Investing in Alternative
The recession, coupled with the fall in the price of
oil, has adversely impacted alternative energy stocks, giving us an
opportunity to stock up on such stocks. As the charts below reveal,
alternative energy index funds are selling for 1/3rd or less of what they were
fetching at the end of 2007. This means that we might expect them to triple from
here when they recover from their current slump over the next year or two. But
unlike blue chip stocks that can at best expect to return to their October,
2007, highs, alternative energy equities have the potential for rapid
(historically 30% a year), long-term (10 years or more) growth. Alternative energy sources
account for only a fraction of 1% of all energy sources. Meanwhile,
alternative energy sources are getting cheaper and better. Wind energy is
presently cost-competitive with conventional power sources in selected markets.
First Solar claims to have just passed below the grid-parity "tipping
point" of $1 a watt. The U. S. government's just-enacted alternative energy
stimulus bill is funding research into very-deep well geothermal power plants,
that, it's hoped, might permit the installation of geothermal power plants
outside volcanically active regions, though it will probably be a while before
these feasibility experiments have been completed. Nuclear power is being
expanded around the world, although problems with perceived safety and nuclear
waste are deterrents. Tidal power is another potential player in coastal areas.
Energy conservation is probably the quickest and cheapest way
to cut our carbon footprints.
On the downside, only nuclear and geothermal sources
guarantee dependable, around-the-clock power delivery.
Guesstimating the Gains: Now to Mid-2010
.I'm personally anticipating a near-term tripling of
alternative energy index funds as they recover their end-of-2007 peak prices.
Looking beyond that, it might be reasonable to expect alternative energy stocks
to return to their historic 30%-per-annum growth rates, at least for a few
years We might speculatively postulate 0% growth for 2008 and 2009, with
30% per annum growth returning in 2010. Then, if the index funds were to
re-attain their end-of-2007 highs during the first half of 2010, we might
anticipate a 3½-folding from current values by mid-2010, followed by a
30%-a-year growth rate after that. How long could we expect to see a 30% annual
growth rate continue?
Guesstimating the Gains: Beyond 2010
Right now, one of, if not
largest company devoted exclusively to alternative energy, Vestas Wind Systems,
expects to report about $11 billion in sales in 2009, while one of, if not
largest conventional energy company, Exxon-Mobil, expects about $500 billion in
sales in 2009, or about 45 times the dollar receipts anticipated by Vestas Wind
Systems. This kind of ratio of 40/1-to-50/1 is probably a reasonable
order-of-magnitude ratio of conventional energy sales versus alternative energy
sales. (Although the ratio of alternative power output to conventional power
output might be 200-to-1, we might expect the dollar ratio to be lower than the
power output ratio because alternative power still costs more than conventional
power.) The next question we have to ask is: is the 30%- per-year growth rate
the rate of growth of power output or is it the rate of growth of dollars
allocated to the alternative energy field? I rather suspect that the
30%-per-year growth rate refers to the rate of growth of generated power rather
than the growth rate of monetary allocations. After all, a sizable part of the
justification for these increases in the installed power base is that the costs
of alternative energy are falling rapidly. And this raises the question: what
about the major players in the conventional-energy business? If there were a lot
of money to be made in this field, wouldn't they be jumping all over it? To some
major players in alternative energy... BP, GE, Sharp. But part of the money
going into alternative energy stems from government subsidies. I suspect that
the blue chip energy companies are waiting for this market to mature
before What usually happens is that as soon as a significant fraction of
the world's total energy budget starts to become diverted from the big
guys to the little guys, the big guys buy out a few of the little guys, and the
rest of the little guys go bankrupt. And after the buyouts, the big guys only
grow at approximately the same rate as the economy as a whole. I think a
tripling or better over the next two years may be in the cards, but after that,
it's hard to say. I think global warming and alternative energy might reach a
panic phase at some point down the road, but just who will profit from this
seems to me to be less certain.
A 30%-per-year growth rate leads to 2.2-folding in 3 years,
and to approximately quintupling in 6 years. At this historic rate of growth,
alternative energy sources would provide about 1/8th of the world's energy
requirements in 12 years... by 2021, and more than half by 2027.
I'm more comfortable
buying alternative energy index funds than I am individual stocks because
I could imagine it being hard to know which companies will survive
shakeouts and which areas of green energy will show the biggest profits.
For example, in addition to a number of competing technologies such as
solar thermal, smart power grids, energy conservation, and saltwater
algae-based biodiesel, there are uncertainties over which companies will
actually survive various shakeouts. As mentioned above, once a sizable market
develops for alternate energy, companies like GE, Chevron, and BP might muscle into
the marketplace and stomp pioneers like Q-Cell and Vestas, or at least,
runners-up like Suntech and Gamesys. Consequently, I'm inclined toward
such ETF's as the PowerShares Wilderhill Green Energy Technology Fund,
the Claymore/MAC Global Solar Energy Index ETF, TAN,
and the First Trust ISE Global Wind Energy Fund, FAN.
All three of these funds have plenty of headroom.