Octopus Jenny's Wind Energy Investment Report

(I did this research for a friend who was curious about wind energy investments. I'm not a pro; I just did this for fun and thought my other friends might be interested, so keep that in mind as you read...)

Wind power is the fastest growing energy source in the world. However, it is hard to invest in pure wind energy because many small companies are privately owned, most public companies are located in Europe, and the bigger companies (like GE) often do other things that progressive investors don't want to touch. (For example, GE Wind only makes up 1.5% of GE). Investing in wind energy is complex because wind companies range from turbine manufacturers (like Vestas) to parts manufacturers and utilities. In addition, the wind energy market in the U.S. depends on the existence of tax credits that serve as an incentive for wind developers and buyers.

Investing in Individual Stocks: Too hard, too risky for folks like us.

Aurora Investment News writes, "[This] kind of growth usually presents interesting opportunities for investors. But traders in the U.S. will find it frustrating to get in on it. The main reason is the mere absence of stocks available for U.S. investors."

Currently, most large, public wind energy companies are located in Europe (Denmark or Germany), and are listed on foreign stock exchanges. Germany has the largest wind market in the world.

Although there are two small U.S. based wind energy companies, they both have major drawbacks. U.S. Wind Farming (USWF.PK) is a penny stock that had a "nasty run-in" with the Securities and Exchange Commission. Western Wind Energy (WNDEF) is trading at $0.96 and has no apparent revenue.

According to Progressive Investor, the wind market is dominated by 10 major companies:

• Vestas (VWSYF.PK) - Danish company. The world's largest wind turbine manufacturer. 34% of market. Considered a "good long term investment" by Progressive Investor. However, Vestas is not listed by Charles Schwab (see below).
  
• Gamesa (GAM.MC) - Spanish company starting operations in the U.S. 18% of market. Considered a "good long term investment."
  
• Enercon (ENDC.PK) - Germany company. 15% of market.
  
• Nordex (NRDXF.PK) - Germany company. 2% of market. Considered a "good long term investment."
  
• GE Wind. 11% of market. (Impossible to invest solely in this sector of GE).
  
• Siemens. 6% of market. (Impossible to invest solely in this sector of Siemens).
  
• Suzlon. 4% of market.
  
• REpower. 3% of market. Considered a "good long term investment."
  
• Mitsubishi. 2% of market.
  
• Ecotecnia (Spain). 2% of market.
  

Other companies include:

• NEG Micon (NEGMF.PK) - Danish company
  
• Bonus (BONU.CO) - Danish company (appears to have been bought by Siemens)
  
• Accionia (ANA.MC) - a wind developer. Considered a "good long term investment."
  
• Novera (NVE.L) - a wind developer. Considered a "good long term investment."
  
• Boralex (BLX-A.TO) - a wind developer. Considered a "good long term investment." Their website points to the Boralex Income Fund - worth looking into later.
  
• Canadian Hydro Developers (KHD.TO) - an independent utility that develops and owns wind farms and market the electricity. Considered a "good long term investment."
  
• Clipper. Considered a "good long term investment." (But shares are not currently available to US residents, even though they are located in California).
  

Since most of these are foreign companies, they must bought "over the counter" using "pink sheets." (See this for information on how to buy OTC stocks).

What are Pink Sheets?

From what I can tell, buying something on the "Pink Sheets" is like going into a dark alley to buy drugs. The "Pink Sheet" is an electronic system published by Pink Sheets LLC that lists penny stocks and other OTC securities. Apparently, it's where good companies go to die. Companies listed there do not have to fulfill any requirements (audits, etc.) like they do to be listed on the NYSE and NASDAQ. The SEC sees companies listed on Pink Sheets as "among the most risky investments" and advises potential investors to heavily research the companies in which they plan to invest. However, some reputable foreign companies (Heineken, Volkswagen, Nestle) are also listed on the pink sheets. ("While these are hardly fly-by-night businesses, investors should still take extra care, because European accounting and disclosure laws are different.")

From Wikipedia: "Buying Pink Sheets shares is supposed to be difficult; broker-dealers are enjoined to weed-out "widows and orphans" who may get an e-mail or word-of-mouth tip about a small stock." (Does that include us?)

