Buying shares of up-and-coming alternative energy companies is a speculative way to invest in this expanding area. We think there are safer ways to tap into that growth

Green stocks are companies that invest in environmentally friendly alternative-energy sources. The category is broad and can include wind power stocks, solar power stocks, geothermal and wave power.

Green stocks have a lot of conceptual and emotional appeal as clean and renewable power sources. However, almost all green stocks rely heavily on government subsidies. These subsidies may suffer as governments grapple with the economic slowdowns (or huge debt loads), and as the cost of conventional energy sources, like oil and natural gas, stays relatively low.

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It’s hard to find good green chip startups

It’s hard to set up any company that grows into a profitable business. It’s even harder to profit in pioneering fields like those that green stocks generally focus on with the 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 ways to profit from emerging green technology. That’s why stock promotions of green stocks or anything else for that matter, are always more common than legitimate startups. Still, even the legit startups mostly wind up going broke.

Here are some factors to watch for in top green energy stocks

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 sources. We also make sure they’re not in any insecure or politically unstable regions.

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.

Take a deeper look into up-and-coming alternative energy companies before buying

As mentioned, wind power, solar power and other alternative energy sources have a lot of conceptual and emotional appeal as clean, renewable and environmentally friendly power sources. This has led to increased interest in renewable energy stocks over the last few years.

However, while the technologies do have real long-term prospects for contributing to power needs, they generally offer limited investment potential for the foreseeable future.

They may attract a lot of investor interest and go through flurries of speculation that can drive up share prices, at least temporarily. But they haven’t yet generated the return on capital that you need for a profitable long-term investment. And we see no prospect of this happening any time soon.

That’s why we don’t recommend stocks that operate purely in just one area of alternative energy.

Concentrating on wind or solar power, in particular, adds risk, because these industries rely on uncertain government subsidies. Some alternative energy companies sell virtually all of their electricity under long-term government-guaranteed contracts. However, governments do sometimes change the terms of “guaranteed” contracts, or tax away some of the provider’s profits.

As a result, individual wind or solar stocks are risky investments, as are many up-and-coming alternative energy companies. 

Use our three-part Successful Investor approach to find the best stocks for your portfolio, which may include up-and-coming alternative energy companies

1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become overpriced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

What is your opinion of investments in energy stocks that are based entirely on alternative energy sources?