The Power and the Story: Breaking Down the Alternative Energy Plays
So, new power's the next new new thing. But will the end of the story be the old old nightmare?
|The Junkie's Perfect Fund Portfolio|
|eBay Can't Carry Net Funds|
|Fund Firms Bet Alternative Energy is the Next Boom|
Let's take a closer look at why everyone's jazzed, and where these funds will be investing. Although most of these companies have a utilities or energy label, they aren't for widows and orphans. In fact, some are "story stocks" -- unprofitable companies with a great story or concept that has made them Wall Street darlings -- which lends them an eerie similarity to now-fallen Net angels.
Even if you're not interested in buying these stocks or new-power funds, they're probably starting to turn up in growth funds you already own. For that reason alone, it's probably a good idea to check out this basic overview of the most popular industries in this theme. While they're hot stocks now, not all of these story stocks will have happy endings.
The ExcitementThe buzz about the new-power theme is driven not just by California's current power debacle. The broader idea is that we haven't built enough power plants in recent years to run our prized digital economy. For instance, servers in beautiful Jersey City, N.J., run this Web site and there are seemingly endless floors of similar servers out there. They all can be seriously disturbed by outages that last just a second or less. The upshot: We don't just need more power, we need more reliable power. And because the utilities industry is deregulated, there could be a messy and profitable scrum to meet corporate and consumer power needs. "The hook to this whole thing is that the infrastructure of this country isn't correctly designed for this massive demand," says John Hammerschmidt, who will be the lead manager of the Turner New Energy & Power Technology fund when it launches on Feb. 28. "We need more power, more uninterruptible power and cleaner power. There are solutions and they're expensive, but they're cheaper than the problems that come with losing power." Now let's look at a few packs of companies that are seen as providing these solutions, starting with the most mature and ending with the most speculative.
Independent Power ProducersThese companies typically have newer and more-efficient power plants that run on natural gas, rather than coal. Some do sell power to local customers, but in varying ways they all are in the business of selling power at peak times to utilities that can't meet their customers' needs. The upside is that they can charge steep rates for this peak-time power, and because it takes five years to build a new power plant -- if the plants' neighbors grant permission -- these folks should be shoring up shortages for some time. Their efficiency can also help these shops compete for customers on price. "If you're a low-cost producer in a large, consolidating industry, you can attract more customers," says Justin Craib-Cox, a utilities analyst at Morningstar. On the other hand, these shops could have a tough time if they have to pay higher prices for the natural gas that runs their plants. They reduce their risks by signing both short- and long-term agreements. "The risk, in my view, is that natural gas prices will keep running up. Then you've got these plants out there that will have to pay two to three times as much as usual for gas. The other problem is that we're going to run out of natural gas supply if we keep using it up at this pace because all of the new generation is based on it," says Robert Loest, manager of the (IPSMX)IPS Millennium fund, where he holds shares of several independent power producers like Calpine (CPN) and AES (AES). Here's a watchlist you can use to track this industry -- including powerhouse Enron (ENE), which is loved by growth investors everywhere, including growth-fund titan Janus. Many of these stocks have had steep run-ups, but some have been knocked down recently as California haggles over what prices it will pay for the energy it needs. "We think these companies have tremendous opportunity for earnings growth over the next few years," says Roger Mortimer, co-manager of the (GTNAX)AIM Global Resources fund, which had Enron and Dynegy (DYN) among its top-10 holdings at the end of the year. "These companies are more expensive than they used to be, but valuation isn't an easy assessment. There isn't enough generating capacity and they solve that problem."
|Down With IPP? |
These independent power producers have drawn
attention in the race for new energy sources
|3-Year Average Return||Price-To-Next Four Quarters' Estimated Earnings|
|Duke Energy (DUK)||14.4||15.6|
|Source: Morningstar, BulldogResearch.com and Baseline/Thomson Financial. Data through Feb. 1.|
MicroturbinesThese are essentially tiny jet engines that can convert up to nine types of fuel into clean power. These are being used, on a limited basis and in beta tests, in buses, and they could be used in cars. But they also can help solve the uninterruptible power problem by taking up the slack when power dips or is lost altogether in a home or big company. "Microturbines are used most typically as backup systems for customers who can't lose power, like hospitals, for example," says AIM's Mortimer. "We're fairly young in the commercial deployment of the technology, but it's reliable." Young is right. Capstone Turbine (CPST), the major pure-play microturbine shop that's publicly traded, isn't profitable. The firm had its initial public offering just last year and the fast-growing firm currently trades at more than 130 times its sales, compared a 2.1 price-to-sales multiple for the S&P 500, according to Baseline/Thomson Financial.
|Big Capstone |
This microturbine company's price-to-sales
multiple is anything but micro
|3-Month Return||Price-to-Sales Multiple|
|Capstone Turbine (CPST)||-25.6%||145|
|Source: Morningstar and Baseline/Thomson Financial. |
Data through Feb. 2.
Fuel CellsThere are many different types of fuel cells, but most convert hydrogen to electricity with next to no emissions. This process has been known and used for years, but there's excitement about it now because they could be used to power everything from electronics to cars. Like microturbines, they could also be used as back-up systems for consumers and major corporate customers. "My standard line is that the market for fuel cells will either be huge or large," says Gregory Dolan, deputy executive director at the U.S. Fuel Cell Council, the industry's trade association. He points out that 60 million cars are sold each year, paving the way for a big market if fuel cells can crack it. That said, Dolan says most of these applications are in beta testing and most commercial introductions are slated to start over the next three years. Even Turner's Hammerschmidt, a fuel-cell fan, is cautiously optimistic. "I think they're still kind of pie in the sky, but they do have some beta sites that are working well. I think they'll end up in cars. They're real and they're doing deals with automakers that are exciting. We're talking about years down the road, but it's out there," he says.
|Power Plays |
Here are the fuel-cell companies that
investors are getting a charge out of
|3-Year Annualized Return||Price-to-Sales Multiple|
|Ballard Power Systems (BLDP)||46.5%||272|
|FuelCell Energy (FCEL)||134||54|
|Plug Power (PLUG)||N/A||104|
|Source: Morningstar and Baseline/Thomson Financial. |
Data through Jan. 24.
The Junk PileThe odd, small world of shareholder-run funds is planning to join the tony hedge fund club. StockJungle.com, the online money management that brought you the (SJCIX)Community Intelligence fund, where pros choose among amateurs stock picks, is sifting through the 20,000 folks that run virtual portfolios on its Web site to find regular folks with an irregular knack for picking stocks. The idea is to cull 10 amateurs with the best returns running portfolios with different styles and, after a background check, give them each up to $2 million to invest. The best will eventually get their chance to run a hedge fund, according to a company press release. Because hedge funds, which fly under regulators' radar screens, typically are only available to millionaires, it's logical to wonder if many well-heeled types will really want to give that much money to the winners of this investment talent show -- the first amateur the firm picked is Dr. Chirag Amin, an orthopedist, medical textbook author, and investing junkie. The Community Intelligence fund, launched in November 1999, only lost 1.7% last year, beating 90% of its big-cap growth fund peers, according to Morningstar. But it seems few of the folks pitching the stock ideas in the fund actually own shares given its $4 million asset base, compared to $1.5 billion for its average competitor. Whether this concept succeeds or fails, I think it's probably a better marketing idea than an investment idea.
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