Many `Green’ Companies Might Cost You Your Green: John Wasik

July 10, 2006

by John Wasik, Bloomberg

July 10 (Bloomberg) — Far too many alternative energy stocks may be the dot-com bombs of this decade — sexy today, nowhere tomorrow.

With gasoline and crude oil prices hovering at record highs, Wall Street has focused on alternative-energy companies with a dangerous exuberance.

Like most fledgling technology companies, many of these green darlings will fizzle or not make a profit for years. Yet there’s a compelling reason for investing in this sector as several industry experts foresee petroleum and gas production peaking and emerging economies demanding more energy. 

There are hundreds of shades of gray when it comes to green energy firms. Some are packaged in mutual funds that have verdant names, but don’t track solar, biofuel and other alternative power companies well.

It’s hard not to get caught up in the excitement over alternative energy. More than 50 ethanol plants are under construction as part of an expected $60 billion surge of total capital spending in green energy this year, up from $48 billion last year, according to New Energy Finance Ltd., a research firm in London, which predicts the renewable energy business will grow from a “25 billion to a $100 billion industry worldwide over the next decade.”

Winners of Late

The anything-but-petroleum energy frenzy has driven stock prices of some hyped companies into overdrive.

— Archer Daniels Midland Inc. (ADM), the Decatur, Illinois- based agricultural processor, is the leading producer of corn- based ethanol, with 25 percent of the market. Its total return has more than doubled in the past year.

— Pacific Ethanol Inc. (PEIX), based in Fresno, California, which makes equipment to process cellulose-based ethanol, has reported net losses since 2002. Its shares have almost tripled during the past year.

— Evergreen Solar Inc. (ESLR), in Marlboro, Massachusetts, has posted losses in the last three years, but has seen its stock price almost double. The company is developing a promising new solar-cell technology, but like all new production methods, it will take time to mature.

— Energy Conversion Devices Inc. (ENER), based in Rochester Hills, Michigan, which makes batteries and fuel cells, has seen its stock price climb more than 50 percent.

Are these stocks like the Internet and telecom starlets of the late 1990s, when the market grossly overestimated sales and profit potential in the run-up to the three-year bear market that followed?

Focused Funds

For a focused play on alternative energy, it’s worthwhile considering specialized mutual funds.

The New Alternatives Fund Inc. (NALFX), a Melville, New York-based fund that invests in wind and solar energy, biomass, fuel cells, energy conservation and related sectors, seemed like a perfect candidate. If you can get past the fact that more than 21 percent of the fund is in cash and the 4.75 percent upfront sales charge, there are a few wind and solar companies in their holdings.

As one of the oldest and most-established funds that invests “at least 25 percent” of its holdings in green energy companies, New Alternatives has had strong performances in the past two years, rising 24 percent over the past year and averaging a 20 percent gain over the past three.

As a long-term investment, though, Alternatives is questionable, lagging the Russell 2000 index by almost seven percentage points annually over the past five years.

What’s in a Name?

You have to look beyond the titles of green funds if you want a specific play in alternative energy. There are dozens of mutual funds that suggest environmental responsibility, yet have few renewable energy stocks.

One would think that the Sierra Club Stock Fund (SCFSX), for example, sponsored by the environmental group (of which I’m a member) and investing in stocks that meet “environmental and social criteria,” would be deep into alternative energy.

Not only is the San Francisco-based fund expensive to own with a lofty 1.7 percent expense ratio and 0.18 percent 12b-1 marketing fee, it curiously owns stocks such as the Hershey Company, Equifax Inc., Moody’s Corp. and Starbucks Corp. among its largest holdings.

While these companies may be socially responsible and clean, if you want an alternative energy fund, this isn’t it. It’s also a mediocre performer, generating a higher return than slightly more than half of its peers during the past five years.

Another would-be candidate is the Winslow Green Growth Fund (WGGFX), in Portland, Maine, which features “environmentally effective investing.” Although you can’t quibble with the fund’s performance — it beat the Russell 2000 small growth-stock index by 4 percent during the last five years — it’s hardly a green energy fund, either. Of the fund’s top holdings, 40 percent are in biotechnology, health care or pharmaceuticals.

Diversification Works

Clean energy development is more than a market fad. It wasn’t a portfolio manager, environmentalist or Wall Street analyst who said that America must develop “cleaner, cheaper and more reliable alternative energy sources,” to replace “75 percent of oil imports by 2025.” It was President George W. Bush, who called for a 22 percent-increase in federal energy research spending for the current fiscal year.

After the “America is addicted to oil” theme was announced in Bush’s state-of-the-union speech earlier this year, it may have marked a turning point in the energy-bacchanalia perspective of U.S. policymakers. Wall Street took note a long time ago.

Yet to profit from the burst of capital spending on green energy, you’ll need to take a broad-based, long-term view. An index fund such as the Vanguard Small-Cap Index (NAESX) or Total Stock Market ETF (VTI) might give you the greatest-possible exposure with the least amount of risk.

Like most addictions, energy gluttony won’t be allayed overnight. Yet there will a financial feast for those who look ahead and diversify.

(John F. Wasik, author of “The Merchant of Power,” is a columnist for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column:
John F. Wasik in Chicago at  jwasik@bloomberg.net.

John Wasik , author of “The Kitchen-Table Investor,” is a columnist for Bloomberg News. The opinions expressed are his own.

Source: Bloomberg

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