Clean Tech Economy
Investing in Cleantech Companies

By Adam Aston
December 18, 2008

If you missed the boom in green energy and environment
stocks back in 2007, you're probably lucky. "Cleantech" shares soared much
higher than the broader market that year, which made it all the more harrowing
for investors when the stocks crashed to earth in 2008. As measured by the
WilderHill New Energy Global Innovation Index, cleantech dropped 63%, compared
with a 44% decline for the benchmark MSCI World Index. A basket of solar
companies, which investors bid up to dot-com-like multiples, plunged 76%. "These
markets dropped off a cliff starting last January," says Michael Herbst, mutual
fund analyst at Morningstar (MORN). "It's been ugly."

All things being equal, the green sector should recover once the global economy
rallies and energy prices start to rise again. "Cleantech will come back with,
not ahead of, the broader market," says Steven Milunovich, a Merrill Lynch (MER)
strategist who covers this area. He and other analysts also believe the sector
could regain its luster much sooner if President-elect Barack Obama pushes
through a huge federal green initiative in his first few months. Any payoff for
near-term bets investors place on cleantech stocks will depend greatly on the
scale of his efforts.

Many experts look back for lessons from renewable energy's first mini-boom—call
it cleantech 1.0—about 30 years ago. Companies selling windmills and solar
systems flourished briefly following the nation's first oil shock, only to
wither when energy prices fell and stayed low, says Paul Deninger, vice-chairman
of Jefferies (JEF), an investment bank. What makes cleantech 2.0 different from
the earlier boomlet—and more likely to endure—is the rise of China and India.
Despite economic setbacks, those countries' industrialization is bound to keep
energy demand growing faster than supply for decades to come, he adds. What's
more, there is strong political support for cleantech in Europe, Asia, and at
both federal and state levels in the U.S. Obama has said he will pump $15
billion a year into green policies and technology. If he does, and if the
economy picks up, Milunovich sees green stocks recovering as early as 2010 or 2011.

For any investor who doesn't enjoy trudging through technical minutiae on
thin-film solar cells and fuel cells, it's best to leave the stockpicking to a
fund manager. There are around 50 mutual funds and exchange-traded funds (ETFs)
covering renewable power and cleantech. The biggest of the bunch, the
PowerShares WilderHill Clean Energy (PBW) ETF, has more than $700 million in
about 50 companies. In line with the sector, it fell some 70% in the year to
Dec. 12. With holdings in U.S., European, and Asian stocks in a mix of
small-cap, medium, and large companies, the fund offers broad exposure by
placing bets on various green technologies.


Solar is already the big winner in Washington. After years of patchy support,
Congress granted eight years of incentives for solar as part of the October
bailout bill. They take effect on Jan. 1 and allow homeowners and nonenergy
businesses, as well as utilities and power plant developers, to deduct 30% of
solar system costs from their taxes. Meanwhile, the stock market crash has
brought shares of top solar companies back within reach. Piper Jaffray analyst
Jesse W. Pichel likes Tempe (Ariz.)-based First Solar (FSLR), the world's
lowest-cost producer of solar cells thanks to its "thin film" technology. He
also has a buy on China's Yingli Green Energy (YGE), which has locked in a large
supply of low-cost raw materials.

It's probably wise to view these stocks as a long-term
play. Oversupply of polysilicon, the raw material for solar cells, together with
tighter credit markets and soft demand, may depress solar company earnings for
the next year or so, reckons Sanjay Shrestha, alternative energy analyst at
Lazard Capital Markets (LAZ). But slowly, he says, the industry is inching
toward "grid parity," when alternative energy costs the same as electricity from
coal and other conventional sources.

Wind power offers less risk than solar. It is one of the most mature sources of
green electricity and is also among the least expensive. As such, wind is the
key to a plan Obama favors to raise America's use of renewable electricity to
25% by 2025, from 8.4% today.

After years of tight supplies, the number of windmills being produced around the
world is finally catching up with global demand. The result is price erosion,
which may pinch profits at manufacturers such as Denmark's Vestas Wind Systems
(VWDRY). On the other hand, falling windmill prices benefit utilities and
project developers that hope to profit from Obama's green stimulus program. In
recent months some have slowed plans to build multibillion-dollar wind farms
because of tight capital. But inexpensive equipment could fan their enthusiasm.
HSBC (HBC) analyst James Magness is bullish about Spain's Iberdrola Renovables,
which has the financial wherewithal to expand its U.S.-based wind farms.

One mission most U.S. utilities eagerly endorse is building "smart grids." The
term refers to a batch of digital technologies that improve the distribution and
monitoring of electricity. For example, through the use of intelligent
controllers on industrial machines and home appliances, power companies can
compensate customers who ratchet down their consumption during peak periods.
Shrestha likes an East Hanover (N.J.) company called Comverge (COMV), which
sells gear that helps customers cut power use during high-cost periods.

In biofuels, all eyes are on a new generation of ethanol makers that use
everything from algae to plant waste to generate fuel. Cambridge (Mass.)-based
Verenium (VRNM) is a front-runner thanks to a joint venture with BP (BP) and a
steady business selling enzymes, a key ingredient in the conversion of plant
matter to alcohol. The winner in this race? The company that proves ethanol is
viable without using food crops such as corn.


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