of the top 11 non-U.S. pure-play solar cell and polysilicon manufacturers was even larger at $58 billion, producing a global solar company market cap of nearly $80 billion.4 Moreover, the majority of thesesolar companies are profitable and the average industry earnings growthrate is about 30 percent. These figures illustrate that the solar industry hasclearly established itself as a solid investment arena, even for institutionalinvestors.In total, there are more than 60 companies listed on U.S. exchangeswith market caps over $75 million that can be considered pure-play cleanenergy companies. The median market cap for these companies is $500million. About one-half of these companies are profitable.In addition, there are many micro-cap companies that are popping upwith market caps of under about $100 million. Most of these companies aretraded over-the-counter on the OTC Bulletin Board (www.otcbb.com) orthe Pink Sheets (www.pinksheets.com). Investors need to be careful aboutinvesting in these stocks because these companies typically have limitedfinancial reporting, less SEC scrutiny, low liquidity, and high volatility. Inaddition, there are outright pump-and-dump scams that are occasionallyrun with OTC stocks.Yet, the flipside is that it is easier to find an “undiscovered gem” amongOTCBB stocks precisely because information is scarce and because WallStreet does not follow the stocks. The best advice for an investor is to thinkof an OTCBB or Pink Sheet stock as more of a “lottery ticket” than a stockinvestment. There is a very real chance you may lose a substantial portionof your investment, but there is also the chance that you will sometimeshit the jackpot with a micro-cap stock that ends up hitting it big by beingbought out by a larger company or by moving up to trade on the Nasdaq(National Association of Securities Dealers Automated Quotations) or NewYork Stock Exchange (NYSE).
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CLEAN ENERGY STOCKS LISTED OUTSIDETHE UNITED STATESThe United States is accustomed to being the leader in a variety of fields.However, when it comes to clean energy, the United States is far behind thecurve. Europe and Japan have a big head start against the United States inmost areas of clean energy. This is particularly the case, for example, in thesolar power sector, where virtually all the major global solar companies arebased in Europe or Asia.This book mainly focuses on U.S.-listed investments, but will still pointout some of the investment opportunities in clean energy available outside the United States. Investing in companies that are based outside theUnited States is easy if the company has an American Depository Receipt(ADR) that is listed on a U.S. exchange. An ADR is a certificate representingownership in the company’s common stock. For example, several Chinesebased solar companies have their ADRs listed on U.S. exchanges, thus making it easy for U.S. investors to buy the stock. These companies include, forexample, Suntech Power Holdings (NYSE: STP), LDK Solar (NYSE: LDK),Yingli Green Energy (NYSE: YGE), and others (Chapter 5 covers the solarindustry in detail).The situation becomes a bit more complicated when an investor wantsto buy a stock that trades on an exchange outside the United States. The investor has to make sure his or her trading account will allow the purchaseof non-U.S. stocks and many brokerage firms will charge higher brokeragecommissions for trading in foreign stocks. Moreover, an investor takes oncurrency exchange rate risk when buying an overseas stock since the investor is essentially long the currency needed to buy the overseas stock.For example, Renewable Energy Corp. (Oslo: REC NO) is the world’slargest pure-play solar company based on current market cap rankings. Inorder to buy that stock, a U.S.-based investor needs to first convert dollarsinto Norwegian kroner in order to buy the stock. The investor will thenbe long, not only the stock, but also the Norwegian krone. The Norwegiankrone has a fairly high degree of correlation with the euro but still tradeson its own Norwegian-based fundamentals.Investing in foreign stocks and being long foreign currencies can actually be a good idea for many U.S. investors since globalization is expandingand is reducing the importance of the dollar’s role as a reserve currencyin the global financial system. The U.S. dollar also remains vulnerable tothe massive U.S. trade deficit, which shows little sign of abating in coming years and is causing the daily outflow of more than $2 billion a day indollars to foreign recipients. Moreover, Asian central banks are looking toreduce the rate at which their dollar reserves are growing.
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In the clean energy sector in particular, investors need to considerinvesting in non-U.S. stocks since the majority of the world’s clean energy stocks are traded outside the United States. While investing in nonU.S. stocks involves some information difficulties and exchange rate risk,the rewards can be large for venturing outside the United States in thefield of clean energy. Web sites that have good information on globally traded stocks include www.bloomberg.com and finance.google.com,among others.
