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Solar-powered hype, or buying opportunity?

Solar stocks are the feel-good investments of the hour. That's why you need to be careful.
/ Source: Fast Company

You watched "An Inconvenient Truth." You swore off your beloved Nike Airs back when the company came under fire for running overseas sweatshops. And every time you plunk that half-gallon of organic milk down at the Whole Foods checkout, you feel a little better about the planet.

So what about putting your portfolio where your principles are? That's where "The Meaningful Investor" comes in. As the private sector steps up with powerful, profit-driven solutions for huge world problems, a new and tantalizing possibility is emerging: the chance to do well while your money does some good.

I'm most emphatically not talking about socially responsible investing, which usually boils down to nothing more than avoiding "evil" stocks of tobacco companies and weapons makers, say--and sacrificing returns in the process. Instead, the premise here is that virtue need not be its own reward.

So call this a column about good greed. I'll be searching for investments where profits and the promise of a better world aren't at odds. Because this is an arena in which wishful thinking can trump sound judgment, I'll be taking a hard-nosed approach. Many "green" investments, for example, offer great stories and big ambitions, along with inflated valuations and unproven markets. Sound familiar, Internet investors?

Solar power is a case in point. There are a dozen or so publicly traded companies that manufacture solar materials or systems. And some big-name billion-dollar investors -- like John Doerr at venture firm Kleiner Perkins Caufield & Byers, or Bill Gross, founder of the infamous Internet incubator Idealab -- are beyond bullish on the sector. Their hyperactive interest is helping to overheat solar stocks. SunPower, for example, a spin-off of Cypress Semiconductor that makes high-efficiency solar-power cells, was recently trading at more than 166 times earnings. Again, sound familiar, Internet investors?

Solar still has one big economic problem: It costs roughly twice as much per kilowatt-hour as power from the grid. But an unusual confluence of events is changing that calculus and making even jaded investors wonder if there isn't something more to solar than hype.

First, of course, are rising petroleum prices. True, they're off their highs, but you'd have to be a Panglossian optimist to look at the Middle East and believe oil and natural gas will really become cheap again. Second, even as traditional energy prices rise, solar costs are expected to continue their descent. The cost of a solar kilowatt-hour has declined from 47 cents in 1990 to around 21 cents today, where it has been stuck for a while.

But all that venture money should start kicking in, helping companies refine their technologies and use fewer costly materials. Lower costs, in turn, will mean the ability to create more capacity. "We're seeing solar produced on a scale that's truly intriguing," says Scott Sklar, president of the green-energy consulting firm Stella Group.

The third force that's changing the dynamics of solar is government subsidies. Uncle Sam now gives a 30 percent tax credit to businesses that use solar energy, and no fewer than 15 states offer hefty incentives of their own. If you're a true free marketeer, this should give you the willies (and remind you, unpleasantly, of the $10 billion spent to subsidize ethanol since 1980). But the hand of government is undeniably squeezing the cost gap between solar and fossil fuels.

One company that has been largely bypassed by the hype, but seems positioned to benefit from solar's surge, is Evergreen Solar. Evergreen makes photovoltaic modules -- the main component in solar-electric systems -- using a proprietary, cost-effective technology.

Evergreen recently announced a four-year agreement to sell $100 million worth of its modules to Mainstream Energy, a company that sells and installs commercial and residential solar- energy systems. Meanwhile, Evergreen's strategic partnerships with Q-Cells AG, a leading German solar company, and Norwegian solar powerhouse Renewable Energy Corp., have helped the company establish a presence in European markets, where -- natch! -- government subsidies are far more generous than they are in the United States.

Evergreen's stock price has fallen by about half since hitting a 52-week high of $17.50 last spring. That's because of worries that a shortage of silicon, the pricey material used to make solar cells, would hurt all manufacturers. But Evergreen should be one of the least-affected companies, thanks to its silicon-stingy technology.

"It's pushing the envelope when it comes to using less silicon per watt of electricity," says Mark Townsend Cox, founder of the New Energy Fund, which specializes in clean power. That could make Evergreen a buying opportunity, even though the company has yet to earn a penny. (Analysts are forecasting earnings of 16 cents a share in 2008.)

Betting on a single pure-play solar stock is a risky move, and not one to be made with the mortgage money. Investors looking to spread things around a bit may want to try the New Alternatives mutual fund. Its three-year annualized return of more than 15 percent  outperformed its midcap blend category, and the fund's father-and-son managers, Maurice and David Schoenwald, invest heavily in solar companies, both in the United States and in Germany. But they also invest in all types of clean-energy stocks.

So, if wind power suddenly shoves solar out of the limelight and becomes the hot energy alternative, the fund will have hedged its green bets. As perhaps should you.