Green Energy Experts: Why Do They Buy Solars?

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 (SPWRA). 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.

Sector	Investments	Related Articles
Energy Efficiency	Waterfurnace, Cree, Flir	Heat Pumps, LEDs, Infrared
Clean Transportation	PTRP, New Flyer	ETFs, New Flyer
Wind	FAN	Wind ETF, ETFs,
Transmission/Grid	Quanta Services, ABB, General Cable	Transmission shopping list
Batteries / Energy Storage	Enersys, Exide, A123	Irrational Battery Investments
Solar	Solar Millennium, Satcon	Solar Shopping List
Geothermal	Ormat	Geothermal & the ARRA
Smart Grid	Echelon, Telvent	Smart Grid Shopping List
Biomass/Biofuel	Aracruz, Plum Creek, Potlatch	Forestry Stocks and ETFs

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.

Comments

[isaac the t...:]

Sounds like your honing that Efficiency/Storage/Tra... Index.

Oct 28 09:11 PM

[La Marque:]

Mr. Konrad: great article. The knowledgeable buy solar because they know that government is subsidizing it and the emotional folks are buying solar. Personally, I don't pick stocks at all at this time because I find it easier to hedge by just buying the etf GEX.

Oct 29 09:56 AM

[Steve Pluvia:]

Smart investors selectively buy solar for the same reason they selectively buy other companies -- future growth and earnings. On the v e r y long list of ridiculous parts of this article, the thought of you speaking to a crowd re: investing takes the cake.

Your gigantic campaign to be an investment guru is only out-shadowed by your wholesale lack of investment knowledge.

Oct 29 10:29 AM

[bschu:]

It would make very good use of your time to look at RTK (Rentech)

They have developed the Process for Bio-fuel plus clean diesel from most any carbon source.

Oct 29 11:08 AM

[robdoc:]

Investing for the long haul sometimes means being concerned about true costs, consequences and the long term potential...not all of these can be boiled down to figures and $.
Solar is a very compelling story in the long run because we are just on the beginning of potential huge breakthroughs.
Solar thermal home systems are potentially the easiest, best way to invest in solar...with very quick payback time.
Just because a group of people don't agree with you on what to invest in doesn't mean that they need to "rethink their investment strategy".
The proof is in the pudding. Talk to me in five years and we'll see where we're at.

Oct 29 11:12 AM

[jerrydd:]

A couple points. Solar is green if you do it right which is buy and install your own. Anyone reasonably handy can do it with a little study and letting an electrician do the final hook up. This can cut your installed cost by 50%+. Prices have dropped greatly like here,

Solar Panels : Solar Panels Direct $2.38 per watt
Solar Panels $2.38 per watt Worlds Lowest Price, Buy Solar Panels at Sun Electronics ... Address: 511 NE 15th Street, Miami, FL 33132, USA ...
sunelec.com/index.html


Because of this price drop only invest in PV companies that produce them under $1.50/wt as those that can't will die.

But at under $2/wt retail, PV is cost effective and there is at least a 200 million home, building system market in the world where they are cost effective with utility power. In the US the PV company that makes panel, inverter, mountings as a plug and play package sold in places like Home depot, Lowes or online will make a fortune.

Why these are cost effective is homes have no land, transmission line, overhead or stockholder costs. Now add they pay 2x's as much for electric they save even more making payback 2-3x's as fast as a solar farm. So yes PV is a cost effective way to cut your carbon footprint.

Another you mention Exide which is a poorly run company with low quality lead battery products that last 1/2 as long or less than others at the same price. And it's a low margin business. Not something to invest in.

Others to avoid are any that say they are ultracapacitors as they can't be both UC and battery because of basic physics. Nor will UC companies ever be viable because of extreme cost, too much weight and little capacity. Again basic physics forces this. It's clear if you study their specs and do the math rather than their hype.

Batteries in general is not good as too many companies for way too few orders and will stay that way for 4-5 yrs until EV's, PHEV's and utility apps finally become large enough to support them.

LED's will not be viable for probably a decade or more so not a good investment.

Oct 29 12:05 PM

[Tom Konrad:]

Looks like I touched a few raw nerves. I'll take that as confirmation of my belief that people are emotionally attached to their investments in solar stocks.

I'm not saying that solar is not green or that it is always uneconomic... but there are a lot of things that are greener and more economic... why not invest in those instead of solar?

In the end, robdoc is right... in 5-10 years, some of us will be richer, and the rest will be coming up with excuses as to why they are not.

Oct 29 12:30 PM

[Steve Pluvia:]

The problem was not "touching raw nerves". The problem is your investment rationale, which is amateur at best.

Oct 29 02:25 PM

[vpratt51:]

I completely get your point. But there are only so many dull areas we can tolerate. Solar has the "cool" factor that chicks just dig more than ions and lead plates, or worse, carbon sequestering (it even sounds nasty). Just tell a lady that her photons knock your electrons off, and your on second base. My DD may be from a different school of economics.

Oct 29 05:22 PM

[H.J. Huneycutt:]

I largely agree with you --- solar is sexier in investing circles, in spite of the fact that it's one of the least promising solutions to energy concerns.

I'm not precisely sure why people like solar so much, but here are a few thoughts:

(1) Everyone understands solar power on some basic level. In fact, most of us have owned solar powered calculators and seen solar in action before. Whereas, how many average Joes understand geothermal power?

(2) There are a lot more recognizable pure-play solar companies out there than companies in other cleantech related industries. It's difficult to find pure-play wind providers that are not OTC; but you can find dozens of solar companies. The competing solar manufacturers seem to have an emotional appeal to investors because there's a "who's going to win?" factor and comparability.