To buy a stock from the Pink Sheets, you must get an account with a brokerage firm. Schwab does not sell Vestas stock. Other brokerage firms include E*Trade, Ameritrade, Accutrade, etc. (I briefly had some stocks through a broker and found that their fees were way, way too high to justify my small amount of stock.)

Cautions about Vestas (from Aurora Investment News, undated)

This year, [an analyst] estimates Vestas' revenue growth will slow to 6%... Vestas is also trying to broaden its reach into the U.S., winning a contract to supply Horizon Wind with 127 mills for the Wild Horse project in Washington state. Vestas is building a factory in China to supply the U.S. market.

While recent earnings have been stronger than analysts were expecting, Vestas still faces a number of obstacles ahead. ...The company faces quality problems in some of the turbines it recently shipped, it's suffering a supply bottleneck and component shortage among its suppliers, and competition is growing among Gamesa, GE Wind and New Dehli-based Suzlon.

"It will take time for Vestas to solve these problems," Frederiksen said, noting that the risks "are in our view not discounted in the currently high share price." Vestas' shares have only risen further since his report was issued last month.

Such caution is essential in a sector where certain growth attracts competitors who compete on price and innovation to gain an edge. A correction in Vestas' price might provide a good entry point should the company fix the problems facing it. That leaves Gamesa as the prime candidate for now.

Wind power is an industry that will continue to grow, if only because governments are willing to subsidize the technology as the only real viable alternative energy that can be easily deployed on a large scale. But extra caution is needed: Not only are most players based abroad, but the fortunes in the industry can change as fast as the wind itself.

Investing in Mutual Funds

I've found three mutual funds that invest in wind energy. There are probably more, but this is all I had time for for now.

Portfolio 21 (PORTX)

Portfolio 21 (PORTX) is a Portland-based socially responsible investment fund that focuses on energy. Three-year returns have been about 15% (though in 2006 they were 24%). PORTX's Morningstar rating is 3 stars (out of 5). Schwab lists it as "average return, above average risk." I generally try to pick stocks where the return is greater than the risk (using the simplified Schwab symbols), so this is not one I would normally pick. In addition, out of their top 10 holdings, only 4 seem to have anything to do with wind, though the other companies might be peripherally related to wind. (They include Staples, IBM, Nokia, Siemens, Canon, and others). Every holding is under 3%, so they must invest in a huge number of different companies, but I was disappointed to see that the majority of these are not directly related to wind power. This might be OK if you wanted a local, socially responsible fund with a decent return.

New Alternatives Fund (NALFX)

The New Alternatives Fund began operations in 1982 as "the first environmental mutual fund," and the first with a significant concentration in alternative energy. The Economist called it "the greenest fund in the U.S." Their list of investments is clearly focused on the alternative energy sector. (There is some hydro in there too). This fund has a front load, which means you pay up front when you buy it (max 4.75%). The Morningstar rating is 2 out of 5. Like PORTX, it's "average return, above average risk." In 2006, the fund grew 33%, which is great; so far this year it's grown about 16%. In 2002, it went *down* 30%. (Since inception, it's grown 10%). The Reuters site gives this mediocre ratings for returns and expenses. In general, this might be OK if you weren't trying to make a lot of money but wanted to get involved in alternative energy funds.

PowerShares

These include the CleanTech and WilderHill funds that I wrote about in the previous post. (I bought the Powershares WilderHill Clean Energy Portfolio yesterday and have already managed to lose $18 on it. But it's a bad day for the market).

So what to do?

At this point, I would say forget investing in individual wind power companies until more publicly traded companies are available in the US. You could try to go through a broker to buy Vestas or Gamena if you were really committed to buying wind power. Or you could just sign up to get wind energy at home through your local utility, which isn't exactly an investment, but it does support wind energy. It might be interesting to invest in one of the mutual funds or PowerShare stocks, but it would depend on whether you're doing it to earn a lot of money or just because you're excited about wind energy. Over time, of course, these may grow a lot, so perhaps it IS the right time to invest in them. But so far they haven't had spectacular returns.