NEW YORK -(Dow Jones)- After moving in lockstep with oil for much of 2007, economic and political pressures are keeping alternative energy stocks from joining the surge with the rest of the energy sector.
Last year, oil prices and alternative energy stocks followed much the same trajectory. When oil gained 16% in October, one of its strongest months on record, the PowerShares WilderHill Clean Energy Portfolio ETF (PBW) jumped 11%.
But when oil climbed 14% over the past month to more than $125 a barrel in New York, alternative energy sat out the fun. Big oil, drillers, riggers, oil services and power companies all have seen healthy gains. But the Clean Energy ETF is up just 2% over the same period, and few analysts expect a change any time soon.
The disconnect reflects factors like political uncertainty and exposure to a weak U.S. economy that have dulled investors' interest in making big bets on the sector. It also shows that investors still have a conservative bent. Alternative energy companies tend to have market capitilizations under $2 billion and like small-cap companies in general are seen as a riskier bet.
"The problem with clean tech is those are high risk names," said Steven DeSanctis, head of U.S. small and mid-Cap strategy for Merrill Lynch. "It's a cutting edge technology, and the risk appetite just isn't there for them right now."
The weak domestic economic outlook appears to be the biggest drag on clean energy sector. While the climb in oil prices and some energy stocks has been driven by increased global demand, many alternative energy companies do the majority of their business in the U.S. That leaves them vulnerable to concern about the state of U.S. consumers and businesses.
"Clean technology is an industry that does well when the economy does well," said Marc Pado, U.S. market strategist for Cantor Fitzgerald. "The more the domestic economy falters or struggles, the less interest there will be in any new technology names."
In addition to the economic concerns, heightened political uncertainty has emerged across the spectrum of alternative technology. The Environmental Protection Agency came under pressure last week from lawmakers urging regulators to roll back requirements calling for greater use of ethanol and other renewable fuels.
Solar energy companies also face uncertainty, as tax policies designed to encourage investment roll off. Commercial or residential buyers of solar technology currently can claim a federal tax credit equal to 30% of installation costs, but the credit is due to expire at the end of the year.
Brion Tanous, clean-technology analyst for Merriman Curhan Ford, said renewals of the tax credits are included in a couple different bills running through the government, with the solar industry asking for an eight-year extension.
