Many ‘green chip’ stocks aim to profit from renewable energy—a growing area of investing with some risks

Although their name is based on blue chip stocks, green chip stocks, which are typically environmentally conscious investments, can be very volatile. Green chip stocks have a lot of conceptual and emotional appeal, but many, especially startups, may offer only limited investment potential.

Environmental or green startups may need a long time to move from the research or concept stage to profitability in the face of high initial costs and the uncertain future for government subsidies. As such, many may not prove profitable for investors.

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Why it’s hard to find good green chip startups

It’s hard to set up any company to grow into a profitable business. It’s even harder to profit in the pioneering fields green stocks generally focus on–environment and alternative energy. But it’s relatively easy to launch a green chip stock promotion that purports to have answers to social problems or a blueprint for profitability from emerging green technology. That’s why stock promotions of green stocks or anything else are always more common than legitimate start-ups. Still, even the legit startups can wind up going broke.

What top green chip stocks would look like

While selecting top green energy stocks, look for well-financed companies with no immediate need to sell shares at low prices. These stocks typically have strong balance sheets with low debt.

We look for an experienced management team with a proven ability to develop energy. We make sure they’re not in any insecure or politically unstable regions such as the Congo and Venezuela, or in countries, such as Russia or Mongolia, with little respect for property rights and the rule of law.

Successful renewable and green chip stocks use steady research spending to come up with pioneering technological advances—and successful investors now recognize that research and development spending is a valuable hidden asset.

Companies have to treat this research spending as a day-to-day expense, much like maintenance or tax payments. So, research spending comes right out of their current years’ earnings. But when they do it right, research and development spending is more like a long-term investment than an expense.

When it pays off, it can yield dramatic long-term gains. In some cases, the seemingly high-priced renewable green chip stocks like energy stocks may be cheaper than they appear at first glance, if you give them some credit for the funds they invest every year in research and development.

Cut your risk in green chip stocks by sticking with investments that have a sound base of other operations

To cut your risk, we recommend that you focus on green energy stocks that already have a sound base of other operations, preferably businesses that provide steady revenue streams. That helps offset the risks of expanding into new fields like renewable-power production.

For example, risks like subsidy cuts are one of the main reasons why we continue to recommend that you focus on solar energy stocks that have a sound base of other operations—such as hydroelectric or wind power—to offset the added risks involved with investing in solar power. An energy company that is solely developing technology in solar power can be a very risky investment.

What green chip stocks do you currently hold?