Wind Power Generating a Higher Profile

Like it or not, when we talk about alternative energy today, we're talking about wind turbines.

Every type of energy has the same upside: providing the power we need to run our economies and our lives. But each has its unique downside. In the case of wind turbines, there are a few. They are a blight to landscape or seascape. They shred birds that are sucked into their blades (5,000 a year in one California wind farm). They are expensive and difficult to maintain.

But they're not going away, and in fact they are becoming more commonplace. Wind turbines generated 59,000 megawatts of power around the world last year, more than quadruple the amount in 1999. The World Wind Energy Association estimates that figure will more than double again by 2010.

That kind of growth usually presents interesting opportunities for investors. But traders in the U.S. will find it frustrating to get in on it. The main reason is the mere absence of stocks available for U.S. investors.

The obvious choice would be GE Wind, the biggest American manufacturer of wind turbines, which posted revenue above $2 billion in 2005, more than tripling from 2004. But impressive as that is, GE Wind only makes up about 1.5% of General Electric's ( GE) $150 billion in revenue last year. There may be a lot of good reasons to hold GE's stock, but GE Wind has to be pretty far down the list.

Then there are the smaller U.S. based wind-energy companies, such as U.S. Wind Farming ( USWF) or Western Wind Energy ( WNDEF).

But they offer little interest to most investors. U.S. Wind Farming last traded at well under a penny on the pink sheets and had a nasty run-in with Securites and Exchange Commission officials last summer. Western Wind was trading at $1.66 and had no apparent revenue.

The biggest opportunities lie abroad. Denmark-based Vestas ( VWSYF) has 34% of the world's share of the wind turbine market, followed by Spain's Gamesa ( GTAF) with 18%, Germany's Enercon with 15% and GE Wind with 10%, according to a report from SustainableBusiness.com.

Big American funds can invest in these stocks in their native exchanges. In fact, two of Vestas' three top shareholders were American: Franklin Templeton owns 14.9% of the company, and Fidelity owns 5%. But for smaller investors, it's possible to invest in both these wind-power companies through the Nasdaq's pink sheets

Buying stocks on the pink sheets is usually courting disaster, because these companies don't need to register with the SEC or meet its requirements. But several well-run multinationals have stocks that trade there, including Heineken, Volkswagen and Nestle. While these are hardly fly-by-night businesses, investors should still take extra care, because European accounting and disclosure laws are different.

Vestas and Gamesa see average daily volumes between 30,000 and 40,000 shares a day. That's hardly liquid, but because the stocks track their European cousins, they are unlikely to be too volatile. Vesta's U.S. shares are up 50% this year in tandem with those traded on the Copenhagen Stock Exchange, while Gamesa's shares are up 45%.

Gamesa saw its revenue rise 34% to 1.77 billion euros ($2.25 billion), while net profit rose 10% to 182 million euros ($231 million). It has one advantage over its rivals, which is an early entry into China, where it has installed one-third of the country's wind-power capacity. It's also pushing for a larger share of the U.S. market, moving from 3% last year to an estimated 15% in 2006.

Vestas, which has been making wind turbines since 1979, is not only the larger of the two, it's more of a wind-power pure play, although Gamesa is working hard to focus on wind and solar. Vestas' revenue rose 51% to 3.58 billion euros ($4.55 billion), although it posted a loss of 192 million euros ($243 million).

This year, Jyske Bank analyst Jesper Klitgaard Frederiksen estimates Vestas' revenue growth will slow to 6% while the company swings to a profit of 138 million euros ($175 million.) Vestas is also trying to broaden its reach into the U.S., winning a contract to supply Horizon Wind with 127 mills for the Wild Horse project in Washington state. Vestas is building a factory in China to supply the U.S. market.

While recent earnings have been stronger than analysts were expecting, Vestas still faces a number of obstacles ahead. Frederiksen said in a report that the company faces quality problems in some of the turbines it recently shipped, that it's suffering a supply bottleneck and component shortage among its suppliers, and that competition is growing among Gamesa, GE Wind and New Dehli-based Suzlon.

"It will take time for Vestas to solve these problems," Frederiksen said, noting that the risks "are in our view not discounted in the currently high share price." Vestas' shares have only risen further since his report was issued last month.

Such caution is essential in a sector where certain growth attracts competitors who compete on price and innovation to gain an edge. A correction in Vestas' price might provide a good entry point should the company fix the problems facing it. That leaves Gamesa as the prime candidate for now.

Wind power is an industry that will continue to grow, if only because governments are willing to subsidize the technology as the only real viable alternative energy that can be easily deployed on a large scale. But extra caution is needed: Not only are most players based abroad, but the fortunes in the industry can change as fast as the wind itself.

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