Wind, Thermal, and Solar

03/17/2006 12:00 am EST

Focus:

Vivian Lewis

Editor and Publisher, Global Investing

Vivian Lewis is editor ofGlobal Investing and minutewoman.com. Here, she looks at a trio of wind, thermal, and solar plays. While she clearly notes that there are risks involved in each of these situations, she considers all three to be buying opportunities.

"Suntech Power Holdings (STP NYSE) is the first Chinese non-state owned (privately-owned) company to issue its stocks on the NYSE. The firm specializes in the design, development, manufacture, and sale of photovoltaic cells modules and systems. These are used in homes, businesses, and public sites, both to generate electricity for the grid, and for contained usage for example to run street or garden lamps, telecom relay stations, or mobile phone networks.

"STP was founded in 2001 by Dr. Zheng Rong Shi and has rapidly developed into a leading solar energy company. In less than 3 years since Suntech commenced its operations, it has increased its manufacturing capacity 12-fold. It sells its products in almost every major world market, so Suntech is among the new breed of successful domestic China-based companies with global ambitions.

"We do have a few warnings: There is a bottleneck in the next two years because of a shortage of polysilicon used to make solar cells and photovoltaic. In addition, the stock's price has increased a lot in the past two years. And, we'd point out a dangerous tendency for Chinese companies to invest a lot at the same time, all producing the same ‘hot product’ on the market.

"Despite these caveats, the stock is rated a buy in our model portfolio. In fact, antsy investors sold the shares after fourth quarter profits came in marginally below 2004 levels, despite doubled revenues. Hot hands with a short attention span don’t have time for renewable energy. For our long-term strategy, the decline is a chance for a better entry price.

"Our researching of alternative fuel stocks turned up Ormat Technologies Inc. (ORA NYSE), which makes power from geothermal and recoverables, and also sells plants it builds to other utilities. That makes it hard for analysts to classify, and also for institutions to justify buying, so it is under-owned by them. An institutional report I read compared it to stocks in the construction services industry, which is ridiculous.

"Moreover, ORA is an odd duck in its ownership as well. It is a US company, but its largest shareholders with a third of the stock are an Israeli private family company. The p/e ratio is pretty hefty at 43.5 times, and it trades are 6 times book value and 7 times revenues. The stock was recently down-rated by Lehman Brothers after the share price rose too sharply (nearly 37% this year so far, and 126% in the past 12 months). Other analysts tend to be negative. Because it is not an ADR, it does not qualify for our Global Investing model portfolio. Nevertheless, I bring it to your attention as I will be buying this stock for myself.

"Vestas (VWSYF Other OTC), our Danish maker of windmills, may be running into NIMBY resistance from property owners in Hyannis, but it is welcome in China. Vestas will establish a combined factory to assemble nacelles and hubs in Tianjin, to be built beside the blade factory already established. Vestas also bought more land in a location that gives good access to port, rail, and roads in China. The factory will open by the end of this year, and Vestas expects to deliver the first products in 2007.

"Under Chinese law, 70% of the value of turbines installed must be locally produced to supply the Chinese market. China will erect Asia’s largest wind turbines in Qingdao, Shandong Province, in collaboration with Germany. Five wind turbines will be installed offshore from Qingdao to generate power for the maritime events of the 2008 Olympic Games to be held there.

"All this would be great if Vestas were making money. But it is simply blowing in the wind for now. The firm continues to hit stumbling blocks and operational risks, and every quarter produces another bad surprise. The last reported quarter saw continuing problems of component shortages and cost overruns. Nevertheless, the stock remains a buy in our buy and hold portfolio."

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