Do renewable-energy projects make the cut as a smart capital investment? The short answer is: they never have in the past.
For many years, utilities, retailers, manufacturers and other companies with high energy demands avoided solar, wind and biomass precisely because those technologies were too expensive, a money-losing proposition both in the short and the long term. However, 2013 is shaping up to be a good year for the stock market in general, and alternative energy in particular. Solar, wind and other energy efficient sources are benefiting from beneficial laws, political focus, as well as technological advancements. Several companies are poised to profit from this perfect storm and investors should take note.
One of the fastest growing clean energy sectors is wind. With positive movement from the Obama administration, wind energy, specifically offshore wind, is starting to see incredible growth and in 10 years, the amount of installed wind could more than triple from current levels. According to the U.S. Department of Energy (DOE), the generating potential of offshore wind in areas with less than 100 feet of water equals the entire generating capacity of the U.S. electric system.
Since there are very few publicly traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an ETF. The First Trust ISE Global Wind Energy Index Fund (FAN) was down between 15% and 20% for 2012, but it has bounced back nicely, up in the 33% range since that time.
Solar energy did have a tough year last year, but shouldn't be counted out as an investment opportunity. The Ardour Solar Energy Index (SOLRX) lost 35% in 2012. This is on top of a 66% loss the year before. In fact, last year only one of the 13 major companies posted a tiny profit, and companies averaged over $28 million in losses.
So is this a good time for solar? Warren Buffett seems to think so.
Two recent purchases by MidAmerican Energy Holdings Co., a subsidiary of Buffett's Berkshire Hathaway Inc. (BRK.A) (BRK.B), include a $2 billion to $2.5 billion deal to buy two California solar power projects from SunPower Corporation (SPWR). MidAmerican also agreed in January to invest in what will be the world's largest solar photovoltaic operation, which is partly owned by First Solar Inc. (FSLR).
A broad collection of solar stocks is likely the best route for adventurous investors to take from here. One good option is a Mutual Fund or ETF concentrated in solar. For MFs, I currently like Guinness Atkinson Alternative Energy (GAAEX). Market Vectors Solar Energy ETF (KWT) also looks like a good value. Other solar stocks and solar ETFs, including Market Vectors Solar Energy and Claymore/MAC Global Solar Index - now called the Guggenheim Solar ETF - (TAN), are both up about 17% this year.
It is a common understanding that the best values are to be found among stocks that few people have ever heard of. These stocks have significant potential to gain as a broader pool of investors becomes familiar enough with them to invest. If Mr. Buffett has moved, chances are that there is now a much smaller pool of new investors. Widely known stocks are also followed by more analysts and professional investors, meaning that it requires much more time and effort to learn something about a stock that other investors are not already familiar with.
To that end, I would look at smaller companies such as those traded OTC or indexed on DB NASDAQ OMX® Clean Tech Index (DBCC). I'd also add to the list Arista Power, Inc. (OTC:ASPW). The company has recently received an order for a Mobile Renewable Power Station (MRPS) and extended support agreement from a U.S. Government Agency. As a growing supplier and designer of solar energy systems, Arista is launching a new community solar purchasing initiative, called "Solarize Seneca." This and several other small-cap stocks are definitely worth the research time before the masses move on them.
Another of the promising investment areas for 2013 may come from the area of energy efficiency. From an economic standpoint alone, smart efficiency measures that businesses and individuals can deploy have a short payback period, and many can bank immediate cost savings.
Companies I like as long-term investments in energy efficiency include A. O. Smith Corp. (AOS) and Tetra Tech, Inc. (TTEK). AOS is in the commercial and residential water heating business, which has a strong balance sheet, excellent sales growth, reasonable debt levels, and its stock is considered undervalued in the high 60 to low 70 price range. Overall, it is a very well-managed company with excellent free cash flow, but its stock is considered overvalued at current prices. If it dips to the mid to low 20s, TTEK would merit a look.
The long-term prospects of solar, wind and other clean energy options are clearly tied into the cost of the prevailing dominant energy source, which are petrochemicals. The logic goes that the more economic activity occurs, the greater oil consumption will be. Since 2009, the price of a barrel of crude oil has been almost exactly correlated to the S&P 500 index. In addition, according to the International Energy Agency, energy consumption in China and other developing countries is likely to double in 10 years and triple by 2025. Oil production cannot match this growth and other sources of energy are necessary. Energy efficiency companies with good management and strong balance sheets will do well in 2013 and beyond.
So far the stock market, as measured by the S&P 500, is up since the beginning of the year, and is on track to have continued gains for the month. Even more impressive, alternative energy stocks are up 9.2% so far for the year on average. Even if you take out volatile penny stocks, gains averaged 8.1%.
Nearly two-thirds of the largest global companies have committed to reduce emissions and increase their use of renewable energy. It is more obvious than ever that businesses recognize that clean energy makes good business sense. Considering this I feel stocks in the alternative energy sector will have a very positive 2013.