What are your criteria for selecting alternative-energy stocks?
The fund holds companies of more $100 million in market capitalization and that devote more than half of their business to alternative energy. This is an industry more developed and advanced than people think; it holds a large number of high-quality, profitable companies.
We look for companies with strong cash flow return on their investments. Often, these companies are overvalued, so we use a valuation metric that looks at historical and future cash flows. We also want companies where market sentiment is improving, and finally, we seek stocks that have momentum behind them.
What are a few of the best-positioned companies?
On the solar side, one of the more interesting investments has been MEMC Electronic Materials. They do have some nonsolar exposure, but the majority of the business is solar. With the bottleneck in polysilicon, they've managed to lock in long-term contracts at very attractive prices, and they're a low-cost silicon manufacturer looking well set for the next two to three years. While much more silicon is expected to come to the market over the next few years, most of this will cost much more than MEMC's silicon currently costs to manufacture, so that the incumbents will continue to have a cost advantage and maintain operating margins.
A stock where we see the most potential from here is Suntech. It's the leading Asian solar cell and module manufacturer. While silicon supply is expected to remain tight through 2009-2010, Suntech has raised money, which has secured their future silicon supply. The company had hoped for silicon prices to fall in 2009, but locking in silicon prices today implies that they're concerned about the ability of the silicon industry to increase silicon supply faster than the growth in solar module demand.
How have these companies performed lately?
Silicon companies have been hit pretty hard. Wind turbine manufacturers have held their value well in the market. Biofuel companies continue to struggle, but that's more about the economics of the industry than the broader markets. Other than wind turbine manufacturers, there have not been very many bright spots in the alternative energy space lately.
On the other hand, there is very clear value in the stocks in this space. When we have gone through this patch of market turmoil, I think the industry is going to come through this as one of the most attractive places for investors to put their money.
