Mr. Molchanov: I cover alternative energy at Raymond James, currently 18 stocks. Of those, 11 are solar, which reflects the relative investability of solar in the U.S. equity market. The other seven companies comprise other technologies in the alternative energy arena, including wind, fuel cells and a handful of others. Certainly the higher-profile companies I cover, which generally have a market cap of above $1 billion, are overwhelmingly in the solar space: First Solar (FSLR), SunPower (SPWRA, SPWRB), Suntech (STP), Trina. Those are all in the solar space, and then the two exceptions are American Superconductor, in the wind arena, and Clean Energy Fuels (CLNE), in the natural gas fuel arena.
TWST: What are the most important trends driving growth in the alternative energy industry that you would tell investors to keep an eye on right now?
Mr. Molchanov: There are two key trends, and those can be positive but also present certain risks, especially over a short-term time frame. One of the trends is the technological evolution of alternative energy technologies. This can include more efficient solar cells, more scalable next-generation wind turbines and, further down the road, things like electrical vehicles and so on. Certainly as technology improves, these products come down the cost curve. By definition, they are becoming more cost competitive relative to the conventional types of energy, and that presents opportunities to investors. In other words, as alternatives enter the mainstream, the growth curve naturally will improve. The risk is that, as costs come down, the market price of these products is also coming down. Solar is a textbook example. As production costs of solar cells and modules decline, the average selling prices, or ASPs, of those products are also coming down. Sometimes costs come down at the same rate as prices, but sometimes prices fall faster than costs. And by definition, margins get squeezed in that scenario. So there can be dislocation in the short run as companies continue to come down the cost curve, even though in the long run, it makes the product that much more attractive.
The second of the two trends is public policy. Public policy in alternative energy tends to be quite favorable. Governments worldwide have incentivized and continue to incentivize alternative energy with financial subsidies, with tax benefits, with mandates or usage requirements, and other policies. But what the government giveth, the government can taketh away, and we've seen a number of examples. Again, solar tends to be the high-profile example here in places like Germany, where the government has begun to cut back on incentives, which in fact makes perfect sense. As economics improve, incentives ought to be phased out, but sometimes the rate at which they are phased out can be a little steeper than the industry would want or perhaps than would be prudent. And in that case, there can be dislocation.
Tickers included in this excerpt: AMSC, TSL
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