Five stocks to play the green energy revolution

If you wanted to see a microcosm of the new American economy in action you could do worse than look at the Sears Tower. An icon of the Chicago skyline and once the tallest building in the world, it will undergo a £21.4 million five-year green renovation to cut its energy use by 80%.

This could once have been dismissed as corporate lip service to a utopian green ideal. But all the signs suggest the re-fit will look like money well spent. Green energy and the associated jobs will be the centrepiece of the near $1 trillion dollars in stimulus funds being planned around the globe in the next few years, with fund managers saying the money will ‘transform’ the sector.

Private capital anticipated the shift. For the first time, investment in renewable energy sources outstripped fossil fuels in 2008, at $140 billion and $110 billion respectively. A third of the investment was in Europe but this is changing rapidly.

Alongside the stimulus packages announced earlier this year, China has announced plans that, if realised, would allow it to generate more renewable electricity than the rest of the world combined within a few years. In the US, president Barack Obama looks likely to steer his carbon emissions bill through both houses of Congress largely intact. Once China and the US begin vying for market dominance in a sector, the wise money would not bet against them.

For the uninitiated, green technology can be a minefield, however. So where are the sector’s leading fund managers choosing to invest?

Bruce Jenkyn-Jones, director and head of listed equity at sector specialist Impax, said the crucial distinction is between early-stage technology, where an information advantage can be decisive but transitory, and heavier industry.

Solar generation, with low entry and manufacturing costs but potential for rapid market gains, is a case in point for the former, while engineering-intensive wind generation was already heavily consolidated.

US energy company First Solar would be a classic example of the high-growth, high-risk model. It has pioneered cadmium telluride technology, increasing efficiency and cutting costs of solar generation, giving it at minimum five-year development advantage. Beyond that point the company’s future looks less certain and at 30 times earnings is priced ‘for perfection’.

However, the technology is unlikely to be overtaken soon and, with a constricted supply of cadmium telluride, producers such as Canada’s 5N Plus still look cheap at just under 14 times earnings, Jenkyn-Jones said.      

At the other end of the scale, wind power manufacturers offer greater stability but less potential for transformational technology and market consolidation. Due to their lower cyclicality, some have not gained in the recent market rally to the same degree as solar manufacturers and still offer cheap access to a high-tech and research-intensive sector, where cheap Asian manufacturing is less of a threat.

Market leaders are available with little reflection of their developing market potential. Spain’s Gamesa is now trading at 10 times earnings, while Denmark’s Vestas is a little higher rated at 17 times earnings.

However, investors need not necessarily be faced with a binary choice between early-stage development and more mature technology, said Bozena Jankowska, manager of the Allianz Global Ecotrends fund.