Canada's clean technology sector could be poised for a banner year in 2011, after a bumpy road in 2010 when many large companies did well while smaller ones languished.
In 2010, the sector showed modest stock growth on average, as the S&P/TSX clean technology index rose about 6 per cent from the time it was launched last March.
But that overall increase masks dramatically different performance among the 22 public companies that are members of the index. Some, such as Innergex Renewable Energy Inc. and Newalta Corp., have risen sharply in 2010. Others, like Plutonic Power Corp. and Ram Power Corp., have slumped significantly over the course of the year.
Generally, it is the large integrated power companies - diversified organizations that are less risky and sometimes pay dividends - that did well in 2010, while smaller companies that depend upon a single project suffered.
"For the larger companies it's actually been a pretty good year … but for the small-cap earlier-stage companies it has been a tough one," said Rupert Merer, an alternative energy analyst at National Bank Financial.
The smaller firms should do better in 2011 as capital becomes more readily available, Mr. Merer said. "We're already seeing the market getting a little easier for these companies."
The best bets, according to Mr. Merer, are companies whose products relate to the transportation sector, as the increase in the price of oil prompts a search for alternatives.
He is keen, for instance, on Westport Innovations Inc., a company that makes bus and truck engines that run on natural gas, and Azure Dynamics Corp., which makes hybrid power systems for trucks and vans. Azure Dynamics is about to launch an all-electric delivery vehicle in a joint venture with Ford Motor Co., and that could give the company a huge revenue boost, he said.
The power producers that out-performed in 2010 might not do as well in 2011, he said, because government contracts are expected to be somewhat fewer, especially in the alternative-energy hotbeds of Ontario and British Columbia. "They are still very solid companies, very stable businesses with long-term government contracts, so I don't see them coming under pressure - but they may see less growth."
Mr. Merer said he expects to see a number of initial public offerings this year, as small private companies that are seeking funding now move on to public markets.
John MacIlveen, research director at Jacob Securities Inc. in Toronto, said he does not expect to see a general upsurge in stock prices at clean technology firms, although select companies that show real results will do well.
The best bets are those that have financing already in place, have projects coming on-line in the months ahead, and can show they'll generate solid cash flow in the future, he said.
"These companies have to demonstrate that their projects are financed, and that they don't need to go to market. That's what will drive the share prices higher," Mr. MacIlveen said. Some are in that position now, so "there's going to be a number of names that should break out of this funk in 2011."
Among his favourites are Ram Power, a TSX-listed company that has funding in place for geothermal projects in North and Central America, and Western Wind Energy Corp., a Vancouver-based developer that has just completed financing for a large wind farm it is building in southern California.
As for the larger power companies like Innergex, Northland Power Income Fund, and Brookfield Renewable Power Fund, they are solid yield plays for a long-term hold, he said. But they are now in the same category as banks, in that investors tend to wait for dividend increases before pushing the stock prices up sharply.
One catalyst that could shake up the renewable energy sector in 2011 is a spate of mergers and acquisitions.
The sector is "ripe for consolidation," according to a recent report from consultants PricewaterhouseCoopers. Canada had far less M&A activity than other countries in 2010, the report said, but that's likely to turn around in 2011.
The prospect of more government support for the renewable sector - particularly from the provinces - along with generally improved market conditions will prompt more deals, said Kristian Knibutat, national deals leader for PwC. Many of the larger infrastructure and renewable funds have raised money and are looking to make acquisitions, he added, as are some traditional energy companies that want to get a foothold in renewables.
As smaller renewable firms look for financing to move projects forward, it's no surprise they are open to making deals with large capital-rich companies, said Mike Bowman, vice-president of corporate finance at PwC. The most active sectors for M&A will be wind and solar power, along with small hydro, he said.