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Crazy Oil Prices Fuel Alternative Opportunities

Posted on: Friday, 19 August 2005, 06:00 CDT

Portfolio 21, a Portland, Ore., mutual fund that invests in environmentally friendly stocks, decided to investigate itself and see where it had the biggest impact on the environment.

"It was transportation," says Carsten Henningsen, co-founder of the fund. Driving back and forth to work and visiting companies burned lots of fossil fuel.

So Henningsen switched to biodiesel -- diesel fuel made from vegetable matter. Biodiesel emissions are much lower than those of regular diesel. Even better: You don't need a new type of engine for biodiesel, and the fuel is made here in the USA.

You may not be ready to switch auto fuel, but rising oil prices may have gotten you wondering: Isn't there some better alternative energy source to oil? And is there some way to invest in it?

Maybe. But right now, the best way to invest in energy is probably through old-fashioned energy companies.

The price of oil has soared from $43.45 a barrel the end of 2004 to $63.27 Thursday, a 46% gain. Gasoline now costs $3 a gallon in parts of the country.

Bizarrely, higher energy prices have shown little impact on official economic numbers.

"Travel is good, restaurant sales are brisk, and we find an acceleration of retail sales that surprises me," says John Lonski, chief economist at Moody's Investor Services.

But that may not last. "I don't think consumers have the ability to continue to perform this feat of spending rapidly while their energy bills grow at a double-digit rate," he says.

Clearly, retailing stocks could be losers if oil prices remain high. Wal-Mart, for example, warned Tuesday that high gas prices could cut its customers' spending.

Another likely victim: airlines. But airlines have two mitigating circumstances, says David Blitzer, chief strategist at Standard & Poor's. Rather than raise ticket prices generally, airlines are adding fuel surcharges, which somehow seem more amenable to the public. "Also, they're in such bad trouble, who notices the fuel costs?" Blitzer says.

As easy as it is to find losers from the run-up in energy prices, it's harder to find winners. Many alternative fuels and technologies are in the very early stages of development. Companies involved in alternative energy are often speculative, to say the least. "They're just burning through cash every quarter, and venture capitalists aren't seeing a return on capital," says Tony Tursich, co-manager of Portfolio 21 (ticker: PORTX).

One technology Tursich likes: fuel cells, which convert a fuel such as hydrogen into electricity with virtually no pollution. The fund owns a small stake in Plug Power (PLUG), one of the few publicly traded fuel-cell companies. Another company, FuelCell Energy (FCEL) is favored by Maurice Schoenwald, manager of the New Alternatives fund (NALFX), which specializes in stocks of alternative energy companies. "It's a great company," he says.

Unfortunately, neither company is making money at the moment. FuelCell lost $1.58 per share the past 12 months. Plug Power lost 64 cents a share.

In the future, we may rely on many different types of power. Hydrogen, for example, has been praised as a clean fuel with great potential. But it's still in the experimental stages. Two possible hydrogen plays: Quantum Fuel Systems Technologies (QTWW), which designs and engineers hybrid and fuel-cell vehicles. It, too, is losing money. Praxair (PX), an industrial gas company, makes hydrogen. The company earned $2.29 per share the past 12 months.

But if you're looking for alternatives, you might be better off with more traditional companies. FPL Group (FPL), for example, is one of the biggest producers of wind power in the nation. BP has big investments in solar and wind power, although they're a small part of the company's business.

And there's always coal, the alternative alternative power.

"We're very encouraged by the prospects for coal," says MacKenzie Davis, co-manager of RS Global Natural Resources. Peabody Energy (BTU), for example, mines low-sulfur coal, which produces somewhat less pollution than other types of coal.

Or you could consider investing in a natural resources fund, which typically invests largely in energy stocks. Somewhere in the portfolio the next ExxonMobil may be lurking.

And in the meantime, you can use the profits from the fund to buy biodiesel.

John Waggoner's column appears Fridays. E-mail: jwaggoner@usatoday.com

Source: USA TODAY

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