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) and SunEdison (SUNE) 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.

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