Time to Buy Green?

Alternative-energy stocks have been singled out for particularly harsh punishment during the market massacre. They've been hurt by the general downturn in share prices and the plunge in oil and natural-gas prices, not to mention that many of the stocks sold at overly generous valuations before the market fell apart.

Consider First Solar (symbol FSLR), one of the best green companies. The stock took off like a rocket after the firm developed proprietary technology to make solar panels without costly silicon. From a price of $50 two years ago, the stock soared to $317 last May. It closed March 2 at $103.97.

Meanwhile, First Solar's price-earnings ratio fell from a lofty 70 to the current 16, based on analysts' estimates that the company will earn $6.60 a share this year.

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So it goes throughout the alternative-energy sector. The stocks have been mauled, but they're now selling at much less-inflated prices.

Venture-capital money is flooding into the green sector -- albeit at a tiny fraction of the pace that it poured into Internet companies during the late 1990s. Venture capitalists invested more than $40 billion in the industry last year, says Jack Robinson, co-manager of Winslow Green Growth (WGGFX) and Winslow Green Solutions (WGSLX), my favorite alternative-energy funds.

The Obama administration is pouring money into clean energy and taking other steps to foster the industry's growth. "There's been a 180-degree change in Washington," Robinson says.

He says there have been huge improvements in geothermal-energy, wind-power and solar technologies over the past few years. "The technology is better and the prices have come down," he says. Soon, users of alternative techniques will be able to sell power for the same or little more than traditional energy providers, Robinson adds. He isn't just playing with words when he says the alternative-energy sector has "the wind at its back."

Although the holdings of the two Winslow funds overlap to some degree, the funds do have key differences. Green Growth invests mainly in alternative-energy companies, but it also holds stock of other firms that are viewed as being environmentally friendly, such as Chipotle Mexican Grill (CMG). The median market value of the fund's holdings (share price times number of shares outstanding) is a small $460 million. Green Solutions invests only in companies the managers see as helping solve environmental problems, and it buys more midsize companies. The median market value of its holdings is $1.6 billion.

Both funds are risky. Green Growth, which has always been streaky, plunged 61% last year and declined 17% in 2009 through February 27. Those losses wiped out much of the fund's strong performance since its inception in 2001.

Green Solutions lost 54% last year and another 19% so far this year. The fund's launch late in 2007 couldn't have come at a worse time.

But Robinson and sidekick Matt Patsky are smart and experienced managers. I can't think of anyone who does a better job of identifying promising small companies in this sector.

What could go wrong now? As long as the global economy continues to shrivel, it's hard to see energy prices rebounding much. That isn't good for alternative-energy stocks. But when oil and natural-gas prices do turn up, as they certainly will, look for alternative-energy stocks to perform strongly.

If you want to play this sector, consider one of the Winslow funds. I prefer Green Solutions because it invests in slightly larger companies. But don't go overboard with either fund. Because they concentrate on one sector -- a young one at that -- and invest mainly in small companies, these funds are super risky. They shouldn't account for more than 5% of your stock holdings.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.