Now, on with it. I want to dedicate this final post for 2006 to caution and cool-headedness. While 2006 was certainly one of the most prolific years yet for alternative energy and clean tech enthusiasts, investing in this asset class remains an overall very risky enterprise, and it is paramount that our readers be reminded of this.
A Few Outside Perspectives
Consider this passage from an email I received from one of our readers about a week ago: “I think some of the best of these companies will be very profitable in the years ahead, particularly considering 'peak-oil' and global warming. One thing you could do that would be beneficial is to differentiate between those companies that are profitable and those that are not, because frankly there are a lot of hype-only companies in the alt. energy space.”
And therein lies the rub. Besides a few token examples like Suntech Power (STP), most alternative energy and clean tech companies have no earnings and high cash-burn rates, making them questionable propositions when subjected to conventional valuation approaches. Most of these investments thus range from risky to highly speculative, and it is still too early in the game, in many cases, to separate the great prospects form the mediocre ones (although you should be able to spot the real stinkers).
Scott Rothbort over at TheStreet.com, in a December 13 article entitled When 'Buy What You Know' Doesn't Pay, goes as far saying: “This entire asset class gets the great-product, bad-investment nod. We can use light, water, wind, steam or bovine excrement to generate energy for all I care. But even if Earth, Wind and Fire were to sing for us, it is highly unlikely that a stand-alone company is going to make you a dime in the alternative energy sector.” While I couldn’t disagree more with Rothbort, his commentary on this topic is one of those bluntly-worded hype killers that are sometimes necessary to bring folks back to reality.
One of my favorite websites, The Motley Fool, has published a number of pieces over the past 12 months that, as 2006 comes to a close, serve as good reminders that investing in alternative energy and clean tech is a risky business. On December 20, FuelCell Energy (FCEL). On November 15, Ballard Power (BLDP) . On October 27, Plug Power (PLUG) And on January 17, Hoku Scientific (HOKU).
Why Alternative Energy Pessimists Are Wrong
The main reason that clean tech and alternative energy bashers are dead wrong is that, for this asset class, the past is no indication of the future. Anyone who bothers to read the news on a daily basis knows that a major trend is afoot, and that this trend will only intensify in the years ahead. Natural resources and ecological services such as clean air are becoming scarcer, and this scarcity will soon prove more of a break on economic growth and societal development than any other set of constraints we face.
Let’s forget about peak oil – let’s just say that it’s too contentious a concept and leave it out for now. Think about the looming global water shortage, air pollution in Chinese cities, climate change, loss of forest cover in many parts of the world, and the decline in global fish stocks, to name a few.
Think also of non-environmental trends impacting the demand for alternative energy, and ask yourself whether you see these trends softening or hardening in the years ahead. Think of terrorism and the impact that it has had and will continue to have on the geopolitics of energy. Any signs of this ameliorating? Think of the emergence of India and China and of their effect on commodity prices.
You would have to be a heck of an optimist to believe that alt energy and clean tech companies won’t ever make you a dime. Demand for the solutions they offer will only grow as we move forward because: (a) the problems enumerated above will have to be solved sooner rather than later and (b) people are not, overall, in favor of giving up economic growth and setting the clock back on four centuries of economic and social development. Most realistic folks out there are buying the clean tech argument because it’s grounded in common sense. But that certainly doesn’t mean you should be careless with your money!
The Future Will Be Bright For Alternative Energy And Clean Technology Stocks
Need proof that investors are picking up on these trends? Consider these numbers from specialist alt. energy information provider New Energy Finance. If you’ve never done so before, you should also browse through recent press releases by the Cleantech Venture Network, an outfit that tracks Venture Capital investments in the broad clean tech space.
The Motley Fool also had nice things to say about alternative energy on a number of occasions this past year, and published a piece entitled Searching for an Energy Revolution that contains some very useful material.
Is there an unhealthy amount of hype surrounding clean tech and alternative energy? Sometimes. Is the whole asset class going to make you piles of cash? No way! Is investing in clean tech and alternative energy risky? You bet! Will there be many companies that go belly-up? Certainly! If you do your homework, and, as a result, pick your investment choices wisely, will you make money? Not a doubt in my mind! Is this asset class, at this stage of its evolution, suitable for more cautious investors? Probably not . . . although keep in mind that many non-pure plays have material exposure to this space. Just think of GE (GE), Sasol (SSL), FPL (FPL) and ADM (ADM).
The alt. energy investor must be patient and keep a cool head. At the end of the day, it’s up to you to determine your own risk profile, do your homework and hedge your bets somehow. But it is my humble opinion that those who decide to ignore alternative energy and clean tech companies altogether will, one day, be wishing they hadn’t.
Happy New Year and see you in 2007!
DISCLOSURE: I am long Suntech Power. I have no affiliation with any of the organizations discussed above.