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Six undervalued stocks for a green future

The wind is blowing in the direction of alternative energy, says this U.S. advisory, which tabs six undervalued firms for major long-term gains.

Energy is a debatable topic. People can argue endlessly about global warming, fossil fuels, Al Gore and where to put a wind farm.

We don’t plan to start an argument here. But we do plan to discuss what the future of energy means for investors.

And it means a lot more than where the price of crude oil happens to be today, or a few months from now. It also means change. Alternative energy isn’t just the calling card of the green movement — it’s an established part of the energy business.

Although they may still be a slim part of the industry, the so-called “sustainable” energies, like wind and solar power, are bound to grow.

That won’t just create more sources of energy in the future, says a leading U.S. advisory. It will create new opportunities for investors.

The Complete Investor has six such opportunities to share with its readers, and a few surprising observations on often overlooked home truths about energy.

Reason to push ahead

“The U.S. has tended to take a woefully short-term view of pressing long term problems — front and center of which is energy,” writes Mr. Stephen Leeb, the advisory’s editor.

But that may be changing at last. In the past, a severe drop in oil prices “would have pushed funding for alternative not just to the back burner but off the stove completely.”

This time, Americans seem to understand that the reprieve in oil prices (and at the gas pumps) is temporary, and that oil and other commodity prices will come back with a vengeance, “a compelling reason to push ahead with alternatives now.”

And the consensus that fossil fuels cause global warming is growing, he adds, giving more impetus to alternatives like wind and solar power.

And there’s another aspect to the energy industry that isn’t always understood, Mr. Leeb says. “To produce energy, you need inputs of both energy itself and of many other essential commodities; but to get at these critical commodities requires — you guessed it — energy.

“To build a wind turbine, for instance, requires steel, energy and water; getting steel requires energy and water along with other materials; and getting water requires energy and steel.”

We may be close to the point where critical commodity shortages will make it impossible to build a comprehensive alternative energy infrastructure, warns the editor, so it’s time to act.

Outsized long-term gains

The U.S. government’s stimulus package earmarks some $100 billion for alternative energy. A lot more than was on offer before, says Mr. Leeb, but a mere pittance compared to what will ultimately be needed.

Renewable energies still make up less than 7 per cent of the energy America consumes. There’s a long way to go, the editor concedes, but we seem to be headed in the right direction.

“Green” companies with solid and growing revenues and profits are slated for “strong and accelerating growth,” he says. He reviews six “well established players” with strong growth rates.

All are trading at remarkably low price/earnings to growth (PEG) ratios, which means the market remains skeptical. Yet these stocks are “nearly sure bets to produce outsized long-term gains.”

Clearly so much more

Two of these stocks are regulars in this advisory’s investment portfolios. FPL Group (NYSE-FPL) is in both Growth and Income.

Wall Street treats this stock as a simple utility — and indeed it is Florida’s primary utility company — but “it is clearly so much more,” says Mr. Leeb. It has been investing its steady cash flow in alternative energies.

FPL has created an unregulated business, NextEra Energy Resources, which is America’s largest generator of renewable energies (wind and sun) and third-largest nuclear power company.

In fact, NextEra accounts for over 70 per cent of FPL’s revenues, with wind as its strongest division. Expect 20 per cent growth in this division in the foreseeable future, says the editor, especially with the help of the stimulus package. FPL has a dividend of $1.89 and yields 3.6 per cent. “The stock is sharply undervalued and remains an aggressive buy.”

Solar panels and wind

The other stock that has a regular portfolio spot is First Solar (NASDQ-FSLR), which is in Aggressive Growth. This company is the clear leader in the solar field, says Mr. Leeb, and its production costs are far less than those of its competitors.

First Solar will be a strong beneficiary of the administration’s energy initiatives. It will receive tax credits for its “bread and butter” solar panels, and for the large energy projects on its drawing board.

The stock has been “battered in the market,” says the editor. “Yet torrid long-term growth — 25 per cent or better — remains highly likely.”

On the windswept side of the equation, the biggest supplier of wind turbines in the world is Danish firm Vestas (OTC-VWQDRY). It has a 22 per cent share of the market, low costs and a history of strong execution.

Tight financing may create short-term ups and downs, but Mr. Leeb contends this stock is headed dramatically higher in the next few years.

Heat in the earth

There’s one more alternative — geothermal energy, which effectively means drawing electricity from the heat stored in the earth. The largest U.S. firm in this field is Ormat (NYSE-ORA).

Right now, Mr. Leeb informs us, companies like this must subsist on “low-hanging fruit, those areas most easily mined for geothermal output.” Still, these are plentiful enough to keep Ormat on a 25 per cent growth trajectory over the next five years.

Finally there are two fast-track higher-risk stocks for the more venturesome. Both are “unique franchises,” says the editor. Itron (NASDQ-ITRI) is the leader in smart metering, a big energy saver. American Superconductor (NASDQ-AMSC) makes superconducting wiring, which can save electricity, and special capacitors for wind technologies.

To many, these stocks may seem as speculative as the future of “green” energy. But if alternative energy keeps growing, those who got in early may find they’ve got a new power source in their portfolios. Have a fine Easter weekend, and we’ll all come back with our energy renewed.