Alternative Energy: An “Earth Day” Look At This Profit-Packed Sector
Wednesday, April 22, 2009
Guest Editorial by David Fessler, Advisory Panelist, Investment U
Editor’s Note: Today is Earth Day, so I hope you turned out the lights before leaving your home or office! Now in its 39th year, the annual Earth Day involves 140 nations. Its aim is to draw attention to climate change, pollution, the amount of energy we use (be it electricity, gas, water, gasoline, etc.) and promotes ways of conserving the planet by being more disciplined and cutting our consumption.
Except for disruptive protests from attention-seeking protestors (who do more harm than good), the wave of more useful “go green” publicity is helping to fuel a growing industry: Alternative, renewable energy. And this year’s theme just happens to be “The Green Generation” - a two-year campaign designed to spur increased usage of alternative energy and promote “green” technologies.
Alternative energy is a subject I’ve written about before - and so has my colleague at Investment U, David Fessler. David is the group’s resident energy and infrastructure specialist - and reports below on the state of the industry, and the profit opportunities within it for investors.
Martin Denholm, Managing Editor, Smart Profits Report
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Alternative Energy: Bubble Or No Bubble?
In investing terms, alternative energy can be a divisive subject.
On the one hand, the bulls believe it’s one of the greatest areas of profit potential. But on the other hand, the skeptics say green energy is forming a speculative bubble that could pop in as little as two or three years, leaving investors in the lurch.
However, while bubble conditions may be developing, they won’t cause a “speculative bubble.” In this case, there’s definitely more to the story…
A Thriving Climate For 3 Alternative Energy Resources
To those who argue that the alternative energy legislation now in place (with more on the way) will have the same damp effect as the efforts to increase ethanol production, you’ll get no argument from me that Bush’s foray into ethanol was misguided at best.
But unlike ethanol, solar, wind and geothermal tax credits have been catalysts for those respective industries and energized them.
Improvements in technology have resulted in generation costs on par with - and in some cases, below - conventional fossil fuel sources.
And with regard to solar in particular, costs per watt are on track to fall by another 50% over the next few years. And in spite of the lower costs, industry margins will be in the 35% to 50% range, three times what they are today. That’s a recipe for increased earnings if I ever saw one.
The $200 Billion Alternative Energy Sector
Over the past two years, about $200 billion has flowed into the alternative energy sector - about right for a capital-intensive business like that.
After all, if it weren’t flowing into alternative energy development, one of the few other places it could go would be to pay for higher oil. But perhaps it’s easier to describe where it won’t be going…
Forget fossil fuels. No one wants a fossil fuel plant in their backyard (and few are even planned, let alone being built).
Forget about any new nuclear power plants here in the U.S., too. Only a few are even in the permit stage (a 10-year process in itself), with subsequent construction lasting 10-15 years at a cost of $15-20 billion.
In fact, back in June 2008, Moody’s estimated that the cost of power from a nuclear plant could exceed $7 per watt - 10 times higher than solar’s $0.70 per watt cost. And then there’s the spent fuel issue, decommissioning, etc.
Beefing Up Alternative Energy… Not Foreign Oil
Given that the U.S. alone spends over $500 billion every year on foreign oil, there’s plenty of room to beef up spending on alternative energies like wind power.
Besides, we don’t really have a choice. Cheap energy is the key ingredient that drives healthy economic growth. And the problem with coal, oil and natural gas is that they’re all finite resources - with best deposits (those with the highest energy content) already used up.
Combine that with oil prices that will likely be closer to $100 a barrel by the end of the year… and interest in alternative energy will reignite.
And to those who argue that alternative energy is a speculative business, I’d counter with the fact that we’re talking about investment, not speculation.
For example, because of the tax credits I mentioned earlier, many start-ups already exist - particularly in the solar sector, where no less than 143 companies are currently in the thin-film segment of the industry.
Now, in an economic environment like this, there’s no question that they won’t all survive. But those who do will have viable, long-term businesses, supplying the world with much-needed alternatives to fossil fuels.
The Changing Face Of Renewable Energy
The renewable energy sector is changing.
Fossil fuels are on their way out. Green energy is on the way in.
The change won’t happen overnight, though. It’s going to be a 20- to 30-year process - which is why it’s destined to be such a great opportunity for investors.
It’s not just an “American social responsibility” thing, either. It’s global. Right now, in fact, our alternative energy progress is way behind many other nations.
Take Portugal, for instance. Over 60% of the country’s energy comes from renewable resources - and its goal is to hit 100%. China and Germany also have aggressive alternative energy generation plans underway.
And because of all the government tax incentives dangled in front of the sector’s players, cost-effective solar panels and wind generators are already in use, busily generating power that produces no greenhouse gases - and more importantly, don’t use a drop of oil when running.
Here’s the bottom-line…
Alternative Energy’s Target-Rich Destiny
The world has such a monumental need for cheap energy that alternative energy is destined to remain a target-rich environment for many years to come. Will some companies make for better investments than others? Of course… just like in any other sector.
But I don’t believe we’ll see a bursting bubble in two to three years. Actually, a mini-bubble popped last year when oil dropped from $147 a barrel to the current level around $48 today.
This drove many solar, wind and geothermal stocks down as much as 80% - with current valuations as low as they’ve ever been in many cases.
And that has helped to set up what could be one of the best sectors to invest in for decades to come.
Good investing,
David Fessler
P.S. Remember that when it comes to the alternative energy sector, you must balance hope with pragmatism. Not all technologies are viable and not all companies are profitable. While plenty of potential exists, don’t get sucked into that alone, at the expense of companies with solid business models and products on the market. Speculators may look at potential, while investors look at performance. So follow the money - and specifically, earnings.
For more on the emerging opportunities in the energy sector, be sure to stay tuned to Investment U.
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2 Responses to “Alternative Energy: An “Earth Day” Look At This Profit-Packed Sector”
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I would like to learn more about the investment oppurtunies from alternative energy companies.
Dave’s got right. And here’s an interesting investment twist: As Dave outlined, solar valuations (among other alt e’s) are very low. Subsidies on new systems are available. I installed a 5.8KW Evergreen PV system (made in USA) on my roof last month. At the same time I bought ESLR (then @ 1.35/sh). Well my system is up and running and the recent appreciation in share price (which still is way below real value) has paid for the unsubsidized part of the system. With net metering, my system is now printing money! Talk about an investment.
Seriously, the future is in distributed power generation and storage. As an engineer I hear all sorts of arguments why oil/gas/coal can’t be replaced as an energy source. Listen, a square meter patch of ground recieves a KiloWatt of sunshine energy while it’s illuminated. It’s just an engineering problem to turn that into useable power. With any luck engineers here in the US will get to the solution first.
Let’s get to work!