This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Stellar Returns in New Energy Lure Those Burned by Past Bubbles

NEW YORK (TheStreet) --- Stellar rallies in many alternative energy stocks are drawing attention to a sector that is looking to reassert its credibility with investors and shake off a reputation as volatile and risky. 

As alternative energy becomes cost-competitive with traditional sources and a rising number of companies book profits, investors burned by sector bubbles are slowly being drawn back.

The cynicism of those with long memories is understandable. Take solar stocks: First Solar (FSLR - Get Report) and SunEdison (SUNE - Get Report) have rallied 138% and 359%, respectively, over the past year. But both are still around 77% off their all-time highs in 2007-2008 when overcapacity saw the profits of many operators plunge.

More recently, alternative energy subsidies in European markets were scaled back amid the sovereign debt crisis of 2010 and have only been returned over the past year to 18 months.

The performance of many alternative energy funds reflects this: The Calvert Global Alternative Energy Fund shed nearly 4% annually over the past three years and booked returns of just 2% annualized over five years. In 2013, the fund rebounded 23%.

Portfolio manager Treasa Ni Chonghaile said the past year has seen alternative energy sources become more cost-competitive, even as subsidies have been reinstated. "It is traditionally a high-risk and volatile sector but longer term it will have a more defensive profile," she said. "There are still lots of costs to be taken out and they will be as scale increases, it's only a matter of time."

Henderson Global Investors Global Care Growth fund co-manager, Hamish Chamberlayne, said the sector has moved away from being "overly reliant" on European subsidies. The downside, he noted, is margin compression for companies that are just beginning to see a pick-up in volumes. "I am quite optimistic about the next few years," the London-based manager said.

Chonghaile said broad-based price competition with traditional energy sources is still three to five years off, even as many alternative operators begin to secure long-term contracts and create dividend streams with their assets. This is expected to reduce price volatility, while country concentration risk is also falling as alternative energy becomes a global sector.

Beyond alternative energy providers, companies that operate more broadly in the industry are benefiting. Johnson Controls  (JCI) is the largest holding in Calvert's alternative portfolio; it's an American company that offers products and services to improve the efficiency of buildings and car batteries. The stock has jumped 34% over the past year and hit its all-time high in January. But like many in the sector, the stock has not been without volatility -- it trades at around $47 now, up from a low of $8.68 in early 2009.

Chamberlayne holds SMA Solar, a German stock he expects to break even in 2014 with a healthy revenue outlook. He has also held First Solar in the past, though describes its business model as "challenging" to understand and admitted he wishes he had held SunEdison more recently.

The strong returns from many alternative energy stocks over the past year also have been bolstered by the rally in small caps generally, fund managers said, given that few companies have yet to crack blue-chip status. Chonghaile said there are hundreds of "investable" opportunities remaining in the sector, with around 85% of the stocks in her portfolio booking profits.

Many traditional fund mangers remain skeptical on the investment story in alternative energy, pointing to a lack of liquidity in addition to the sector's traditional volatility.

Fort Pitt Capital Corp Senior equity analyst and vice president, Kim Forrest, voiced the view of many value-oriented managers. She avoids alternative energy companies on the basis that many are not yet profitable and points to alternative energy subsidies as an additional stock risk.

"But I believe strong alternative energy companies will create fantastic science, and deliver to the marketplace," she said of the longer-term view.

-- Written by Jane Searle in New York

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
FSLR $49.70 -2.10%
SUNE $29.97 -3.50%
AAPL $130.28 -1.14%
FB $79.19 -1.19%
GOOG $532.48 -1.40%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs