Characteristics of the best energy company stocks you should know about when adding them to your portfolio

How to invest in energy stocks

While selecting energy company 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 with little respect for property rights and the rule of law such as Russia or Mongolia.

We avoid any energy stocks that trade “over the counter,” where such things as regulatory reporting are lax. And we don’t invest if the stock is trading at an unsustainably high price, because it’s likely the result of broker hype or investor mania.

We also look at the market cap of energy stocks versus the estimated value of the reserves they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its reserves. We like an energy stock’s market cap to be no more than half the value of those reserves. We assume that the company will be able to expand its reserves through exploration, but if the reserves are double the energy mining stock’s market cap, it provides a margin of safety.

Two alternative energy company stocks we like

Here are two alternative stocks we cover in our Wall Street Stock Forecaster newsletter that can give you exposure to alternative energy—but at the same time cut your risk.

General Electric, symbol GE on New York, is one of the world’s largest industrial corporations. GE’s products include major appliances; lighting products; medical imaging equipment; power generation and delivery products; and aircraft jet engines.

GE sells a wide range of environmentally friendly consumer products, including low-wattage light bulbs and energy-efficient appliances. It also supplies wind turbines and solar panels to electrical utilities. As well, its expertise with nuclear power plants should help it profit from the construction of new plants around the world. Nuclear plants generate fewer emissions than gas and coal-fired plants.

Ormat Technologies, symbol ORA on New York, designs and makes geothermal and recovered-energy power plants. (Recovered-energy generation captures unused waste heat, such as exhaust from industry, and converts it into electricity.) The company owns and operates its own plants, which it uses to generate electricity for sale, and sells plants to customers around the world.

Geothermal energy taps into heat energy from the earth’s molten interior. Movements of the earth’s crust bring magma, or molten rock, nearer to the surface, where it heats reservoirs of water to create hot water and steam. Geothermal energy companies like Ormat then drill into these reservoirs and use the steam and hot water to drive electricity-generating turbines.

Investing in renewable energy company stocks

Focusing on renewable energy stocks that are solely focused on developing or using a single technology—and don’t have a source of conventional power production like hydroelectric or natural-gas fired plants to provide cash flow—adds a lot of risk.

That’s because they constantly risk being overtaken by competitors with a superior product. As well, customers may hold off purchasing their solar or wind equipment if they believe a new technology is about to emerge. For these reasons, we also think you would be far better off investing in companies with the research budgets to keep ahead of the competition and move quickly to embrace new technological developments.

Bonus Tip: Successful investors now recognize that research and development spending is today’s best-hidden asset. Companies have to treat this spending as a day-to-day expense, much like maintenance or tax payments. So research spending comes right out of current year’s earnings.

But when you 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 dividends. In many cases, today’s seemingly high-priced renewable energy stocks are much cheaper than they appear at first glance, if you give them some credit for the funds they invest every year in research and development. 

Are you investing in energy company stocks? How have they performed in your portfolio? Share your story with us in the comments.