LARGE-CAP STOCKSThe clean energy revolution is touching companies of all sizes. Many largecap companies are actively trying to take advantage of clean energy trends.Investors should consider how clean energy trends affect any large-capstocks that they may own.A large-cap company cannot be considered a pure play on clean energy trends since the revenue and earnings that a large-cap company mayderive from clean energy is probably miniscule compared with its overallrevenue. An investor is therefore not gaining any significant exposure toclean energy by investing in a large-cap company, unless the clean energycomponent at that company promises to have a very significant impact onearnings down the road. Investors interested in investing in clean energytrends should therefore focus on the small and mid-cap companies thatderive a significant portion of their revenue from clean energy.While large-cap companies cannot be considered a pure-play on cleanenergy, there are some large-cap companies that will benefit more thanothers from clean energy trends. General Electric (NYSE: GE), for example, is the U.S. large-cap company that is the most heavily involved in theclean energy industry. GE has collected its clean energy products underthe brand name of “Ecomagination” and has devoted an entire Web site tothe product line (see ge.ecomagination.com).GE’s Ecomagination brand includes a wide variety of products including wind power systems, lighting, cleaner locomotives, clean coal plants,CO2 sequestration technologies, clean water technologies, water desalination plants, and others. GE is expanding its R&D in cleaner technologiesfrom $700 million in 2005 to $1.5 billion by 2010. GE originally targetedits Ecomagination product sales at $20 billion by 2010, but GE Chairmanand CEO Jeffrey Immelt said in May 2007 that GE will “blow away” that$20 billion target.5 GE is aggressively pursuing clean technology as one ofthe main drivers of its overall growth. Yet GE’s stock price is driven by
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much more than its Ecomagination product line, which means there is noguarantee that success in the Ecomagination product line will necessarilydrive the stock price higher. For example, GE’s financial results forQ2–2007 were good but were undercut by disappointing performance inhealthcare and its subprime mortgage lending unit (which it now wants tosell), areas that have nothing to do with clean energy.In addition to the Ecomagination product line, GE also has an investment division called “GE Energy Financial Services” that is actively investing in clean energy projects and companies around the world (seewww.geenergyfinancialservices.com). GE Energy Financial Services has$14 billion in assets and invests “more than $5 billion annually in two ofthe world’s most capital-intensive industries, energy and water.”6 Much ofthis investment is in traditional energy projects, but GE Energy FinancialServices is making a big push into clean energy. GE Energy Financial Services plans to expand its investment in renewable energy to $3 billion bythe end of 2008 from $1.8 billion at the end of 2006.7 Kevin Walsh, managingdirector of GE Energy Financial Services, said that the growth opportunityin clean energy “is so apparent” that “we’re going after it.”8 Regarding solar power financing, Mr. Walsh said his company is doing its due diligenceon financing large-utility-scale solar projects and said, “We truly believeutility-scale solar will be an incredible opportunity.”9
GLOBAL PETROLEUM COMPANIESThe positive mention of petroleum companies in a book on clean energyinvesting may be heresy. However, from an investment standpoint, theforward-looking integrated petroleum companies are not likely to lose outfrom the clean energy revolution, and may even thrive as they continue tomilk profits out of the petroleum industry (which will last for decades) anduse that huge petroleum cash flow to leverage themselves into new cleanenergy opportunities.The large integrated petroleum companies can afford to wait and invest in whatever areas of the clean energy industry that turn out to be lucrative, thus ensuring their survival and profits for coming decades, evenif the petroleum business slowly dies out. There is an old business lessonabout letting the pioneers in a new industry get shot in the back with arrows, and then moving in safely to buy the ones that ultimately becomesuccessful.Some of the global-petroleum companies have already become significant players in the clean energy industry. Marathon Oil (NYSE: MRO), forexample, has partnered with Andersons (Nasdaq: ANDE), a modest-sized
