Green energy investors have been hammered the last few years because they bought on promise and saw the market measure by performance.
The First Trust Green Edge ETF (QCLN) tells the story. Back when green investments were measured on their promise, in 2007, the index stood at over 30. Right now it bounces at around 9. This is despite the fact that the index's managers make semiannual changes to the names in the index, dumping the garbage and adding new companies.
Among the 14 companies dumped in the latest clean out are A123 (AONE), the battery maker; Chinese solar players JA Solar (JASO) and Canadian Solar (CSIQ); and FuelCell Energy (FCEL), which produces backup power with hydrogen. Only two companies were added: Vinod Khosla-backed KiOR (KIOR), a cellulosic gasoline and diesel start-up, and Enphase (ENPH), which makes micro inverters for solar systems.
ENPH sells at $5.14/share, but at least it has a recognized product in a recognized industry. Inverters are used to convert the DC power of a solar system into the AC power of the grid, or vice versa. (You have something like an inverter on the wire of your laptop right now.) The efficiency of these devices can be easily measured by feeling them -- the hotter they are, the less efficient they are.
Those from ENPH are pretty cool. And since they are small they can be integrated into the panel, creating something that's easily plugged into the grid. The run rate on sales is about $200 million/year, but where are the profits? Gross profits, which do exist, are regularly more than eaten by marketing expenses and research, so the run rate on losses is about $40 million/year.
To what extent is this promise, and to what extent is this reality? The company has traded as high as $9/share, but is now down about one-third from its IPO price. Here, the price mixed between promise and performance seems finely balanced in that these devices do have a market, the company does have sales, and it could be integrated into a larger company at a profit for the shareholders.
This is not at all the case for KIOR. cellulosic gasoline and diesel -- produced without food crops --is a sort of holy grail for the biomass business, and KIOR is considered a strong play there. Its plant in Columbus, Miss., which sits near the Alabama border along U.S. 82 coming out of Tuscaloosa, is just due to turn on this month. That means there are no revenues, and no real way to measure profitability, other than hope it can make it work. Columbus was chosen because it's in the center of Mississippi's forest country, and thus there is a lot of wood waste there for the plant to use.
The stock's IPO price was $15 in May, and it's currently at $8.71. Last month, when GigaOn's highly respected Katie Fehrenbacher profiled KIOR, shares were closer to $7.50. The company is presently in what Fehrenbacher calls the "valley of death," where capital is going out but no production is coming in. Expect news in January, when the fourth-quarter results come in.
It's sort of like an old-fashioned oil play in that we could well have a dry hole here if operations can't be scaled profitably, but we might have a gusher if they can be. Right now, that's where the whole field is at as an investment. Should you take a plunge on KIOR? Only if you don't mind losing all your money. Should you be looking at ENPH? The business is real, but how big can it get, how profitable?
Best to stick with the ETF. Eventually something will pay off, and the folks at First Trust are likely to be in on it when it does. Given the investment history of the last few years, there is likely to be little competition.