Riding the ups and downs of alternative energy
A long-term investment with plenty of volatility, analysts say
Stephanie I. Cohen ... Sept. 27, 2006
WASHINGTON (MarketWatch) -- If filling up at the pump has you cursing big oil companies, investing in alternative energy companies may offer some sweet revenge. Picture the upside: Advancing alternative energies while turning a profit.
The downside? Volatility in the underlying energy markets, where a steep drop in oil or gas prices can smother profit forecasts, investor enthusiasm and even regulatory support just as quickly as they are ignited by a spike in prices at the pump.
Meanwhile, companies with names like SunPower, SunTech Power, and Powerlight are among those fetching headlines and investment dollars the likes of which haven't been seen since the Arab Oil Embargo of the early 1970s.
They are also drawing in such luminaries as Sir Richard Branson, who announced last week that his Virgin Group is pumping up to $400 million into alternative fuels via an investment fund dubbed Virgin Fuels with an initial investment in California-based ethanol producer Cilion, a privately held company.
Branson has plenty of company. According to PricewaterhouseCoopers and the National Venture Capital Association, investments by venture capitalists in alternative energy deals jumped 69% in the second quarter from a year ago.
In 2005, $1.6 billion in venture capital went toward developing clean technology in North America, up 34.9% from 2004, according to Cleantech Venture Network.
"There's a raft of IPO's coming," said New Energy Fund Managing Partner Mark Townsend Cox. When evaluating where to place a bet in the burgeoning field, Cox said an investor must always ask "does the technology work and is it economical?"
But no amount of due diligence will shield investors from big risks and big swings in stock prices.
"As is often the case with emerging markets, these stocks have been volatile," said Rob Stone, managing director of equity research at Cowen & Co. Investors should see the alternative energy sector as long-term commitment, he added.
In the past two months, solar stocks have dipped 40% to 50%, said Jeffrey Bencik, senior analyst at Jeffries & Co.
Dave Edwards, managing director and head of the merging growth group at Think Equity Partners, warns "there will be more losers than winners" in this dynamic new arena.
Solar isn't the only green energy card to play. Companies that deliver fuel cells, wind power, and biofuel technology are also seen as contenders in the fight against higher prices and the need to nurture more domestic sources of energy.
While there are plenty of mainstream and multinational companies undertaking green ventures -- FPL Group. Inc. (FPL : FPL Group, Inc.: 47.90+0.43+0.91%) , Sharp Corp. (SHCAF) , and General Electric (GE : General Electric Company
: 35.47+0.19+0.54%) -- investors have a myriad of lesser-known options.
Solar Photovoltaics, after lurking for decades in the dark recesses of government labs, is suddenly sexy again amid swelling commercial demand and alluring government tax credits at home and abroad, where many of the biggest players are based. And since solar accounts for less than one percent of the electricity generated worldwide, analysts see plenty of room for growth.
Last year, solar upstarts made up the three biggest initial public offerings in the technology sector: Q-Cells Ag, SunPower Corp., and Suntech Power Holdings Co., Ltd., according to a CleanEdge Inc. report on trends in the alternative energy market. These companies remain analysts' top picks today.
Ron Pernick, co-founder and principle of CleanEdge calls the solar market a "pure technology play." He points to solar cell and panel manufacturer SunPower (SPWR : 31.60-0.34-1.06%) as a prime example, noting that the Silicon Valley firm is a spin-off of Cypress Semiconductor that makes high efficiency solar cells that convert sunlight into electricity.
Shares of SunPower priced between $12 and $14 at the company's initial offering last year. Shares were recently trading at $27.10 after tumbling from $44 in March to a low of $24 in mid-July. Piper Jaffray's 12-month price target for SunPower is $39.
The overall solar market is seen expanding from $7.2 billion in 2004 to $39.2 billion by 2014, according to CleanEdge. There are investment opportunities at "every step of the solar food chain," Stone said.