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agri-business company, to build and run ethanol plants. If that partnershipworks out, Marathon Oil could easily afford some of its pocket change tobuy Andersons at some point in the future, thus taking complete controlof those ethanol plants and distribution channels. Through such partnerships, which are growing, a major company can get a good look at a smallcompany and decide later whether that small company might be a goodacquisition target down the road.BP PLC (NYSE: BP), formerly British Petroleum, is taking a very aggressive approach in developing its own clean energy business. BP is actually carrying out its “Beyond Petroleum” advertising slogan. This book willnot discuss the alternative energy initiatives for all the global petroleumcompanies, but BP illustrates what legacy petroleum companies can do tomake sure they are not rendered obsolete by clean energy trends. Here is aquick overview of BP’s alternative energy initiatives.BP’s Alternative Energy Effortsr Solar. BP Solar was a Top 10 global producer of solar cells in 2006and is targeting 600 megawatts of solar cell production by 2008 (seewww.bp.com/solar).r Wind. BP Wind is expanding aggressively and has begun wind projectsin the U.S. that will produce a combined operating capacity of 550megawatts. BP Wind has partnered with Clipper Windpower (London:CWP LN) to supply up to 2.3 gigawatts of wind power projects, whichis enough electricity to power about 630,000 homes.10r Hydrogen power. BP is working with GE on carbon gasification andcarbon capture programs that allow coal and petroleum to be usedto produce hydrogen for power generation, while allowing CO2 to becaptured. BP is also working with Edison International (NYSE: EIX) tobuild a $1 billion 500-megawatt hydrogen-fueled power plant that willuse petroleum coke as the feedstock and capture and store up to 90percent of the CO2 generated by the process.r Natural gas power. BP helps build and supply efficient natural gasfired power plants that have lower greenhouse gas emissions thanlegacy natural gas plants. For example, BP, in a joint venture withSK Corporation, built a large 1.1-gigawatt combined-cycle gas turbinepower plant in South Korea, which is the most efficient power plant ofits kind in the country. BP is constructing a 250-megawatt steam turbine power generating plant at its Texas City refinery and has approvalfor a 520-megawatt cogeneration facility in Cherry Point, Washington.r Biofuels. BP plans to spend $500 million over the next 10 years to findbetter biofuel solutions. BP and DuPont (NYSE: DD) have partneredto develop biobutanol from renewable sources. The companies expectinitial commercial-scale production to begin in 2007 with feedstock
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from British Sugar (which is a division of Associated British Foods thattrades in London under the symbol of ABF LN) in the form of sugarbeets. BP is working with auto manufacturers to prove the attractiveness of biobutanol as a gasoline additive. Biobutanol is an alcohol, likeethanol, but BP believes that biobutanol has superior performance attributes for use as a gasoline blending agent as compared with ethanol(see www.bp.com/biofuels).
CLEAN ENERGY EXCHANGE-TRADEDFUNDS (ETFS)There are only a handful of clean energy exchange-traded funds (ETFs) andmutual funds, most of which have been launched in the past two years.However, more clean energy ETFs and mutual funds will be launched incoming months and years due to strong investor interest in the sector anddue to the expanding pool of stocks available to buy in the sector. Thereader can find the latest list of clean energy ETFs and mutual funds onthis book’s companion Web site at www.ProfitingFromCleanEnergy.com.A clean energy exchange-traded fund (ETF) seeks to track an underlying index that is comprised of a list of clean energy stocks. An ETF isnot trying to pick good and bad stocks—it is just trying to track the index,for better or for worse. The main advantage of a clean energy ETF is thatthe investor can invest in the whole clean energy sector at a relatively lowcost, as compared with trying to choose a diversified portfolio of individualclean energy stocks. However, investing in an ETF means that both goodand bad stocks are averaged together, meaning that performance may onlybe average. In addition, investors should recognize that the clean energyETFs hold mainly small, growth stocks, and that the performance of theseETFs can be volatile and even erratic. An investor would be well advisednot to use one’s core portfolio