Green energy experts accept that solar panels are one of the least cost effective ways to reduce your carbon footprint. Nevertheless, many buy solar stocks. They should rethink their investment strategies.
I recently spoke on "Stock Selection in the Era of Peak Oil and Climate Change" at the ASPO 2009 International Peak Oil Conference. Whenever green energy enthusiasts find out that I analyze green energy stocks professionally, they react in one of two ways. Many want to know my top stock pick in general (New Flyer Industries NFI-UN.TO/NFYIF.PK) or in their favorite sector (see below.) Others tell me about their own green energy investments.
My guess is that the latter group hopes I will stamp some sort of stock guru seal of approval on their portfolio. If so, they usually go away disappointed. This is not only because I have not yet been issued with a special seal by the stock guru union. It’s also because, even if I had such a stamp of approval, I would seldom need to use it.
I find that even industry experts who know more than I do about green energy fail to apply that knowledge when it comes to investing. Enthusiastic amateurs are often worse. The typical green stock holdings of a brilliant cleantech engineer are a couple solar stocks, like First Solar (FSLR) and Sunpower (SPWR.) People who will lecture tirelessly on the need to improve the efficiency of buildings before slapping solar on the roof don’t walk the walk when it comes to their investment portfolios. Instead, they take whatever portfolio they have, slap on a couple solar companies. They forget all about the efficiency stocks and other, more cost-effective renewable options such as wind, geothermal, and biomass that they would recommend if they were asked about what we needed to decarbonize the economy.
Invest In What You Know, Use What You Know
To be fair, none of these people are professional investors. They cannot be expected to make the same sort of decisions that a professional would. On the other hand, many are extremely knowledgeable when it comes to green energy. The old adage "Invest in what you know" does not mean that a pilot should buy airlines. It means that that a pilot will have more knowledge of the airline industry than an industry outsider, and my be able to use this knowledge to either choose between well-run and poorly run companies, or to have a better understanding of industry cycles, and buy when industry fortunes are on the upswing, and sell before a decline in profitability. The key to successful investing is not depth of knowledge, but knowledge that other market participants lack.
Likewise, an energy rater will know that efficiency improvements will deliver much faster paybacks than solar PV. Yet, based on my informal survey, energy raters are more likely to own a solar stock than an energy efficiency stock Dedicated greens know taking mass transit or biking to work is much greener than any private car, even an electric one. Yet these same greens are more likely to have investments in electric vehicles or battery stocks than investments in mass transit or bicycle companies.
"But I Don’t Know any Energy Efficiency Stocks"
When I ask these people why their portfolios don’t match their lives, they usually tell me they don’t know what stocks to buy. Ignoring the fact that people who aren’t willing to do several hours of research for every stock they own should not be venturing into the Wild West of individual stock investing (don’t say I didn’t warn you) here are a few of my favorite investments in each of the major green energy sectors.
Note that this is not intended as a list of companies to buy now. I currently consider most stocks to be overvalued, and am waiting for a market decline before buying again. But, if you have an urge to buy a glamorous solar stock today, or are reading this article after the market has descended to more reasonable valuations, I hope you’ll use this list to buy stocks in the sectors you know are greener, even if they’re not as sexy.
The Right Questions
Using your knowledge from the real world to help choose your investments is another variation on the theme of Asking the Right Investment Questions I recently discussed. The easiest way to gain an advantage over other market participants is to zig when emotional investors zag. Solar has a lot of appeal because it lets anyone with a rooftop generate electricity, and emotional green energy investors tend to buy solar stocks.
It’s difficult to underestimate the emotional appeal of the personal energy independence photovoltaics seem to promise. Nevertheless, few rooftop solar installations do add to our personal energy security: They are grid-tied, and stop producing power whenever the grid goes down. While solar panels can be a good investments with sufficient subsidies and tax breaks, or where electricity is extremely expensive, government subsidies and small markets with expensive electricity are not good foundations for the explosive growth that solar stock speculators are betting on.
Financial modeling shows that solar will only be a significant part of the most effective carbon mitigation strategies if prices fall quickly and dramatically. Such cost improvements are possible, but will come with the risk of extreme disruption for the current crop of solar stocks.
Investors swept up in the emotional appeal of solar stocks are providing those of us who pay close attention to the economics of green energy an opportunity to profit at their expense. Taking advantage of the opportunity is not only likely to benefit the investor, it will also help the companies we do invest in raise capital.
DISCLOSURE: Long WFFIF, CREE, NFYIF, PWR, ABB, AXPW, ORA, ELON, TLVT.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
Tom, this article makes me want to buy everything on your list that I don’t yet own.
I’m trying to be sufficiently cautious about the near term but it’s hard.
Question: Is JCI still one of your favorites?
Thanks so much as always!
I still like JCI, but, to be honest, I have not looked at the company closely recently. I’m delaying doing in depth research because, like you, I have trouble not buying if I get too close to a company.
If you do have to buy now, try balancing the position with a short. Or make a rule with yourself that you’ll sell something else for everything you buy.
The market looks increasingly shaky to me… we may not have to wait that long. And when the market is falling, you’re unlikely to have a strong urge to buy.