thinking. But you can bet that the dot-com and watt-com booms will be similar in one respect: Just as many Internet companies fell by the wayside, many alternative-energy firms will disappear in the coming shakeout (for a look at individual alternative-energy sectors and their prospects, see 5 Pillars of Renewable Energy).

So if you want to buy individual stocks, invest in companies that are already profitable and likely to survive. The standout in the solar sector is First Solar (symbol FSLR). "As other competitors suck wind, First Solar will be getting their market share," says Morningstar analyst Rick Hanna.

First Solar's strengths and the shortcomings of its rivals became evident in March, when the Tempe, Ariz., company bought the solar-power assets of rival OptiSolar for $400 million worth of stock. OptiSolar had landed a contract to build the world's largest photovoltaic solar farm for PG&E, a huge California utility, but it couldn't handle the project. "It's becoming pretty clear that some of these companies can't produce power at the cost they said they could," says Hanna.

First Solar's technology produces electricity at the lowest cost-per-watt in the industry. Most solar cells use silicon wafers to generate electricity from sunlight. Silicon wafers are also the basic component of semiconductors, which makes solar-cell firms compete with chip makers for materials. But by using cadmium telluride to make its thin-film panels, First Solar is immune to silicon supply problems.

When it comes to alternative-energy stock prices, profitability and viability don't necessarily add up to stability. First Solar went public in November 2006 at $20 per share, skyrocketed to $317 by May 2008, then cratered to $85 last November. The stock closed at $142 on April 9. At that price, it trades at 22 times estimated 2009 profits. But given the vagaries of the market, earnings estimates for alternative-energy companies turn on a dime.

Although solar and wind generate the most renewable-energy buzz, geothermal energy is cheaper and more dependable (it works rain or shine). The go-to company in this area is Ormat Technologies (ORA). Some geothermal companies are larger, but they're privately held, and the stocks of smaller public firms are riskier than Ormat. That makes Ormat "the only blue-chip geothermal company you can invest in," says Brian Yerger, head of research for AERCA Advisors, a Wilmington, Del., consulting firm. Ormat's scarcity value translates into a premium price. At $31, the stock trades at 23 times 2009 earnings of $1.35 per share. (Ormat was a member of the original Kiplinger Green 25; see the table below.)

Update: Kiplinger Green 25 Stocks
We introduced the Kiplinger Green 25 in 2007. Our timing stank. After stocks peaked in October 2007, only two of our choices, both involving takeovers, gained. Here's what we think now.
Company	Recent price	Change*	Comments
ABB (symbol ABB)	$15	-32%	Strong position in emerging markets and robust global spending on infrastructure benefit this Swiss engineer. BUY
American Intl Group (AIG)	$1	-98%	Disastrous derivatives bets turned this innovative insurance giant into a financial basket case. SELL
American Standard	#	45%	The company changed its name to Trane, then sold out to Ingersoll Rand in December 2007 for cash and IR stock worth $48 a share.
Applied Materials (AMAT)	$11	-45%	Largest player in the semiconductor-equipment industry is waiting out the slump in demand for chips. BUY
Burlington Northern (BNI)	$66	-17%	Warren Buffett remains a believer in this well-run railroad. A good sign. BUY
Covanta (CVA)	$15	-32%	Leader in waste-to-energy generation continues to land municipal contracts. BUY
Exelon (EXC)	$48	-33%	Largest nuclear-power-plant operator and low-cost electricity generator is in an enviable position. BUY
FPL Group (FPL)	$52	-13%	Reduced power use will crimp profits in the near term, but the utility, a leader in wind power, has a bright future. BUY
General Electric (GE)	$11	-71%	There are a lot of unknowns on the balance sheet of its financing unit. But the rest of GE is solid and shares look chearp. HOLD
Honda Motor (HMC)	$28	-11%	Honda's fuel-efficient cars and powerful brand, plus disarray in Detroit, fuel this Japanese carmaker. BUY
International Rectifier (IRF)	$15	-61%	Demand is strong for its energy-efficient chips, but competition is stiff in this fragmented industry. SELL
Itron (ITRI)	$47	-41%	High debt is a worry, but this leading maker of "smart" utility meters will weather the credit crunch. BUY
Johnson Controls (JCI)	$17	-85%	The auto-industry downturn has hurt the stock, but Johnson's heating, ventilation and air-conditioning business is going strong. HOLD
McDermott Interntaional (MDR)	$16	-58%	Has been hurt by snags in oil projects in the Middle East. Its power-generation and government-contracting lines are firmer. HOLD
MEMC Electronic Materials (WFR)	$19	-65%	Global slump has converted a shortage of silicon wafers for chips and solar cells to a glut. SELL
Ormat Technologies (ORA)	$31	-27%	Developing geothermal energy isn't easy in a credit-starved market, but patient investors should find the payoff worthwhile. BUY
Philips Electronics (PHG)	$16	-56%	Dutch electronics giant is a leader in LED lighting, but global consumer-spending slump endangers its dividend. SELL
Rohm & Haas	#	39%	Dow Chemical bought the specialty-chemical firm for $78 a share, make Rohm & Haas one of our two winners.
Shaw Group (SGR)	$28	-39%	U.S. and China plan to spend billions on infrastructure. That's good news for this construction and engineering powerhouse. HOLD
SunPower (SPWRA)	$26	-60%	Leader in high-efficiency solar-cell technology has landed contracts to supply solar-power systems to Wal-Mart and Macy's stores. HOLD
Suntech Power (STP)	$14	-58%	Investors soured on solar stocks, but they will eventually warm to this leading Chinese producer of photovoltaic cells. HOLD
Tenneco (TEN)	$3	-92%	Caught in the undertow of Detroit's sinking auto business. SELL
Trinity Industries (TRN)	$12	-65%	Times are tough for this producer of railcars and construction products, but the share price reflects the company's troubles. HOLD
United Technologies (UTX)	$47	-36%	Diversified industrial conglomerate has held up well in the global slump and sports an attractive 3.3% yield. BUY
Zoltek (ZOLT)	$8	-78%	Despite growing pains, this maker of wind-turbine blades produced record sales for 2008. But it's a risky stock. HOLD
Prices as of April 9. *From price recommendation in our October 2007 issue through April 9. #No longer traded

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