Progressive Investor Sample Article
What's Ahead for 2008; Investing in Banks?; Cleantech Portfolio; Analyst Interview
Issue 51: January 2008
What's Ahead for 2008
As most of you know, cleantech stocks sold off along with the overall market, having nothing to do with the fundamentals of the industry. Some stocks have started to come back, but the biggest names lost 40% of their market value this month. In our view, there couldn't be a better time to buy, buy, buy.
The reasons behind last year's boom haven't changed: concern about global warming, soaring fossil fuel prices and government subsidies in countries like Germany, Spain and the U.S.
With over half US states having adopting RPSs requiring renewable energy, utilities are now the largest customers, and solar and wind projects offer defensive investments with guaranteed yields. Therefore, renewable energy projects will continue to be built, and tax incentives are likely to be extended this year. The Senate Finance Committee just included them in the economic stimulus bill. If they don't end up in the final bill, it would put a crimp on U.S. installations, but most companies in the sector don't rely on the U.S. market.
It would be hard to beat last year's bull market in solar, where the benchmark Powershares WilderHill Clean Energy ETF rose 58% (8% in 2006) and most solar stocks rose 100-300%.
The emergence of dozens of Chinese solar companies, all scrambling to ramp up production, and greater availability of polysilicon is now leading to predictions of oversupply, lower margins and prices. Next year, supply could outstrip demand. Pundits still expect polysilicon supply to remain tight through 2009, after which prices should come down.
The other side to the story is that demand is being held back because prices are high. Solar prices are widely expected to reach grid parity over the next five years - if you could buy a solar system for your home for $4000 instead of $12,000 (after rebates), wouldn't you be more likely to jump in?
For now, the sector looks undervalued. As we've said many times, the industry is just taking off, it's no time to get out. Prices for solar companies haven't been this cheap since 2003! It's a perfect situation where demand, profitability and low stock prices are coming together.
If you want to play it safe, stay with vertically integrated companies that sell into prime solar markets - Germany, Spain, Italy, Greece, France, and Korea - such as Q-Cells (QCE.DE) and SolarWorld (SWV.DE), and those that produce solar cheaply - First Solar (FSLR) and Yingli Green Energy (YGE) stand out from the crowd. Suntech (STP) is a leader among the Chinese stocks. On the silicon side, MEMC (WFR) and Hoku Scientific (HOKU) are still strong stocks.
Solar power purchase agreements (PPAs), where solar companies pay for installation and maintenance and then charge the end user stable electricity prices over 20 years have become very popular. That points to growth for companies that offer the most perceived reliable, high quality solar panels - Sharp (SHCAF.PK), Kyocera (KYO) and pure play, Sunpower (SPWR), which is MMA Renewables' (the biggest player) partner.
Energy efficiency is widely expected to be a winner this year. Demand Response, which is being increasingly adopted by utilities, doesn't need government support to be economically viable, particularly in the commercial and industrial segments. $100 million for R&D got into the Energy Bill, which lays out a national action plan for demand response. That points to companies like Echelon (ELON), EnerNOC (ENOC) and in particular Comverge (COMV) because of it's multi-sector strategy [see our SB20 issue]. American Superconductor (AMSC) should benefit from the emphasis on the SmartGrid.
Biofuels, which received a big push from the U.S. Renewable Fuels Standard, should also do well after a miserable 2007, but investors should be wary of the likely blizzard of cellulosic initiatives, and of course, avoid corn-based ethanol. And bio-plastics and other biomass stocks that help manufacturers reduce their petroleum costs could also get attention.
Siemens (SI) and Philips (PHG) are poised to benefit as countries shift from traditional incandescent light bulbs to higher-margin compact fluorescent bulbs.
The green building industry continues to gain momentum and should have a fairly strong market this year on the non-residential side. Companies with international exposure and that serve the renovation market should do particularly well. Interface (IFSIA) continues to be a strong stock here.
We haven't even begun to talk about recycling stocks, which we're about to start covering. The industry is consolidating and experiencing strong growth. Recommended stocks include Metalico (MEA), Metal Management (MM) - which will soon merge with Sims Group (SMUPF.PK) - Schnitzer Steel (SCHN) and Casella Waste Systems (CWST).
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