So far 2008 has been a fascinating, if difficult, time. We are in a testing period, but one in which there are many lessons to be learnt. This period of volatility comes at an uncertain time for the fledgling area of alternative energy. Companies in this sector are generally going through very rapid growth phases, which require funding and investors with a healthy appetite for risk.
The two main alternative-energy technologies today are wind and solar. Wind is cost-competitive with coal-fired power in certain locations, while solar is rapidly working towards that goal and is likely to achieve it in some instances by the end of this decade.
The interesting point here is that the solar industry can learn a lot from the wind energy industry’s experience earlier this century. Post-bubble, the wind industry went through a difficult period, where valuations were excessive, funding was not available and companies did not have economies of scale. The result was plummeting stock prices.
Today, much of the solar industry does not have sufficient scale to deliver returns. Access to capital is extremely difficult and valuations in some places are excessive. You must therefore buy selectively. The major difference today is that there are a few players in the solar industry which are now at sufficient scale and are delivering returns. Some of these players also have sufficient access to the main bottleneck in the industry – polysilicon (the raw material required for solar panels).
We are in an interesting period, which will sort out the survivors from the also-rans. This leads to my three stock picks – all involved in the evolution of solar power.
Q-Cells (XETRA:QCE) is a leader in solar cell manufacturing, and has been more successful than peers in addressing the polysilicon shortage and reducing its costs. As the size of photovoltaic installations increases, a player with the size of Q-cells is ideally placed to benefit. On the technology side it has some interesting subsidiaries, which in future could add meaningful value to the company valuation. The stock price has recently been very volatile, hitting e102 in December, and e45 in March, but this has been down to investor sentiment, as the company itself has done nothing but beat guidance.
While the winners and losers may not now be immediately clear, what we can take as read is the explosion in solar power globally. Roth & Rau (XETRA:R8R) makes machines for solar-cell manufacturing. It has a very strong position and reputation in the industry and is now selling to a wide variety of clients. Its technology is unique and critical to the continued reduction in the cost of solar cells. The company benefits from long lead times and therefore substantial visibility to future earnings.
My last idea is on the smaller side – Xantrex Technology (TSX:XTX). Xantrex provides inverters to solar power plants. The inverters are used to convert raw electrical power to power in the form required to connect with the electric grid. This stock has not performed well since its initial public offering in March 2004, but the group has recently won new orders and seems poised to benefit as solar power continues to be installed.
The stocks Alex Illingworth likes
Stock, 12mth high, 12mth low, Now
Q-Cells, e102.85, e44.59, e73.05
Roth & Rau, e259.68, e66.12, e150.18
Xantrex Technology, CAD13.19, CAD4.61, CAD9.00