assets to buy a clean energy ETF and insteaduse a smaller portion of one’s portfolio that is earmarked for taking a swingat one of the more aggressive and speculative areas of the stock market.Before investing in an ETF, an investor should always examine the listof stocks held by the ETF since an investor is really just buying a basketof these stocks. If the investor does not like most or all of the stocks thatthe ETF holds, then the investor should not buy the ETF. For example,the PowerShares WilderHill Clean Energy Portfolio as of June 2007 held40 stocks broadly spread across the subsectors of ethanol, fuel cells, solar, power storage and management, power efficiency, and clean utilities.Top holdings included Echelon Corp. (Nasdaq: ELON), Cree Inc. (Nasdaq:CREE), Color Kinetics (Nasdaq: CLRK), First Solar Inc. (Nasdaq: FSLR),
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SunPower Corp. (Nasdaq: SPWR), OM Group Inc. (NYSE: OMG), CypressSemiconductor Corp. (NYSE: CY), Zoltek Cos (Nasdaq: ZOLT), AmericanSuperconductor Corp. (Nasdaq: AMSC), and Itron Inc. (Nasdaq: ITRI).A list of clean energy ETFs is shown in Table 1.1. Of the six clean energy ETFs shown, the PowerShares WilderHill Clean Energy Portfolio hadthe largest amount of assets under management at about $950 million, inpart because it is the oldest clean energy ETF (started in March 2005). Theother ETFs had assets of about $20 million or less.Advantages of the PowerShares WilderHill Clean Energy Portfolio include its liquidity and the sensible choice of the clean energy stocks in itsportfolio, but it also had the highest expense ratio of 0.71 percent versus0.50 percent or less for the other ETFs that hold U.S.-listed stocks. ThePowerShares Cleantech Portfolio has a broader mix of stocks due to its“cleantech” mandate rather than just “clean energy,” which is a plus fordiversification purposes. The PowerShares WilderHill Progressive EnergyPortfolio is not really a clean energy ETF but is more of a progressive fossilfuel fund since it owns companies involved in nuclear power and uranium,coal-to-fuel, and other companies involved with fossil fuels. The First TrustNasdaq Clean Edge U.S. Liquid Series Index Fund is slanted more towardselectronics and power solution companies than the more traditional cleanenergy mix.Regarding global clean energy ETFs, the PowerShares Global CleanEnergy Portfolio holds a broad range of 76 global clean energy stocks. ThatETF is anchored by some large-cap stocks (Sharp and Sanyo) and a 27 percent contingent of clean utilities, which should keep the volatility down butmay also limit the upside potential. The Market Vectors Global AlternativeEnergy ETF, by contrast, holds only 30 stocks, although those stocks arewell-chosen as the big global players in the clean energy industry.
GREEN MUTUAL FUNDSClean energy ETFs, because of their low expenses, can make attractive investment vehicles for short-term traders and for investors with a relativelyshort investment horizon. However, the clean energy business is a new andvolatile industry and there are a number of companies that are not goingto thrive over the long haul and that will drag down the performance ofthe ETF funds. Therefore, it can make sense for an investor with a longerterm horizon to consider one of the actively-managed clean energy mutualfunds, even though the expenses on a mutual are typically higher at 1.50percent to 2.00 percent of assets and front-end load expenses can be ashigh as 4.75 percent. Only an investor with an investment horizon of at
16Exch
AMEX
AMEX
AMEX
PBW
PZD
PUW
PowerSharesWilderHillClean EnergyPortfolio
PowerSharesCleantechPortfolio
PowerSharesWilderHillProgressiveEnergyPortfolio
ETF Name
WHPRO
$23
$22
$950
Assets(in millions)
0.70%
0.60%
0.70%
ExpenseRatio
24-Oct-06
24-Oct-06
3-Mar-05
FundInception
Global
U.S.-listed
U.S.-listed
Geographic
Slanted towardnuclear andcleaner fossilfuels; 15%large-cap
Broader stockmix due toCleantechmandate
Good mix ofU.S.-listed CleanEnergy stocks
Comments
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www.powershares.com
www.powershares.com
www.powershares.com
Web site
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CTIUS
ECO
IndexTicker
JWPR076-Asplund
ETFTicker
TABLE 1.1 Clean Energy Exchange-Traded Fund (ETF)
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NYSE
QCLN
GEX
First TrustNasdaq CleanEdge U.S.Liquid SeriesIndex Fund
MarketVectorsGlobalAlternativeEnergy ETF
AGIXL
CELS
NEX
$16
$18
na
0.65%
0.60%
0.75%
3-Mar-07
8-Feb-06
13-Jun-07
Global
U.S.-listed
Global
Good global listbut only 30stocks; strongon wind (19%)and solar (39%);40% in U.S.
