Not so long ago, alternative energy sources such as wind and solar were the Rodney Dangerfield of the energy sector: They got no respect. Skeptics said government subsidies kept them alive, and were needed because renewables were not cost competitive against traditional energy sources such as natural gas and coal.
Things have changed. The New York Times recently reported that the "cost of providing electricity from wind and solar power plants has plummeted over the last five years, so much so that in some markets renewable generation is now cheaper than coal or natural gas." Years ago, no one thought air travel could be cost competitive against trains or buses. When was the last time you took a long-distance trip by train or bus?
Fossil fuel may not go the way of the Pullman car, but its days as the largely monopolistic source of energy are numbered. The Times cites a study by the investment-banking firm Lazard that found the cost of utility-scale solar energy to be as low as $0.056 cents per kilowatt-hour and wind at $0.014. Without subsidies, solar costs about $0.072 per kilowatt-hour at the low end, with wind coming in at $0.037. Compare these costs with those of natural gas at $0.061 per kilowatt-hour on the low end and coal at $0.066 and you can see renewables are already cost competitive, even without subsidies.
Let's limit our review to companies with market caps of $500 million or more. In the alternative energy sector, I have found two companies in the wind business that are not pure plays but are positioned to benefit from increasing demand for alternative energy sources such as wind. To make sure these two companies, General Electric (GE) and Brookfield Asset Management (BAM) are not just blowing hot air, I submitted them to the rigorous analysis of my guru strategies, which analyze stocks in the manner of such great Wall Street investors as Warren Buffett and Peter Lynch.
General Electric is a leading wind turbine manufacturer, though it does not disclose revenue from its wind business. Here is an observation from Morningstar about wind's significance to the company: "GE has changed its focus as the world has shifted; it now has a heavy focus on clean-energy products, such as wind and gas turbines. The strength of GE's competitive advantage is most notable in wind turbines, where the company was able to unseat longtime incumbent Vestas with its superior manufacturing execution and better customer satisfaction. Though the wind energy business is currently under margin pressure driven by oversupply, we continue to see GE emerging as one of the dominant players."
The analysis model I base on the writings of James P. O'Shaughnessy produces positive results for General Electric based on the company's large market cap ($270 billion), strong cash flow per share, huge number of shares outstanding (10 billion) and enormous trailing 12-month sales ($147 billion). The strategy takes the companies that pass all of these tests and then picks the top 50 based on dividend yield. General Electric's yield of 3.28% places it among the top 50.
Brookfield is a Canadian asset management company focused on renewable power, property and infrastructure, and it owns both hydroelectric and wind-power generating facilities. Ten percent of its assets under management are invested in renewables.
My approach to analysis based on Peter Lynch's investment strategy that identifies Brookfield as a shining light in the alternative energy sector. The company's price-to-earnings ratio relative to growth (PEG ratio) is a very strong 0.49 (1.0 is acceptable and below 0.50 is electrifying). Also in the company's favor is its equity-to-assets ratio of 18% vs. a minimum of 5% required by the strategy, and return on assets of 3.85% vs. a required minimum of 1%.
Both General Electric and Brookfield are in a variety of businesses, so their stock prices are only partially based on renewables. Yet both are deeply committed to the wind energy sector and should be able to ride the thermals of this high-flying industry.
