Taking Stock of Green Energy Options
Pure-play alternative-energy stocks can be dicey. A smarter bet: The companies that will supply the infrastructure for the sector's growth
by Alex Halperin
While the dot-com stocks were staging their spectacular rise and fall several years ago, other sectors were having their own bubble moments. Take the case of alternative-energy player Capstone Turbine (CPST).
In 2000, Capstone, a producer of small, low-emission generators, saw its market value climb above $5 billion. Seven unprofitable years later, the stock trades for less than a dollar, and the company has a market cap around $120 million.
Capstone is just one of several clean-energy stocks to have seen stunning valuations evaporate. Unlike the Internet, alternative energy has yet to see substantial growth in the wake of its bubble.
Capstone still makes generators used as backup or replacement power sources, but the buzz around renewable energy has shifted to other sources including solar and wind. The seesaw price of oil, conflicts in the Middle East, and worries over climate change have pushed the subject back onto the front page and brought a new round of government and venture capital investments. But investors looking to ride the renewable energy wave should remember the experience of Capstone.
Investment Investigation
Where should eco-focused investors look? The best plays may not come from the obvious places.
The better bet may lie with established industrial companies with their own alternative energy businesses that have the stamina to ride out fads. Or consider a contrarian move: Old-line companies that will be needed to help speed the transition to a greener energy infrastructure.
It's easy for eco-focused investors to get drawn into the hoopla. A scan of the landscape of publicly traded alternative-energy companies shows thrilling and exotic possibilities. Depending on which eco-conscious pundit is talking, an investor is bound to wonder if the U.S. economy might one day run on wood chips, algae, corn, hydrogen, manure, clean coal, the tides, or heat generated beneath the surface of the earth.
For the investor looking for a stake in a cleaner future, each of these options carries a high degree of risk. "Renewables [alternative energy solutions] are much more like a life sciences investment," says Dan Pullman, vice-president at investment bank McNamee Lawrence, who specializes in clean energy.
As with biotech, it can take seven or eight years to see whether a technology will win acceptance from the market. Then, even if the investor has backed the right horse—whether solar, biofuels, or hydrogen will end up in the winner's circle—he or she must also pick out which of the contending companies using that approach will prove dominant.
One possibility is to invest through a mutual or exchange traded fund with stakes in a basket of companies. However, the options available to U.S. investors are unsatisfying (see BusinessWeek.com, 3/1/07, "Green Funds: Less Than Meets the Eye"). They include wildly volatile funds investing in companies like Capstone to self-proclaimed "green" funds that have holdings in sectors such as fossil fuels and Las Vegas casinos.
Slow Growth
Despite the excitement surrounding alternative energy, investors have to realize that it will take decades to emerge as a major part of the American energy supply. "Realistically, it's going to take a long time to reinvent the economy," says Peter Fusaro, chairman of consultancy Global Change Associates.
What's more, the emergence of alternative energy in the U.S. is likely to happen in a much more fragmented fashion than is the case with hydrocarbons, where a few giant companies rule. Sunny California is a leader in the U.S. solar energy market. Meanwhile, gas stations selling e85—gas made primarily of corn-based ethanol—are concentrated in the upper Midwest. With fragile startups looking to carve out renewable energy niches, "I think small investors will get their heads handed to them," Fusaro says.
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