Environmental investing could be in the 'early stages' of a bubble

Ethanol, wind farms and other green technology might prove more beneficial to the environment than to investors. "We're in the early stages of a green bubble," said Robert Crowley, president of the Massachusetts Technology Development Corp., the state-owned venture capital firm in Boston. "We are positive about green energy, but there are many dumb schemes out there. There is definitely a lot of great green technology out there, but it also has the potential to become the Internet bubble of the early 2000s." For instance, while wind power is viable, investors are selecting weak technology stocks that are traded with the promise that they will be profitable down the road, said Scot Millen, director of client services at the Washington Financial Advisers Inc. of Baltimore, which manages $200 million in assets. Moreover, enthusiasm for unproven companies can lead to investors paying ridiculous prices, he said. "Everyone is looking for the next big thing, and everyone is feeling the pinch at the pump," Mr. Millen said. "We could be heading into a bubble. Small bubbles exist already. People will get burned." To avoid the risk of a bubble, he suggested investing in well-known companies that support alternative energy, such as General Electric Co. of Fairfield, Conn. Not everyone, however, shares his concern. "We are not in a bubble," said Christopher Staudt, principal at Environmental Capital Partners LLC, a New York-based venture capital firm, though he acknowledges that certain areas within the environmental industry, such as renewable energy and related technologies, have experienced some bubble characteristics. "There have been some mediocre companies successfully demanding high valuations," he said. "But the long-term dynamics behind areas like solar energy remain exceptionally strong." Investor enthusiasm for environmental stocks has translated into a significant rally in green mutual funds during a three-year period that ended with a sharp sell-off in January, said Michael Herbst, a fund analyst at Morningstar Inc. of Chicago. "It's a cycle we'll likely see repeated a couple more times over the next 10 years," he said. That means investors will have to suffer through volatile returns. "If you're looking to invest in these areas, you are going to have to have the stomach to tolerate double-digit gains and losses," Mr. Herbst said. Some stocks, including solar energy, have sold at multiples of 25 times earnings in the last few years, but many of those valuations have corrected. To be sure, a rocky market is not the same as a bubble. If ominous views about greenhouse gases and global-warming factors are accepted, there will be a shift away from traditional energy and adoption of new technology, but it is going to take years to unfold, he said. "It's not a short-term trend," Mr. Herbst said. "These companies are building products," he said. "The growth projection for these companies seems to be realistic." Morningstar tracks about 33 green mutual funds, half of which were launched in 2007. The funds held about $6.9 billion in assets as of April 30. In Europe, which has focused on green technologies longer than the United States, analysts are watching for signs of an overheated market. "A green bubble is definitely a concern in the long term," said Kavitha Chakravarthy, co-author of a study on green investing and a financial analyst at London-based research firm Frost & Sullivan Ltd. "Because of the sudden interest in green investments, the market might not be able to sustain that much money pouring into these investments. It will depend on external factors like oil prices and the economic condition." The research projected a compound annual growth rate of 18% in the alternative-energy market during the next six years. The 180 billion euromarket is expected to grow to 572 billion euros by 2014. If there is a potential bubble, a possible cause could be higher stock prices driven by several European governments that offer subsidies for companies to go green. Additionally, an Austrian regulation mandating that pension funds invest a portion of their assets in socially conscious investments is gaining momentum across the continent, according to the research. Along those lines, the United States is headed for a green-investment frenzy if the Democrats win the White House. "Then you'll see a massive government coordination and backing, and all kinds of subsidies pouring into renewable energy. It will be a giant industry," said Dr. Robert Bell, author of "The Green Bubble - Waste Into Wealth: The New Energy Revolution" (Abbeville Press, 2007). All of this leads him to the conclusion that there will be a green bubble. "That's a certainty," said Mr. Bell, who is also chairman of the Department of Economics at Brooklyn College in New York. "But we are not at that point yet." E-mail Sue Asci at sasci@investmentnews.com.