Investing In Green Tech
Kerry A. Dolan, 02.02.10, 06:00 PM EST
Green tech stocks to buy in 2010.
Hoping to make money in the stock market by investing in green tech or alternative energy? It's not an easy sector to bet on, says Steve Milunovich, alternative energy analyst at Bank of America Merrill Lynch. "So many areas of alternative energy need government subsidies," he says, because the technology is still too expensive to compete with coal, oil and natural gas. "But if you can pick the winner, you can do really well."
Case in point: First Solar ( FSLR - news - people ). Anyone who bought shares of the solar panel maker soon after it went public in 2006, when shares traded around $20, has profited handsomely. First Solar shares now trade for around $113; the company has a market valuation of $9.6 billion.
Milunovich isn't particularly optimistic about investment returns in the solar sector as a whole these days. He has a neutral rating on First Solar and an underperform on SunPower ( SPWR - news - people ). "Solar has been a very poor performer for the last two years. Everyone's concerned about the German feed-in tariff reductions hurting the market," he explains. His recommendation for a solar investment now? Low-cost Chinese panel makers, including Suntech Power Holdings ( STP - news - people ), Trina Solar ( TSL - news - people ) and Yingli Green Energy Holding ( YGE - news - people ). (First Solar, SunPower, Trina Solar and Yingli Green Energy Holding are investment banking clients of Bank of America ( BAC - news - people ) Merrill Lynch.)
One energy sector where Milunovich sees growth this year is the smart grid. Utilities in California and elsewhere are installing two-way meters at residential customers' homes with the hope that people who have more information about their electricity use will ratchet down their consumption. A beneficiary of this trend is Itron ( ITRI - news - people ), a company that has been making electricity, gas and water meters for many years. Itron had revenue of $1.6 billion over the last four quarters and a market cap of $2.5 billion. Milunovich recommends the stock as a buy.
Another grid-related stock he likes: EnerNOC ( ENOC - news - people ), an intermediary between utilities and commercial and industrial customers. At times of peak demand, utilities can turn to EnerNOC and, for a fee, pay it to have large commercial users of energy cut back on their consumption. EnerNOC has installed software with its customers that can enable this to take place nearly automatically. Revenues are currently around $200 million but Milunovich says it could become a billion-dollar company. EnerNOC is the largest player in what's called the demand-response business.
In the lighting sector Milunovich recommends buying Cree ( CREE - news - people ), a maker of light emitting diodes. These lights use 70% less energy than traditional incandescent bulbs, but due to high costs they are still just a tiny sliver of the lighting market. Philips predicts LEDs could account for as much as 80% to 90% of the $100 billion general lighting market by 2020. Cree is already a pricey stock--it trades at 9 times its $650 million in revenues and 81 times its $67 million in net income. Milunovich advocates patience: "You look back at Microsoft ( MSFT - news - people ). It grows into the valuation."
