BOSTON (TheStreet) -- Investors would have been better off owning almost any other industry besides alternative energy in the past year. High-tech solar, wind and turbine companies couldn't even beat dirty, old Big Oil.
But long-term investors have a chance to buy alternative-energy shares at attractive prices, says Les Satlow, portfolio manager at Cabot Money Management. "Green" companies such as First Solar (FSLR) and Aixtron (AIXG) afford advantages on their rivals, Satlow says.
Around the world, government subsidies and mandates have propped up alternative-energy companies, including stimulus-funded grants in the U.S. Evolving regulations are a risk, though unprecedented government support makes many clean-technology companies very attractive, Satlow says.
|Les Satlow, portfolio manager at Cabot Money Management|
"The long-term attraction to the space is that the function of government support is successful," he says. "The government is lending its near-term support to the industry to drive down marginal costs. If that's actually successful, like with the case of solar, it makes it competitive with conventional electricity production. If we even get anywhere close to that, it provides a tailwind to the industry that is potentially beyond what you can forecast or calculate."Salem, Mass.-based Cabot Money Management oversees about $480 million in assets and focuses on growth companies, defined as those that can increase earnings faster than the overall stock market. Satlow manages the firm's Core Growth Portfolio, which is up 1.3% in 2010 and 6.8% over the past year, although both trail the benchmark Russell 1000 Growth Index. Alternative-energy stocks haven't performed much better than traditional energy shares, based on the performance of comparative exchange traded funds. The Market Vectors Global Alternative Energy (GEX) ETF, the PowerShares Global Clean Energy (PBD) ETF and the iShares S&P Global Clean Energy (ICLN) index are each down more than 10% in the past 12 months. The Vanguard Energy (VDE) and the Energy Select Sector SPDR (XLE), which hold oil and gas companies, have outperformed alternative-energy ETFs. Energy as a whole is in a slump as investors are concerned that economic growth will remain sluggish. Exxon Mobil (XOM), National Grid (NGG), Exelon (EXC) and FirstEnergy (FE) are down 7% or more. In addition to the risk of new regulations, alternative energy has several other strikes against it. Green companies rarely pay a dividend, unlike Exxon, for example, which yields 2.7%. Many also have high price-to-earnings ratios, suggesting they're overvalued. While Satlow says investors must always pay attention to valuation, he contends that these methods may not accurately portray some of these companies. The green industry's potential is enormous, Satlow says. Still, he recommends investors be selective in their picks, while understanding that companies' businesses vary widely -- from small modules to large equipment to services. Investors should be mindful of how each part of the alternative-energy industry has a different cycle, Satlow says. "You can't just buy the solar group because the equipment will move different than the cell makers or the module makers," he adds. Like with most industries, the green space will offer genuinely attractive investment opportunities and failures. In this particular space, the major driver from Satlow's perspective is the regulatory one, which can become the biggest risk as well. The most important hurdle will be the removal of subsidies, allowing companies to compete on their own in a free market, Satlow says. For investors with a long-term horizon, Satlow offers four green stock picks his firm owns.
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