Ardour Capital's Walter Nasdeo unearths opportunities in alternative energy
I don't want to be ghoulish about the BP (BP) disaster, but it forces people to think about a different way of producing power without the risk of another Gulf disaster.
When oil prices rise, alternative energy is seen as a cheaper substitute and the stocks move up. When oil prices fall, alternative energy stocks lose their perceived advantage and fall, too. Right now the price of oil is down and alternative energy stocks have followed suit. The Ardour Global Alternative Energy Index is down about 27 percent from its recent high on Jan. 11.
The solar sector has lagged the broad stock market, partly because of economic issues in Europe. While the German culture is very environmentally sensitive, there is uncertainty over a subsidy to encourage alternative energy. In the U.S. we still don't have a well-thought-out plan to get money to solar. Billions are available, but solar companies are having a hard time getting that money. Government agencies are understaffed, and if something goes wrong in the application, it's bounced back and you have to start all over again.
However, as the alternative energy industry matures, some companies are breaking away from the pack. First Solar (FSLR) in the U.S. is the largest of the solar stocks, with a market capitalization of about $10 billion. It has a robust balance sheet—$1 billion in cash and $162 million in debt at the end of the first quarter. We think its stock could rise from 119 to 180 over the next 12 months.
China's Trina Solar (TSL), a low-cost maker of solar-powered products, has projected sales of $1.21 billion in 2010 and $1.4 billion in 2011, with earnings per share of $1.74 and $2.02, respectively. The company trades at around 18 and could reach 26 over the next year.
Alternative energy companies have traditionally been pure-play small-cap stocks. For those who want to take a chance, we like Beacon Power (BCON), which has a market cap of $60 million. Its technology offers superior energy storage to support the stability of electrical grids.
In the short term, I'm more optimistic about solar than wind; there's overcapacity in turbine manufacturing, which plays into the hands of the wind developers. Two wind stocks we do recommend are Germany's REpower Systems and PNE Wind, which trade on the Frankfurt stock exchange. REpower's year-over-year results show a 27 percent increase in operating earnings, and its gross profit margin is expanding. The stock could rise from €118 to €140 by mid-2011. PNE is a wind project developer, and its strong cash position gives it flexibility. Its stock could see a 70 percent jump.
The alternative energy industry is still young on the development curve. There have been fits and starts for many years. Today, we need the boost of subsidies. In a few years, we won't.
The Stats: Walter Nasdeo is managing director/director of research for Ardour Capital Investments, an investment bank specializing in alternative energy. Two of its five alternative energy indexes are tracked by exchange-traded funds—Market Vectors Global Alternative Energy (GEX) and Market Vectors Solar Energy (KWT), both sold by Van Eck Global.