The Clinton administration’s decision to dip into the nation’s oil stockpile helped pull prices back from 10-year highs. But it might be too late to curb a renewed push to tap renewable energy resources that has financial planners and mutual-fund managers seeking “greener” pastures for their energy holdings.
“When oil prices jumped in the 1970s there was interest in stocks (of alternative energy companies), but it abated when oil prices dropped and they haven’t really regained their popularity until recently,” says Stephen Barnes, a portfolio manager at Barnes Investment Advisory in Phoenix.
This doesn’t mean investors should dump shares of oil giants and flee to the arms of a company harnessing wind power. Alternative energy is developing slowly, which may mean a long gestation period for companies aiming to profit from these technologies.
For fund managers — and long-term individual investors — companies that can develop successful alternatives to oil-derived energy sources stand to be huge winners. Among the potential gainers are both small companies and established energy conglomerates with divisions engaged in harnessing such renewable energy resources as the sun, the wind and the tides.
Sunny Forecast for Fuel Cells
Weather-driven power sources, like solar and wind power, are fickle but the forecast for fuel cell technology is bright, says Barnes. Unlike traditional power generation based on the burning of fossil fuels or the splitting of atoms, fuel cells use hydrogen as a power source, and so only have heat and water as byproducts. But Barnes cautions that fuel cells produce power on too small a scale to make a huge impact on the energy business.
A problem for investors is that many alternative technology companies are trading at a premium, and so finding value is complicated, says Barnes. An example is Ballard Power, a Canadian fuel cell maker. Daimler-Benz purchased a 25 percent stake in the company for about $200 million in 1997 with the aim of applying fuel cell technology to a new generation of automobiles running on electric power. Ford purchased a smaller stake in 1998. Since then, Ballard’s stock price, which traded up from just more than $30 in January to its current price of around $115, has risen too high to be considered an alternative energy bargain.
The biggest push for fuel cell energy is in the automobile market, with electricity generation down the road. “Our strategy is to find reasonably priced participants in the alternative fuel space,” Barnes said, “so we’re looking at companies with subsidiaries in an advanced stage of development or at buying into companies that make this technology.” In time they are likely to unlock the value of these technology companies and spin them off, he adds.
A Search for Cutting Edge Technology
Other energy-related companies with high valuations include Calpine, Enron and Duke Energy says Justin Craib-Cox, a stock analyst at Morningstar.
But there are some companies where value can be found, such as Avista in Spokane, Wash., which operates a fuel cell unit and a local power utility. “They have missed their earnings targets and so they are discounted a lot,” he says. “In the long term they look pretty good.”
Given an increased demand for energy, a number of utilities and independent power companies are looking for ways to develop cutting-edge technologies, says Craib-Cox. Many are aiming to make the transfer and sale of power between utilities more efficient, he says. These companies include El Paso Energy, Southern Co. and TXU Corporation — all are profiting from the rising price of energy and renewed interest in the utility sector.
A company worth watching is Arlington, Va.-based AES, which aims to help large industrial companies to make their power plants more energy efficient. “This company is growing very quickly and providing a lot of gain year-on-year,” says Craib-Cox.
Another beneficiary of the upsurge in this sector is New Alternatives, which is ranked second for total returns for the quarter ended Sept. 21, according to Lipper. The fund, which has over the last year has grown from $35 million to nearly $60 million in assets, has posted a year-to-date return of 67.5 percent.
Oil Prices Only Part of Story
About half of the fund’s investments are in alternative energy companies, including fuel-cell energy companies such as Fuel Cell Energy, and Plug Power.
The current price of oil, while it plays a role, is not the primary reason for the fund’s performance, says Maurice Schoenwald, who manages the fund with his son, David. “We have pursued alternative energy since 1982 when the fund started, but recently the technology has become cost-effective and some of these companies are competing with conventional energy providers.”
Still, investments in alternative technology remain speculative, warns Barnes. “What’s speculative is not the viability of the technology but what the company is worth. I think a really big issue is getting the company’s valuation right, which is hard when dealing with a company that is more concepts that fundamentals.”