Green Stock Market

Future Energy That Generates Profits Today
By CONRAD DE AENLLE
Published: July 21, 2007
ALTERNATIVE energy is considered to be good for the environment and good for the soul, but not so good as a way to make money. Generating power from renewable sources like wind, the sun and the earth’s own heat has a reputation for being unprofitable without government subsidies or sky-high energy prices.

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But for shareholders of a specialist mutual fund, it has been an easy way to generate smart returns. Guinness Atkinson Alternative Energy has returned close to 40 percent so far this year, better than all conventional energy funds in the database of the research firm Morningstar.
The rising cost of fossil fuels undoubtedly accounts for part of the performance. There must be more to it than that, however, because the fund showed healthy gains earlier in the year when mainstream energy prices were falling.
Edward Guinness, the fund’s co-manager, points out that demand is surging continually for wind turbines, solar panels and similar devices as consumers come to recognize that supplies of conventional energy will diminish or become harder to locate. At the same time, the industry has become more adept at managing the growth and profiting from it.
“These are serious going concerns with good management teams taking them through a period of fast growth,” he said. Unlike other technologies of the recent past that captured investors’ imagination, like biotechnology and the Internet, Mr. Guinness estimates that 85 percent of the three dozen or so companies in his portfolio will be profitable this year.
“As energy prices rise, more technologies become financially viable, which allows them to manufacture in scale and bring costs down,” he explained. “The field opens up more and more for alternative energy to play a substantial role” in supplying power.
Mr. Guinness, whose firm also runs much larger portfolios focusing on traditional forms of energy, favors three segments of the renewable sector: wind, solar and geothermal. The business model for the last one resembles the oil industry a century ago: invest money upfront, stick a hole in the ground and bank the profits as the earth’s heat is transferred, usually through steam or superheated saltwater, to electricity generators.
The fund owns stocks of two companies that do this on an industrial scale, Ormat in the United States and Geodynamics in Australia. A third holding is W.F.I. Industries, a Canadian company that amounts to a geothermal boutique, supplying pumps and pipes that are buried in backyards to power individual homes.
Wind was one of the first renewable sources to be commercially viable. Turbine manufacturing is especially profitable today, Mr. Guinness said, because demand is outstripping supply, sending prices higher.
He anticipates 25 percent annual sales growth for the sector over the next five years. His preferred vehicles for capturing it are the Danish company Vestas, regarded as the industry leader, and Gamesa in Spain.
Solar is less profitable but Mr. Guinness finds its long-term growth prospects more auspicious. He anticipates 30 percent to 40 percent annual sales increases.
“Solar could grow a hundredfold over 15 years,” he said. “It’s an incredibly attractive area to invest in.”
He has doubled the solar component of his portfolio in recent months to 30 percent of assets. His choices include SunTech Power and Q-Cells, solar cell makers based in China and Germany, respectively, and MEMC Electronic Materials, a Missouri company that produces silicon wafers used to coat the cells.
TWO other holdings that do big business in solar are the Renewable Energy Corporation in Norway and the Colorado company Solar World.
Mr. Guinness added that he was shunning some of the larger solar businesses, like SunPower and Energy Conversion Devices, because their valuations are too rich. He is also wary of whole segments of the renewable energy industry, like fuel cells, which show little likelihood of winning in the marketplace, and ethanol because the plant materials used to make it are too expensive.
But he emphasized that he considers them exceptions in a field with a future that holds much promise and opportunity for those who want to do good and to do right by themselves financially, too.
“We see ourselves at the foothills of a long period of steady growth at high levels,” Mr. Guinness said. “We’re just now beginning to enter the sweet spot where costs are going down and the technologies are becoming economically viable with fossil-fuel technologies. That is going to support significant demand growth.”