Alternative Energy: How to Invest in the Next Booming Industry

Alternative energy is undoubtedly the future and we are just entering the early phases of what will be the next booming industry.

Even if the whole global warming epidemic isn’t enough to change human behavior, we really don’t have much choice in the matter. Fossil fuels are becoming more difficult and expensive to find, and extract, from the earth. Couple lower supply levels with rapidly increasing demand from nations such as China, and India, and you have the perfect recipe for much higher oil prices. Many experts believe we have reached, or will soon reach, “Peak Oil.”

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Peak oil is the date when the peak of the world’s conventional petroleum (crude oil) production rate is reached. After this date the rate of production is predicted to enter terminal decline, following the bell-shaped curve predicted by the theory. Some observers such as Kenneth S. Deffeyes, Matthew Simmons, and James Howard Kunstler believe that because of the high dependence of most modern industrial transport, agricultural, and industrial systems on inexpensive oil, the post-peak production decline and possible resulting severe price increases, will have negative implications for the future outlook of the global economy.

With oil prices over $60 per barrel, alternative energy is suddenly receiving an unprecedented amount of attention and funding. The rate of technological advancement is increasing and clean energy systems that were once price prohibitive are becoming more and more feasible.

Investing in the Future

The number of publicly listed companies involved in the clean energy sector has skyrocket in recent years as private equity firms and individual investors are attempting to position themselves in what will be the next big thing. But similar to the dotcom days, there is plenty of hype mixed in with the companies offering substance. With the technology difficult to understand or envision, the average investor should be cautious when picking individual alternative energy stocks. We have made a few recommendations http://www.goldstockbull.com/category/energy-stock-picks/ in previous articles, but these stocks are very volatile, and only suitable for investors that are very risk tolerant. A safer, more diversified vehicle for investing in alternative energy exists, so let’s take a closer look inside our favorite Clean Energy ETF.

Performance

Green ETFs have been performing very strongly lately, driven mainly by the solar sector. Market Vectors Global Alternative Energy (NYSE:GEX) started trading in May of this year at $40, and hit a high $48 on Tuesday. That is a 20% return in just over two months.

But our favorite alternative energy play, the PowerShares WilderHill Clean Energy ETF (AMEX:PBW), recently shot up to nearly $23, after starting the year at $17. That is a gain of nearly 35% in just six months.

The PowerShares WilderHill Clean Energy Portfolio (Fund) seeks to replicate, before fees and expenses, the WilderHill Clean Energy Index, which is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.

Over 50% of the allocation is small-cap growth, with the top 10 holdings heavily weighted heavily toward the solar sector and consisting of:

Yingli Green Energy Holding Co. Ltd. (YGE) [ADS] 3.83%
Trina Solar Ltd. (TSL) [ADS] 3.68%
JA Solar Holdings Co. Ltd. (JASO)[ADS] 3.61%
Echelon Corp. (ELON)3.57%
First Solar Inc. (FSLR) 3.46%
Suntech Power Holdings Co. Ltd. (STP) [ADS] 3.43%
Zoltek Companies Inc. (ZOLT) 3.33%
American Superconductor Corp. (AMSC) 3.27%
Evergreen Solar Inc. (ESLR)3.15%
Ormat Technologies Inc. (ORA) 3.10%

Much of PBW’s recent action came from surges in First Solar, JA Solar Holdings, Trina Solar, and Yingli Green Energy, which all spiked 15% or more on news of inking deals worth over $1 billion dollars, doubling earnings, or beating analysts’ profit expectations by significant margins.

The solar sector is hot (pun intended). and we expect PBW to continue its climb. and make a record high above $24 in the coming weeks. After breaking this resistance, we think the ETF could reach towards $30 by the close of 2007.

Disclosure: The author owns PBW.

PBW 1-yr chart:

Comments

[Long-Short Guy:]

Related:
<blockquote>..Gu... Atkinson Alternative Energy has returned more than 35 percent so far this year, better than all conventional energy funds in the database of the research firm Morningstar... Guinness, whose firm also runs much larger portfolios focusing on traditional forms of energy, favors three segments of the renewable sector: wind, solar and geothermal... The business model for the last one resembles the oil industry a century ago: Invest money up front, stick a hole in the ground and bank the profits as the earth's heat is transferred, usually through steam or superheated salt water, to electricity generators. The fund owns stocks of two companies that do this on an industrial scale, Ormat in the United States and Geodynamics in Australia. A third holding is W.F.I. Industries, a Canadian company that amounts to a geothermal boutique, supplying pumps and pipes that are buried in the backyard to supply power to individual homes. Wind was one of the first renewable energy sources to be commercially viable. Turbine manufacturing is especially profitable today, Guinness said, because demand is outstripping supply, sending prices higher. He anticipates 25 percent annual sales growth for the sector over the next five years. His preferred vehicles for capturing it are the Danish company Vestas, regarded as the industry leader, and Gamesa in Spain. Solar is less profitable but Guinness finds its long-term growth prospects more auspicious. He anticipates 30 percent to 40 percent annual sales increases... He has doubled the solar component of his portfolio in recent months to 30 percent of assets. His choices include SunTech Power and Q-Cells, solar cell makers based in China and Germany, respectively, and MEMC Electronic Materials, a Missouri company that produces silicon wafers used to coat the cells. Two other holdings that do big business in solar are the Renewable Energy Corporation in Norway and the Colorado company Solar World. Guinness added that he was shunning some of the larger solar businesses, like SunPower and Energy Conversion Devices, because their valuations are too rich.</blockquote&g...

Source: Good for the soul doesn't have to mean bad for the wallet

2007 Jul 22 02:07 AM