Green energy stocks offer only a limited amount of investment appeal
Successful renewable and green energy stocks use steady research spending to come up with pioneering technological advances—and successful investors now recognize that research and development spending is today’s best-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, today’s seemingly high-priced renewable 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.
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A number of renewable energy ETFs have emerged over the past few years as concern over the environment has grown. However, many of the stocks in those renewable energy ETFs have only limited investment appeal.
Many of those stocks are only profitable—if at all—because they receive government subsidies. But many governments around the world are cutting subsidies for renewable energy investments as they look for ways to deal with their ballooning budget deficits.
To cut your risk, we recommend that you focus on individual renewable energy stocks instead of a renewable energy ETF.
Themes like green energy stocks can cause you to overlook crucial details.
A key problem is that if the theme is your overriding investment consideration, it’s all too easy to get sloppy about the details. You may come around to the view that the theme is so powerful that you can safely disregard p/e ratios and other measures of value and risk. You may wind up basing investment decisions on offhand projections or self-serving advice from promoters.
Mind you, facts support most popular investment themes. Keeping those facts in mind can help you spot stocks with extra potential. But if you let the theme make the decision for you, you are sure to overlook risk.
How we judge stocks that are part of a popular theme, like green energy stocks
Before we give any advice on stocks that are part of a popular theme, we always look for clear signs of investment quality.
For example, as we mentioned earlier, the theme of renewable energy has become more popular in the past few years, as concern over the environment has grown. However, as with all investment themes, we’ve always recommended that you choose green energy stocks very carefully. That’s because many of these companies have lots of conceptual appeal, but only limited investment appeal.
These firms often need a long time to move from the research or concept stage to profitability. As well, many governments are cutting subsidies for renewable energy development as they struggle with high budget deficits.
Cut your green energy stock risk by sticking with stocks 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 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.
Solar power stocks rely on subsidies
Solar energy is very reliant on government subsidies. Even though sunlight is free, solar power costs more to generate than power from traditional fossil fuels. The main reason is the high cost of building solar plants. This includes the cost of solar panels, mirrors, transmission lines and generators, as well as the cost to buy or lease the land to put them on.
Are you holding green energy stocks in your portfolio? How has this theme investment worked for you? Share your experience with us in the comments.
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