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Stock picks
The Next Boom
James Dunn - May 29, 2008
We’ve had an Asia boom, a tech boom, a biotech boom and a resources boom: where next?
Booms in various sectors come and go on the stockmarket. In recent years we have seen the great tech boom of 1999-2000, the China boom, a flurry of interest in biotech stocks, and then a succession of commodities becoming flavour-of-the-month on the market, such as nickel, uranium and most recently, coal and iron ore.
Investors who want to bypass the mundane compounding of retained earnings that is the more reliable way to build wealth on the stock market are always looking for the next boom. The latest wave that many of these investors are looking to catch is climate-change related investment – or to tap into a broader theme, ‘cleantech’.
That’s the term used to describe companies involved in renewable and alternative (to fossil fuels) energy sources, biofuels, energy efficiency, water purification technology, recycling, pollution remediation and new materials technologies.
Simon Bond, who runs the Newport branch of ABN AMRO Morgans, says the next market bubble is already forming, in the “hopeful alternative energy” companies.
“At the moment, this market is developing into a hotbed of alternative energy opportunities. Over 2008-09, this looks like developing into a full-blown bubble, very similar to the tech boom – in fact it will be the next tech boom. The same problem will be present, in that many of the companies involved will be yet to commercialise their technologies.”
There is a smattering of renewable energy stocks on the local market. For example, Babcock & Brown Wind Partners (BBW) has investments in wind power in Australia, Germany, France, Spain and the US; Viridis Clean Energy (VIR) has investments in wind power in Germany and the UK, power from landfill gas in the UK and US, and natural gas and process gas (gas captured from industrial processes) in Italy.
Operating renewable energy companies also include Energy Developments (ENE), which has landfill gas, coal seam methane (CSM) and natural gas projects generating power in Australia, the UK, US, France, Greece and Taiwan; and Queensland Gas (QGC), which is supplying CSM to two electricity companies in Queensland.
Companies with non-fossil fuels renewable energy potential include those developing geothermal energy using hot dry rocks (HDR) technology, which pumps water deep into the earth to form super-heated vapour, which drives energy turbines. The first flows of geothermal steam have been achieved by Geodynamics (GDY), and there are four other players in this field: Petratherm (PTR), Torrens Energy (TEY), Geothermal Resources (GHT) and Green Rock Energy (GRK).
“Climate change, carbon emissions and concerns about oil’s future supply are all coming together in a perfect storm,” says Bond. “We believe that the world’s addiction to fossil fuels will bring forward the onset of the alternatives – whether it’s hot-rock energy, or wind energy, or solar energy, or wave energy like Carnegie Corporation (CNM) is trying to get up. I don’t think you could dream up some of the new inventions that will be floated in the future. A lot of the solutions floated will turn out to be nothing more than hot air – but some of them will find some traction.”
Bond cautions that to many investors, alternative energy is not just an investment idea, it is a cause. “When you get a market like that, there will be investors who are prepared to push the market higher, not so much though greed – as there was in the tech boom – but hope. I think there will be non-financial reasons why some of these stocks will be pushed higher, and investors will have to be wary of that.”
Simon Kent-Jones, investment strategist at Ord Minnett, agrees that alternative energy is the logical next sector of the stockmarket to step into the spotlight. “Investors are certainly very keen on companies that can show some relevance in this field, but the trick for investors is going to be in sorting out which companies are closest to commercialisation.”
Just as in 1999-2000, says Kent-Jones, we could see companies that have not yet commercialised their technology bid to very high prices. “But I think an area like coal-seam methane, for example, is alternative energy that is successful in the sense that there are power stations being run off the gas that is tapped out. Queensland Gas Company (QGC) and Arrow Energy (AOE) are two of the more advanced stocks in that area, and Santos (STO) is involved as well. That’s an area that you can say has been successfully commercialised,” he says.
“Elsewhere, I think stocks such as Linc Energy (LNC), which is trying to do coal gasification; and the hot-rock companies like Geodynamics (GDY) and Torrens Energy are also interesting. The thing about coal-seam methane is that it can provide baseload power, and hot-rock power might also be successful in that way. Whereas with other alternative energy sources, it’s a matter of trying to figure out storage, and my sense is that that’s years away,” says Kent-Jones.
Craig James, chief equities economist at CommSec, says the resources boom has not yet run its course. In particular, he believes the junior resources sector is an “untapped area.”
“Most investors, even the institutions, have tended to play the resources boom through BHP Billiton, Rio Tinto and Woodside Petroleum. They’ve been tentative about going down the market-size ranking. While the big-cap resources area has run very strongly, the small and mid-cap resources sector has stayed on the periphery.”
If commodity prices have further to rise, says James, the junior producers and explorers will be an “area of great interest” to investors.
CommSec’s preferred stocks in that area include the zinc plays Terramin Australia (TZN) and Tri Origin Minerals (TRO), uranium project developer Extract Resources (EXT) and onshore oil and gas junior Innamincka Petroleum (INP), which the broker expects to enter production in June.
James Dunn was the founding editor of Shares magazine, personal investment editor at The Australian and has written for BRW, The Australian, Personal Investor, The Age and Management Today. He is the author of Share Investing for Dummies.
In 1984, James won two BMWs on Sale of the Century. Selling the cars financed a share portfolio – which unfortunately did not survive the 1987 crash. This event inspired James to become a finance journalist.
Have you checked out FatCat yet? CompareShares' new money site launched this week - click here to read the latest "money" articles from Australia's leading journalists.
More articles from this edition of CompareShares:
Stock picks: The Next Boom
Trading psychology: Experts reveal secrets to making money on the markets
Advisor Lounge: Are allocated pensions all that they are cracked up to be?
Stock Analysis: Using the PE and PEG to value travel company Webjet Ltd
Get Educated – Margin Lending: Margin lending in the aftermath of Opes Prime
Wealth: Alan Bond rejoins top 200 rich list
Survey: Economy headed for slowdown
Commodities: Oil prices rebound, 'oil-shock' warning
Report: Home borrowers will be worse off
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