Blue-Chip Alternative Energy Picks

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Includes: AA, ADM, CAT, DE, DUK, FPL-OLD, GE, JCI, OC, PBW, PCG, PNM, SHCAY, SIEGY, WM
by: Tom Konrad, CFA


Alternative Energy: Risky but Alluring

For many of my older or more cautious clients, investment in small, profitless (or nearly so) startup alternative energy companies is inappropriate. Even a diversified ETF such as the Powershares Wilderhill Clean Energy portfolio (NYSEARCA:PBW) is too volatile due to its heavy exposure to profitless renewable energy companies such as Evergreen Solar (ESLR). Because of this, in the last year PBW has been over $24, but as low as $16.24. While such volatility can lead to supercharged profits when you are riding it in the right direction, many investors cannot sleep at night if one of their holdings lose a third of their value in just a couple months (as PBW did last year.)

Nevertheless, growing awareness of Global Warming, Peak Oil, Gas, and Uranium, and energy security worries are leading to broad interest in alternative energy among people who do not fit the typical aggressive speculator profile of people who can shrug off a 50% loss in a single holding over a short period of time.

The Blue-Chip Solution

Fortunately, not all companies involved in alternative energy are risky startups. For an investor who is willing to own stocks that are not pure-play companies, getting an exposure to quality businesses in alternative energy can actually be easier than finding quality companies among the firms whose business is purely devoted to a singe renewable energy technology. In fact, many of the industry leaders are actually divisions of larger conglomerates. For instance, the largest U.S. Wind Turbine manufacturer is General Electric - Wind (NYSE:GE), while Sharp Solar (Pink Sheets) (OTCPK:SHCAY) is the world's leading manufacturer of solar modules. Conglomerates are by far the easiest way to invest in Energy Efficiency, the dullest but most profitable alternative to conventional energy generation..

While these companies lack the sex appeal of overnight high flyers like First Solar (NASDAQ:FSLR), which has doubled since its IPO less than six months ago, they also provide a lot more downside protection than bombs like Distributed Energy Systems (NYSEARCA:DESC), which was down about 60% over the same period and off over 80% from its all time high. Any investment adviser or financial planner will tell you that diversification is key to a healthy portfolio: these companies have built-in diversification from their wide array of businesses. Below, I highlight some of my favorites.

Using your Ecomagination

I've already mentioned GE's leadership in wind turbines, but their Ecomaginationdivision (with its attendant publicity) also includes a healthy dose of energy efficient technologies, including not only the familiar compact fluorescent lamps, but also LEDs, more efficient gas turbines, consumer products, and on and on. Their Jenbacher engines are widely used to generate electricity from a wide variety of biogas, and a the also have a solar photovoltaic division (which used to be the independent PV company AstroPower, which they bought out of bankruptcy.)

GE does play the whole Ecomangination thing up, while they are still selling pulverized coal plants as well [they were the planned supplier for TXU Corporation (TXU) . . . and they'll probably still sell three of those.] On the other hand, GE's CEO Jeffrey Immelt has said "Renewable energy, energy efficiency, environmental technology - we're going to own it.." I believe he's serious about that, and GE will try to "own" all those things. They have a better chance of owning renewable energy than First Solar, and if they are going to "own" renewable energy, wouldn't a renewable energy investor want to own GE?

An Efficient Choice

Another favorite of mine is Johnson Controls (NYSE:JCI). Johnson's Building Efficiency segment "engages in the design, production, and installation of control systems that monitor, automate, and integrate building operating equipment and conditions." In short, they are deeply involved in the next generation of more efficient buildings. Since energy efficiency is the most cost effective form of alternative energy, this business is much less susceptible to the wild roller-coaster ride of other alternative energy stocks which gyrate wildly in response to fears (or hopes) of skyrocketing energy prices. They also have a joint venture with Saft Groupe to produce batteries for the hybrid vehicle market, which GM recently awarded a battery development contract..

Some Call it "Trash," I call it "Fuel"

You might be surprised at my next pick: Waste Management (WMI). What does trash have to do with renewable energy? As a feedstock. Not only does WMI have recycling operations, but they operate at least 86 landfill gas projects which produce electricity, but also have 17 waste-to-energy operations. While in the short term, rising fuel prices will cut into their operating margins, capturing methane (a highly potent greenhouse gas) should be a valuable source of carbon credits (once there is a market for these), and recycling is an excellent way to save energy compared producing raw materials. Another future potential revenue source from alternative energy will be waste to energy. While WMI already operates 18 waste to energy facilities, there is a lot of room for new developments such as plasma conversion, which can make the process cheaper and more efficient.

Climate Action Partnership

You might also look for blue chip companies by looking at their actions. Companies which feel they are strategically positioned for serious political action to prevent climate change will probably also be lobbying for such action. In January, seven major companies formed the Climate Action Partnership with three national environmental nonprofits. They are calling for real cuts to carbon emissions, [PDF] and you can bet that part of the reason is they feel it will benefit their shareholders (if they called for action on climate change, but felt that it would hurt their shareholders, those same shareholders could legally sue them for any damage to the bottom line.) The fact that the cuts they are calling for are fairly aggressive is significant, because many industry lobby groups have called for carbon regulation, but only because they (rightly) fear that if they're not at the table when the negotiations take place, they'll end up being served as the main course.

Here's a quick rundown of the companies in the partnership, and why I think they are each participating:

Alcoa (NYSE:AA): lightweight recycled aluminum for more efficient vehicles.

Caterpillar (NYSE:CAT): Much waste methane electricity generation is based on CAT engines and turbines. They also stand to benefit from the rush to biofuels because they are a major supplier of farm equipment.

Duke Energy (NYSE:DUK): While not a major generator of renewable energy, they are hoping carbon regulation will benefit their nuclear heavy strategy (they're also doing some good things in cogeneration, aka combined heat and power.)

DuPont has been reducing their carbon footprint for two decades, and it also has considerable biofuels operations.

FPL Group (FPL-OLD): Currently the world's largest operator of wind energy. Less talked about, they also own more concentrating solar power stations than any other utility.

General Electric (GE): see above.

PG&E (NYSE:PCG): Great energy efficiency programs, wind, solar.

PNM Resources (NYSE:PNM): Before this, I had never associated PNM with environmental responsibility (or irresponsibility for that matter.) Greenwashing? Their territory has a lot of potential for concentrating solar power and wind . . . I hope that's what they're thinking. I'd love to hear your opinions.

That's not even the entire list. Others that come to mind are Archer Daniels Midland Company (NYSE:ADM) (biofuels), Deere & Company (NYSE:DE) (farm equipment), Siemens (SI) (Wind, PV, transmission), and Owens Corning (NYSE:OC) (wind turbine blades). The point is that there's no problem filling a diversified portfolio with large, stable companies that can also benefit from rising energy prices and regulation of carbon emissions. Your alternative energy portfolio is less limited by lack of choice or aversion to risk than it is by unwillingness to accept some bad with the good.

I like to look not for companies that are perfect, but more for ones that are headed in the right direction. A profitable portfolio is built on tomorrow's winners, not yesterday's. The same can be said for an environmentally responsible portfolio.

Full Disclosure: Tom Konrad and/or his clients have positions in the following stocks: ESLR, GE, Sharp, JCI, WMI, Dupont, FPL, ADM, Deere, Siemens.