First there was the dotcom bust of the late 1990s, then came the real-estate bubble that's deflating before our eyes. Next up: the green bubble. Alternative energy ventures have received a lot of great press, heavy investment and lip service from politicians in the last couple of years, but many of the nascent green industry's balance sheets are beginning to bleed red.
Among the hardest hit is T. Boone Pickens and his alternative energy hedge fund BP Capital, which has reportedly lost some $2 billion. The Oklahoma oil tycoon who leased hundreds of thousands of acres in West Texas for a giant wind farm, has put that project on hold, saying he'll have to wait for fossil-fuel prices to rise again in order to make the project economically viable. Oil was at $48 a barrel this week, down from a peak of $147 in July. Another canary in the coal mine: the once soaring market for carbon credits in Europe has tanked, as manufacturing firms worldwide slow production. Even the once promising sector of corn ethanol has gone bust, with the American company VeraSun declaring bankruptcy in October and other publicly held ethanol companies reduced to penny stocks.
Some sectors are brighter than others. Rick Hanna, an equity analyst at Morningstar, remains bullish on solar companies. "The United States promises to be one of the largest ultimate markets for solar power," he says. The sector has suffered in the short term from lower fossil-fuel prices, but Hanna's counting on the new Obama administration to put through a cap-and-trade program to help bridge the cost difference. "It's early on in solar's technological revolution," he says. "The cost will come down, and the cost of fossil fuel will rise, not just because of supply and demand, but also with the carbon-tax regimes, which may make it more expensive for traditional power to operate." And, regardless of what is happening in the United States, Germany, Japan and Spain continue to be major markets for solar energy (Germany is the world's largest, followed by the United States and Spain), aided by generous helpings of government investment.
The road for green mutual funds has been decidedly bumpier. Just one year ago, these funds, which tend to invest in more volatile small-cap stocks, were riding a wave of popularity. The Winslow Green Growth Fund, launched in 2001, was seeing 5-year average returns of 25 percent. The New Alternatives Fund was seeing a 20 percent average annual rate of return. In 2008, the Winslow fund, which invests in such companies as Chipotle Mexican Grill, Green Mountain Coffee and First Solar, hit a low of $16 (down from $30 a year ago) before rising into the low $20s this week. "I think we're seeing now that the market has found a bottom," says Matthew Patsky, manager of Winslow's Green Growth Fund. "We are seeing more money coming back into the market looking for attractive values, and it seems they are seeking out green companies in a big way." Environmentally friendly companies have high growth potential, especially with the incoming administration in Washington, he says.
Perhaps, but that possibility is little comfort to companies like Covanta Energy, a New Jersey-based company that converts waste into electricity and recycles metal. The company has relatively lucrative long-term contracts with municipalities around the country that pay Covanta a fixed price for collecting their trash while also receiving revenue from utilities that buy the electricity the company produces. Covanta gets even more revenue from additional electricity that it sells on the open market. "It's a very stable business model, and yet the stock has been slammed," says Patsky. Covanta stock hit a low of $15 in October, down from a 52-week high of $30, before rebounding to $21 on Friday.
Stock market volatility isn't likely to settle any time soon. According to Michael Herbst, a Morningstar equity analyst who follows mutual funds, weaker green companies will probably get weeded out before the crisis comes to an end—much the way weaker dotcoms failed after the first tech bubble burst, though he hesitates to draw too much of a parallel between the two economic periods. "During the tech bubble you saw people investing like mad in companies with no products and no revenues, nothing other than allure," he says. "That certainly is the case for some companies related to alternative energy, especially the very early stage companies. But you're also including in this bucket, well established, international companies like Vestas [one of the world's largest wind turbine manufacturers]." Over the next 10 to 15 years, says Herbst, the outlook for green funds is good, because "the need for alternative energy and clean technology is going to remain important." But the next two years look cloudy. "It's a very tough time for earlier stage companies," he says. You bet your bubble.