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Alternative Energy Stocks – Fad or Trend?

May 19, 2011 9:36 AM ET
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Harris Roen's Blog
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Long Only, ETF investing, Energy

Seeking Alpha Analyst Since 2009

Harris Roen is a financial writer with a passion for understanding the economic activity of our interconnected world. His previous experience of over 15 years as a professional portfolio manager helps him ground-truth the hype through independent research and analysis, providing valuable information for readers. Mr. Roen filters through numerous economic mainstream and specialty media reports, looking for clear, dependable information. Key economic data such as interest rates, investor sentiment, earnings and debt are constantly monitored to discern vital long-term market trends. Independent thinking is used to distill data into trends that can be turned into actionable strategies. Individual companies and mutual funds are examined in detail to see who rises to the top regarding present quality and, more importantly, positive future prospects. The Roen Financial Report has a specific focus in the energy arena, where high-quality companies that are building a future less dependent on coal and foreign oil are sought out. The goal at the Roen Financial Report is to present expert content in a useful, affordable newsletter. The publication strives to make recommendations solely on clear, deliberate strategies in an understandable, helpful manner.
I am not a fan of “fad” investing. There are many dangerous examples of how fad investing can get the uninitiated in trouble. A classic case was during the tech bubble a decade ago. When 3Com spun off Palm, Inc. in July 2000, the price of Palm’s stock skyrocketed as investors piled on. The market cap of the new spinoff quickly became bigger than the parent company! When the bubble burst, Palm stock dropped 84% in 4 short months. Woe to the person who joined the Palm cult at the top of the bubble.
A “trend” on the other hand, is based more on fundamentals than it is on a passing craze. There may still be ups and downs, but if there is an underlying reason for growth within an industry then the long-term investor will be well served.
So which camp does alternative energy investing fall into? A thorough review of the literature shows that it is clearly more of a trend than a fad.
A paper titled Special Report on Renewable Energy Sources and Climate Change Mitigation was just published by theIntergovernmental Panel on Climate Change. It contains a thorough literature review of likely scenarios of growth in renewable energy supplies by 2030 and 2050. 164 scientific papers were examined to map out likely global trends, and the results are quite promising for alternative energy investors. The chart below shows how much energy will likely be coming from renewable energy (RE) sources.

Click for larger chart

Each dot represents a report on the scatter charts. The vertical axis shows how much energy each report projects will come from renewable energy sources. The horizontal axis shows how much carbon will be emitted. The grey cross shows 2008 levels.
The take home from this is that under almost all the scenarios, there is an increase in renewable energy production, and it may be substantial. For example, more than half the papers forecast a 270% increase in energy produced from renewables. And if you exclude traditional biomass sources (firewood, charcoal, etc.) then the increase could be more than 10-fold!
It is difficult to predict exactly which companies will benefit from this trend in the short term, but this looks like as iron-clad a trend as any. Followers of the Roen Financial Report know a balanced portfolio of alternative energy companies will be a wise long-term investment.

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