It always pays to be skeptical when a company claims to have a have a revolutionary new invention or technology.
That’s because, when you invest based on company marketing claims, you risk becoming too focused on the innovation and failing to look at the stock’s fundamentals, such as p/e ratios and other measures of value and risk. Sound-bite-based investing also ignores (or glosses over) a company’s industry position and the conditions within its particular market.
Many investors ignored the risks of solar-power stocks
For instance, a number of investors plunged into solar-power stocks in the mid-2000s.
Investors were mainly interested in solar-related companies because of heightened media attention to issues like the high cost of fossil fuels and a sense of climate-change urgency. Supportive government policies, including subsidy programs, were also on the rise.
One of the companies that investors bid up sharply was silicon producer Timminco Ltd. (symbol TIM on Toronto). Timminco hit a high of $34.50 in June 2008. It has since dropped over 97%, and now trades at about $0.82 a share.
Timminco hit its highs after it announced that it had developed a new method of converting chemical-grade silicon into high-grade silicon. High-grade silicon is used to make solar cells, which absorb sunlight and convert it to electricity.
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However, on March 16, 2010, Timminco announced that it had suspended production of solar-grade silicon, the product that fuelled its rise. As well, a class-action lawsuit filed against the company accuses it of making false and misleading claims about its solar-grade silicon production process.
Skeptical stock market investment advice looks deeper than media hype
Our stock market investment advice has always been to avoid Timminco shares. That’s because, unlike sound-bite-based investing, we thoroughly analyzed the company and determined that, among other factors, Timminco was heavily reliant on high solar-grade silicon prices, which have since fallen sharply.
Moreover, demand for solar power continued to face a number of unique challenges, including competition from power produced using oil and coal, and the risk of declining government subsidies. Right now, for example, the German government is proposing a 16% cut in feed-in tariffs for new rooftop solar systems (feed-in tariffs require utilities to pay higher prices for solar power).
A broad base of other operations is key to solar success
The opportunity for stock market investors to profit from solar power is there — the technology is proven, and demand for renewable energy is rising. However, we’ve looked at a number of pure solar-power stocks over the years, and haven’t been able to find any we can recommend in our stock market investment advice.
In the end, we think the best way to profit in solar power is through large companies that have the research budgets to successfully stay ahead of the competition in developing solar technologies or generating solar power. These companies should also have a sound base of other operations to offset the added risks that solar power entails.
FPL Group Inc., a stock we cover in our Wall Street Stock Forecaster newsletter, is a good example of this type of company.
FPL operates Florida Power and Light, a regulated utility with 4.5 million electricity customers in eastern and southern Florida. FPL Group also owns NextEra Energy Resources, which operates unregulated electrical-power projects in Canada and 26 U.S. states. NextEra is the leading producer of wind power in the U.S. Besides wind projects, FPL Group is investing heavily in solar-powered generating stations. It opened one in 2009, and will open two more in 2010.
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