Slanted towardpower stocks
Broad,diversiﬁed list of76 globalstocks.
www.vaneck.com/etf
www.ftportfolios.com
www.powershares.com
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Source: Company Web sites and Bloomberg.Note: Please check fund Web site for the latest information.
AMEX
PBD
JWPR076-Asplund
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least several years should even think about getting in a fund with a 4.75percent front-end load expense.The clean energy sector lends itself to stock-picking by professional investment managers who closely watch the industries and who are equipped(in theory at least) to separate the wheat from the chaff. Paying a front-endload expense and an annual expense to hire a professional manager canmake sense in an industry such as clean energy that has such strong potential and such a wide range of stocks with disparate potential.There are four clean energy or “green” mutual funds listed in Table 1.2.There are other green or environmental funds that are not listed here thatare managed by global banks and brokerage firmsThe two largest funds in the green mutual fund group are the Winslow Green Growth Fund and the New Alternatives Fund. However, thenew Calvert Global Clean Energy Fund, which was started in March2007, promises to be a formidable challenger. A brief profile of each fundfollows.
r Winslow Green Growth Fund (WGGFX). The Winslow Green GrowthFund pursues environmentally responsible investing. The fund waslaunched in 1994 and now has about $237 million in assets under management. The fund interprets its “green” mandate liberally and investsin a number of food companies such as Whole Foods Markets andGreen Mountain Coffee, with lower overall exposure to clean energyand cleantech companies than the clean energy ETFs, for example. Thefund at the end of 2006 held 50 companies with top holdings including Isis Pharmaceuticals (Nasdaq: ISIS), SurModics (Nasdaq: SRDX),Green Mountain Coffee Roasters (Nasdaq: GMCR), Fuel Tech (Nasdaq:FTEK), ThermoGenesis (Nasdaq: KOOL), aQuantive (Nasdaq: AQNT),NutriSystem (Nasdaq: NTRI), SourceForge (Nasdaq: LNUX), WFI Industries Ltd (Toronto: WFI CN), Whole Foods Market (Nasdaq: WFMI).The fund has an impressive 10-year annual return record of 18.25 percent. See www.wggf.com.r New Alternatives Fund (NALFX). The New Alternatives Fund wasthe first environmental mutual fund, launched in 1982. The fund focuses on alternative energy investments on a global basis. The fund hasabout $200 million in assets under management. The fund’s top holdings include Acciona SA (Madrid: ANA SM), Abengoa (Madrid: ABGSM), Gamesa Corporation Technologica (Madrid: GAM SM), OrmatTechnologies (NYSE: ORA), Schneider Electric (Paris: SU FP), Brookfield Asset management (Toronto: BAM/A CN), and Conergy (GermanXetra: CGY GR). The fund posted a large gain of 33.8 percent in 2006and its five-year average annual return is 15.86 percent. See www.newalternativesfund.com.
$201 mln$80 mln
NALFXGAAEXCGAEX
Calvert Global AlternativeEnergy Fund
Source: Company information and Bloomberg.
