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August 14, 2002
Alternative Strategies for the Alternative Energy Sector
by William Baue
The recent downturn in alternative energy stocks is not necessarily reason for social investors to
abandon the sector altogether.
SocialFunds.com --
Social investors generally look favorably on alternative energy companies, which promote
environmental sustainability by using renewable energy sources. However, the recent downturn of
some alternative energy stocks may give social investors reason for concern, even in the context of
a bear market.
 AstroPower (ticker: APWR), which
produces solar cells that convert sunlight directly into electricity, plummeted to its 52-week low
of $7.50 on August 7, down from its one-year high of $28.527 on April 2. Two fuel cell companies,
Ballard Power (BLDP) and Plug Power (PLUG), also hit their
52-week lows around that same period. On August 5, Ballard fell to $10.12, and Plug Power hit
$4.04 on July 24. Both stocks hit their one-year highs (of $38.50 and $13.10, respectively) on
January 9.
"The alternative energy stocks certainly have taken a beating, for a multitude
of reasons," said Eric Prouty, principal for Energy Technology at the Boston-based investment bank
of Adams, Harkness & Hill (AHH).
"First and foremost, the market--especially the market for technology stocks--has not been
particularly good over the last year."
Mr. Prouty explained that during a bear market more
mature companies tend to fare better than companies that are still in the process of building their
business.
"A lot of these alternative energy companies are in the development stage, so
they've fared very poorly," said Mr. Prouty. "Companies in the wind industry are a bit more
mature."
The fact that many alternative energy companies missed their estimates cast a
pall not only on those individual companies, but also on the whole sector, according to Mr. Prouty.
"A lot of investors just exited the sector on the whole after the poor performance of a
few key players in the market," said Mr. Prouty
However, social investors need not abandon
the alternative energy sector due to declining stock prices over the short-term. Because so many
alternative energy companies are still in their development stage, investment risks run higher, but
so too do potential returns.
"It's a 'buyer beware market' and people have to realize a
lot of these companies, especially the development-stage ones, need to be invested in with high
risk capital," Mr. Prouty said. "We think there's going to be winners and losers within this
category. These stocks are certainly not for everyone."
Two strategies can help insulate
investors against these risks in the alternative energy sector.
"Either do a significant
amount of homework, or play the "basket" approach, where you buy a well-diversified basket of these
types of stocks," said Mr. Prouty.
One way to insulate against segment-specific risks,
such as the possible elimination of the California solar tax credit, is to invest in companies that
provide services across the entire sector. Meter-reading, for example, represents the gateway
between the consumer and the producer/marketer, while superconductors also have a diversity of
applications.
"Itron (ITRI), which makes advanced meter-reading technology, is a good
profitable company with a very clean balance sheet that dominates its market," said Mr. Prouty.
"Intermagnetics General (IMGC), a good profitable company in the superconductor arena that's been
hit pretty hard recently, also has a very clean balance sheet with a lot of cash, and it remains
cash-flow positive. AHH has 'buy' ratings on Itron and Intermagnetics General."
Some
smaller companies represent more risk but also more potential reward.
"Impco (IMCO) produces systems that
convert an engine to run off of natural gas or propane instead of diesel or gasoline," said Mr.
Prouty. "We think they're going to be a beneficiary if the economy gets better. Another company
we like a lot is Quantum
Technologies (QTWW), a sister company to Impco. They make fuel cell enabling technology, or
the 'plumbing' that enables a fuel cell vehicle to function. They work with GM, Hyundai, and
Toyota, among others."
Mr.Prouty said AHH has 'strong buy' ratings on both Impco and
Quantum Technologies, but quickly disclosed that AHH has been involved in banking deals with both
companies in the past. He also indicated that Winslow Management, an affiliate of AHH, owns stock
in both companies.
"We think that investors are going to have to be more selective than
just playing a category," Mr. Prouty concluded.
©
SRI World Group, Inc. All Rights Reserved.
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