Outlook 2008: Alternative Energy Companies Will Power "Green" Profits in the New Year

Editor's Note: This is the Seventh Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008

If "green" investors want to succeed in the New Year, there's really only one thing to remember: In 2008, alternative energy is an alternative no longer.

The world's effort to rescue the earth from years of pollution and environmental neglect came of age in 2007, as "green" investors sent shares of environmental stocks 50% higher [as determined by the WilderHill Clean Energy Index].

As most sectors fell victim to the subprime-led U.S. credit crunch, the declining dollar, the slowing U.S. economy or a combination of all three, environmental stocks were stalwarts. And the good news for would-be "green" investors is that 2007 was only the start of a multi-year growth story.

Today, roughly $1 out of every $10 invested in stocks in the Unites States is flowing into environmentally conscious companies. And that ratio can only increase. As such, when investors position themselves for 2008, don't just look for an encore - expect a virtuoso performance. Indeed, this year's returns will at least equal the double-digit gains of 2007, and could well eclipse them.

Why Red China is Going Green

For years, emerging markets investors and businesses with global aspirations have looked the other way with regards to the growing environmental catastrophe that is much of emerging Asia. In the past few years, however, Asia - and especially China - are experiencing mounting pressure to clean up their environmental acts. It's a controversy that is going to escalate, sending environmental-sector stocks even higher.

China is burning so much dirty coal, so inefficiently, that it's under explicit pressure to save energy. At its current rate of energy consumption, China will account for roughly one-third of the increase in global energy usage between now and 2030, and most of that will be generated by coal, according to the International Energy Agency.

Simply put, China will use cheapest technology powers the country has. If that means pollution so thick, you can taste it the moment you open your eyes in the morning, so be it. That's the price that the environment is paying for playing host to the fastest-growing economy in history.

China has largely scoffed at efforts to apply mandatory caps on carbon and sulfur emissions. And no real attempt has been made by the government to fund the costs of bringing alternative-energy power sources on-line.

China missed its target for energy saving last year, and is on pace to miss its goal of cutting energy consumption by some 20% [measured by units of gross domestic product] by 2010, according to The Wall Street Journal.

However, thanks to the Asian culture's fear of "losing face," a dramatic about face is in the offing for the mighty Red Dragon - and soon. The Chinese capital, Beijing, will play host to the 2008 Summer Olympics, which begin in early August [according to the official schedule, the opening ceremony is set for Friday, Aug. 8]. For the first time, the world will get to see firsthand just how bad China's pollution problems have become.

That's why we expect serious commitments to come out of China before an athlete steps foot off a plane, injecting even more pop into a sector that last year was vaulted into the spotlight as a Wall Street darling. And those commitments won't end once the TV crews leave, either: Cleaning up China's environment will require a commitment measured in years, not months, and in billions of dollars.

When it comes to China investments, "the smart money is in the clean money," says Keith Fitz-Gerald, the investment director for Money Morning and The Money Map Report.

The Sun Shows the Way

The challenge for investors is knowing which areas will yield the biggest profits. Oxford Club Investment Director Alexander Green has specifically identified solar power as a green-energy sector that warrants close investment attention.

In a recent edition of Oxford's Communiqué, Green acknowledged the strength of the environmental sector but warned that many investment candidates come with drawbacks. He noted, "Hydroelectric power is dependent on geography. Nuclear energy faces issues surrounding the transportation and storage of radioactive waste. Only solar power, which uses free and readily available sunlight, comes without the baggage. And experimental solar cells are now reaching efficiencies of over 40%."

Using the world's most abundant resource - light from the sun - as a clean energy source makes imminent sense. But we're only just now channeling technology into an efficient and inexpensive means of harnessing the sun's power.

The Solar Energy Industries Association (SEIA) says that solar power will provide 50% of all new electricity in the United States within eight years, creating tens of thousands of new high-tech jobs, while helping to conserve natural gas and saving American taxpayers billions in energy costs.

We'll be the first to admit that estimate may be on the ambitious side, but the fact is, solar power is making serious headway in powering this great nation of ours. And today, it still accounts for only a small fraction of current energy use, giving the industry and its top-shelf companies huge growth potential. And when you add in the effect that the big new polluters such as China and India will have on the global environment, the solar industry is like a cannon packed with gold shot.

To demonstrate the power of solar, Google Inc. (GOOG)  - a known advocate of green energy - built the largest solar panel installation to date on its corporate campus. Each day, the company provides a real-time update of the power the panels are generating. At the time of this writing, Google had harnessed enough of the sun's light in the last 24 hours to power 3,191 hours of flat-screen television viewing, 817 hairdryers for 15 minutes, or 319 coffee makers for an hour.

More than $70 billion was invested globally in clean energy and clean technology markets in 2006 - a 43% increase over 2005. And the trickle-down of the massive investment dollars has reached the end-user level. For solar, it's meant the number of new systems installed in the United States has nearly tripled, according to the Interstate Renewable Energy Council.

China has quickly established itself as one of the world leaders in solar-energy technology. In 2007, half a dozen China-based solar-energy firms issued stock via initial public stock offerings (IPOs), and three of those companies were among the better-performing stock offerings of last year.

To play the industry, look to a cutting-edge, market-leading company like First Solar Inc. (FSLR) because whoever can make the best product the cheapest, wins.

First Solar designs and manufactures solar modules using a proprietary thin film semiconductor technology that has allowed the company to reduce the average solar module manufacturing costs to among the lowest in the world.

What's more, management expects its cost per watt to continue to decrease over the next several years, due to:

  • An increase of sellable watts per solar module.
  • An increase in production output.
  • A geographic diversification into lower-cost manufacturing regions.
  • And lower fixed costs, driven downward by economies of scale, making its panels even more appealing.

The only limitation to sales in the last year has been the company's production capacity. Customer demand has simply exceeded the number of solar modules the company is able to produce. But a fat order backlog is not a bad thing.

If funds are more you style, consider some of the better-quality exchange-traded funds (ETFs) that focus on "clean" technology. One of the top names is PowerShares WilderHill Clean Energy (PBW).

[Editor's Note: Robert Williams, a veteran commodities trader, is the Managing Editor for The Oxford Club. For information on an Oxford membership, please click here.]Money Morning's "Outlook 2008" series last covered Uranium. Next up: Bonds.

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