none
nonenone
none
BackLoad
1.85%
1.25%1.98%
1.45%
ExpenseRatio
31-Mar-07
3-Sep-8231-Mar-06
3-May-94
Inception
www.calvert.com/alternativeenergy/
www.newalternativesfund.comwww.gafunds.com
www.winslowgreen.com
Web site
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4.75%
4.75%none
none
FrontLoad
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na
$237 mln
WGGFX
Winslow Green GrowthFundNew Alternatives FundGuinness AtkinsonAlternative Energy Fund
Assets
Ticker
Fund Name
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TABLE 1.2 Clean Energy Mutual Fund List
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r Guinness Atkinson Alternative Energy Fund (GAAEX). This fundinvests in global alternative energy stocks. The fund was launchedin March 2006 and has $80 million under management. As of December 31, 2006, the fund held 55 stocks and the top holdings wereQ-Cells (German Xetra: QCE GR), Nordex AG (German Xetra: NDX1GR), Biopetrol Industries AG (German Xetra: B2I GR), Iberdrola SA(Madrid SMCE: IBE SM), Environmental Power Corp. (AMEX: EPG),Vestas Wind Systems (Copenhagen: VWS DC), Clipper Windpower PLC(London: CWP LN), REpower Systems (German Xetra: RPW GR), Climate Exchange PLC (London: CLE LN), and Fuel Systems Solutions(Nasdaq: FSYS). For more information, see www.gafunds.com.r Calvert Global Clean Energy Fund (CAEIX). Calvert recently launchedits Global Clean Energy Fund in March 2007. Calvert has been a pioneerfor 30 years in the area of socially responsible investing. The fund intends to invest in about 150 companies, mostly from the United States,Europe, China, and Japan. The fund intends to invest 80 percent in pureplays and about 20 percent in “market leaders” such as GE and BP, according to the fund manager. See www.calvert.com/alternativeenergy/.In addition to mutual funds that focus on buying green stocks, thereare “socially responsible” funds that invest in traditional areas of thestock market but exclude stocks that do not meet certain social or environmental criteria. Environmentally screened mutual funds are operated by the Sierra Club (www.sierraclubfunds.com), Spectra,11 Portfolio21 (www.portfolio21.com), and others. Socially responsible investing hasgrown rapidly in the past few years and assets under management are nowas high as $2 trillion. An excellent source of information on socially responsible investing can be found at the Social Investment Forum’s Web site atwww.SocialInvest.org.
GLOBAL ETFs AND GREEN MUTUAL FUNDSInvestors should seriously consider the clean energy ETF and green mutual funds that are global in scope. As mentioned before, there are onlyabout 60 pure-play U.S.-based clean energy companies, whereas there aremany more stocks globally. Mutual funds that invest in global clean energystocks include the New Alternatives Fund, Guinness Atkinson AlternativeEnergy Fund, and Calvert Global Alternative Energy. Clean energy ETFsthat invest in global stocks include the PowerShares WilderHill Progressive Energy Portfolio, the PowerShares Global Clean Energy Portfolio andthe Market Vectors-Global Alternative.
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21
FUTURES AND OPTIONSThere are a variety of futures and options contracts that are tied to theclean energy industry. In the biofuels market, for example, the ChicagoBoard of Trade has an ethanol trading complex with futures and swaps.There are various futures and options contracts on ethanol feedstock products such as corn and sugar (for ethanol) and palm oil (for biodiesel) atvarious exchanges around the world. There are carbon allowance futurescontracts at the International Commodity Exchange (ICE). Trading opportunities in these areas will be discussed in more depth later in the book.
INVESTMENT CRITERIA FOR PUBLICLYTRADED STOCKSThis book focuses on identifying the clean energy companies that havepublicly traded stock and that have market caps at least $75 million. However, not all of the companies listed in this book as participants in the cleanenergy industry will represent a good investment. In setting out the criteriafor choosing attractive clean energy stocks, we start with some standardinvestment criteria:
r Industry with an attractive and scaleable profit model.r Company has a protected niche or a unique strategic advantage.r Company has a current or strong promise of accelerated earningsgrowth.
r Company has a strong and proven management that can deliver results.With the clean energy industry, we are mainly operating in the investment style known as small- and mid-cap growth. In other words, we aremainly looking at small- and mid-cap companies that are in a high growthmode. This raises some additional investment challenges, as comparedwith investing in more stable, large-cap stocks. Small- and mid-cap growthcompanies operate in fast-growing industries where there are a myriad ofproblems including disruptive technology change, difficulty in commercializing even promising technologies, difficulty in gaining sales traction, unclear paths to profitability, a shortage of capital, volatile financial results,among many others. Quite simply, we need to be very careful about choosing clean energy stocks. We cannot simply invest in a company that tells agood story or that has a technology that looks promising. We need to assesswhether there is actually large-scale demand for that company’s product
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and whether that company is capable of commercializing and selling thatproduct or service in a profitable manner.Here are some additional criteria that a small- to mid-cap clean energycompany should satisfy:
r Proprietary technology or a sustainable niche that will allow the company to compete against larger companies that have much greater resources.r Ability to commercialize a product or service and quickly scale up thatproduct or service to serve