By Sam Mamudi, MarketWatch
Following President Barack Obama’s election and Democratic congressional victories in November, many investors expected strong political action to combat climate change and turned bullish on the green-energy sector.
But such optimism has since softened as political realities and the impact of the frozen credit markets hit the sector, also known as cleantech.
The Obama administration hasn’t moved as far or as fast on green energy as hoped, while cleantech companies, especially in the wind and solar areas, have found it hard to secure financing to build their infrastructure.
“A lot of folks thought that the minute we had a new administration, these companies would take off,” said Paul Hilton, director of advanced equities research at Calvert Investments, which invests according to socially responsible principles.
While there has been a rally in the stocks, some managers think that it’s still too early to be heavy in cleantech companies.
“We’re hesitant to move into pure play names in the renewables area,” said Andrea Reichert, research analyst at the Parnassus Funds, another socially conscious fund group.
There’s also the question of just how much cleantech can grow.
“I appreciate that cleantech is going to gain market share, but there are limits to what a lot of these technologies can bring to the utility grid,” said Brian Angerame, manager of Legg Mason Partners Capital Fund, a go-anywhere stock fund. For instance, reaping wind and solar energy can be inconsistent due to the weather, he said.
“As investors we’ve had a hard time justifying the prices that solar and wind companies have been trading at,” he said. In particular, he said it’s very difficult to calculate the returns that these companies can expect.
Political headwinds are another obstacle. While the passage of the Waxman-Markey bill through the House of Representatives was historic — committing the U.S. to emissions limits for the first time — it wasn’t as strong as first hoped.
The bill initially proposed that a minimum of 25% of U.S. energy come from renewable sources by 2020, but the final in the version that figure is effectively 15%. Much of the bill’s contents are widely expected to be watered-down further as it passes through the Senate.
Still, Calvert’s Hilton said, even the 15% standard will help cleantech companies: in 2006 just 2.4% of the U.S.’s energy was provided by renewable sources.
Old versus new
When it comes to energy, Richard Davis, London-based manager of BlackRock Commodities Income Investment Trust, is a believer in traditional sources such as oil and gas.
“The prospects for traditional energy are absolutely fantastic, and that won’t go away,” he said. “Once demand growth comes back, supply growth will still be limited.”
Angerame said that because it will take a while for clean energy to have a broad impact, so-called dirty energy will remain important. What’s more, demand from emerging markets is likely to stay high, if not increase, as those countries develop, he said.
Traditional energy suffered more in 2008 than cleantech stocks, as commodity prices tumbled in the second half of the year. Over the past 12 months, United States Oil Fund ETF is down more than 65%, trailing iShares S&P Global Clean Energy Index ETF , which is down about 55%, and PowerShares WilderHill Clean Energy is off about 50% in the same period.
But in the first six months of 2009, the Oil ETF outperformed its clean energy counterparts, up 24%, while the PowerShares and iShares ETFs were up 19% and 18%, respectively. Read more here.