(3) Some of the companies operating in the cleantech sphere are basically conglomerates. For instance, ABB's a great company, but they are like the GE of Europe (without the financial junk). It's a good investment, but it's not a fun company to analyze and they have their foot in so many different things, it's difficult to follow them all, so investors don't really understand them as well.

(4) You mention investing in bicycles and mass transit --- you're absolutely right that these are better solutions than supposedly "fuel efficient" cars that don't really solve most of our problems. But the problem is --- how do you invest in bicycles and mass transit? Maybe you know of bicycle manufacturers sold on public markets, but I don't --- and I've looked before. Mass transit is difficult to invest in as well; most providers are publicly-owned. The only way to play it is to buy into manufacturers that make products related to mass transit like railcar manufacturers. But I don't think most people think that far and "finished products" are much sexier than "materials used for the manufacture of ..."


I've become increasingly skeptical of the solar sector, but if I had to pick companies in that sector, I like LDK Solar (LDK) and Evergreen Solar (ESLR) the most. ESLR probably manufacturers the highest quality solar panels and I think they have some of the best minds on the engineering side working for them. Still, I have my doubts about the sector in general.

Oct 30 11:32 AM

[Anthony Alfidi:]

Energy efficiency and transmission stocks have an intuitive appeal. Analysts need to determine whether they are as constrained by natural resources as solar and wind companies.

Oct 31 11:46 AM

[Tom Konrad:]

VPratt,
It sounds like your DD is from the "Dating" school of economics. A very important school of economics, but I'm not sure you're applying it correctly. What is sexier: a small account filled with sexy stocks, or a large one filled with boring stocks?

I'm not telling you not to buy a Tesla to cruise and try to pick up chicks in. I'm telling you that you'll make more money and more likely be able to buy that Tesla in 5-10 years if you buy Energy Efficiency stocks than if you buy Solar stocks today.


On Oct 29 05:22 PM vpratt51 wrote:

> I completely get your point. But there are only so many dull areas
> we can tolerate. Solar has the "cool" factor that chicks just dig
> more than ions and lead plates, or worse, carbon sequestering (it
> even sounds nasty). Just tell a lady that her photons knock your
> electrons off, and your on second base. My DD may be from a different
> school of economics.

Oct 31 02:37 PM

[Tom Konrad:]

HJ- Will deal with each point in turn.

1) Successful investing requires work. People who don't want to work make dumb investments. There are lots of people who don't want to work.

2) The number of solar cos is a reason to stay away. The industry is too competitive. The number of solar companies is also the *product* of the unfortunate tendency for investors to favor solar. VCs make the same mistake small investors do, and because of the popularity of the sector, it's easier for the company to IPO.

3) Agreed. I've nothing to add.

4) The ETF I listed, PTRP, contains both bicycles and mass transit. I also list a bus stock (New Flyer=Mass Transit). There are more mass transit plays here: www.altenergystocks.co...


On Oct 30 11:32 AM H.J. Huneycutt wrote:

> I largely agree with you --- solar is sexier in investing circles,
> in spite of the fact that it's one of the least promising solutions
> to energy concerns.
>
> I'm not precisely sure why people like solar so much, but here are
> a few thoughts:
>
> (1) Everyone understands solar power on some basic level. In fact,
> most of us have owned solar powered calculators and seen solar in
> action before. Whereas, how many average Joes understand geothermal
> power?
>
> (2) There are a lot more recognizable pure-play solar companies out
> there than companies in other cleantech related industries. It's
> difficult to find pure-play wind providers that are not OTC; but
> you can find dozens of solar companies. The competing solar manufacturers
> seem to have an emotional appeal to investors because there's a "who's
> going to win?" factor and comparability.
>
> (3) Some of the companies operating in the cleantech sphere are basically
> conglomerates. For instance, ABB's a great company, but they are
> like the GE of Europe (without the financial junk). It's a good
> investment, but it's not a fun company to analyze and they have their
> foot in so many different things, it's difficult to follow them all,
> so investors don't really understand them as well.
>
> (4) You mention investing in bicycles and mass transit --- you're
> absolutely right that these are better solutions than supposedly
> "fuel efficient" cars that don't really solve most of our problems.
> But the problem is --- how do you invest in bicycles and mass transit?
> Maybe you know of bicycle manufacturers sold on public markets, but
> I don't --- and I've looked before. Mass transit is difficult to
> invest in as well; most providers are publicly-owned. The only way
> to play it is to buy into manufacturers that make products related
> to mass transit like railcar manufacturers. But I don't think most
> people think that far and "finished products" are much sexier than
> "materials used for the manufacture of ..."
>
>
> I've become increasingly skeptical of the solar sector, but if I
> had to pick companies in that sector, I like LDK Solar (seekingalpha.com/symbo...)
> and Evergreen Solar (seekingalpha.com/symbo...) the most.
> ESLR probably manufacturers the highest quality solar panels and
> I think they have some of the best minds on the engineering side
> working for them. Still, I have my doubts about the sector in general.

Oct 31 02:47 PM

[Lexy:]

The outlook for Evergreen Solar is bad due to a steep drop in panel prices (low demand coupled with cheap Chinese imports). Just thought you should know.

www.boston.com/busines.../

On Oct 30 11:32 AM H.J. Huneycutt wrote:

> I've become increasingly skeptical of the solar sector, but if I
> had to pick companies in that sector, I like LDK Solar (seekingalpha.com/symbo...)
> and Evergreen Solar (seekingalpha.com/symbo...) the most.
> ESLR probably manufacturers the highest quality solar panels and
> I think they have some of the best minds on the engineering side
> working for them. Still, I have my doubts about the sector in general.

Nov 01 01:24 PM