“Hot” theme investments like renewable energy penny stocks, generally will only offer very limited investment potential for the foreseeable future.

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—including renewable energy penny stocks.

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.

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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 the area of alternative energy.

Concentrating on wind and 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 solar stocks are risky investments, as are renewable energy penny stocks.

Take a deeper look before investing in a “hot” theme like renewable energy penny stocks, and avoid the potential for quick losses

Theme investing can pay off from time to time. However, theme investing can turn out badly for investors, especially those who get in late or forget about investment quality. You may be interested in environmental preservation, but that doesn’t mean you should invest.

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.

Investment quality remains the most important factor for a stock—including for theme stocks

Before we give any investing advice on stocks that are part of a popular theme, we always look for clear signs of investment quality.

For example, the theme of renewable energy has become more popular as concern over the environment has grown. However, like all investment themes, our investing advice has always been that you must choose your renewable-energy investments very carefully to profit. That’s because many of these companies have only limited investment appeal.

These firms often need a long time to move from the research or concept stage to profitability. As well, high government deficits cast doubt on how long governments will keep paying subsidies for renewable energy development.

To cut your risk, our investing advice is to focus on renewable 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.

Stick with stocks that have a sound base of other operations as a way to cut your risk in renewable energy penny stocks

As mentioned above, to cut your risk, we recommend that you focus on renewable 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 natural-gas fired power generation 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.

Use our three-part Successful Investor approach when investing in any type of energy stock, even renewable energy penny stocks, to prosper:

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.

How competitive are renewable energy companies compared to more-established blue chip companies that also have renewable energy operations?