Alternative Energy Investing: Find The Priuses of the Stock Market

by: Tom Konrad, CFA

The market has fallen sharply, and Solar stocks have fallen even more following rumors that Congress will pass the Energy Bill without the Production Tax Credit or Investment Tax Credit. Given this volatility and Renewable Energy's reputation for profitless startups, now might seem like an excellent time for a risk adverse investor to abandon the sector altogether.

Not so. Even if all tax credits and other incentives for Renewable Energy were to be removed, the underlying drivers of Alternative Energy remain firmly in place: Rising energy prices and decreasing reserves, the need to reduce our Greenhouse gas emissions to avoid the worst effects of Global Warming, and the likelihood of continued nationalizations, or the more subtle nationalization by taxation/royalty increases practiced in more developed countries.

Defensive Alternative Energy Sectors

Without direct government support, the sectors likely to suffer the least are the ones which are already economic. Top of the list is Energy Efficiency, which might actually gain from a cut in subsidies for renewable energy, as green House Gas production efforts shift away from Renewable. Among renewable energy technologies, Geothermal, small Hydro, and Wind are already cost competitive with fossil competitors in the best locations. Biomass and Biodiesel are also cost competitive when using waste as feedstock.

Most of the best companies in Energy Efficiency (especially when it comes to energy Efficient Buildings) tend to be systems integrators, large companies with strong energy efficiency arms. These companies have an added advantage for a risk- adverse investor: built-in diversification. This brings me back to a way even the most cautious stock market investor can participate in the Alternative energy Boom: By buying the companies in my Blue Chip Alternative Energy Portfolio: large, profitable companies that stand to gain from increasing energy prices and carbon regulation.

Charles and I have added a few to my original list since the original article. Here is the updated list, along with links to articles describing why we like each of the stocks:

Stock Ticker Article(s)
General Electric (NYSE:GE) Blue Chip Portfolio
Sharp (OTCPK:SHCAY) Blue Chip Portfolio
Johnson Controls (NYSE:JCI) Blue Chip Portfolio
Waste Management (WMI) Blue Chip Portfolio
Alcoa (NYSE:AA) Energy Efficient Vehicles
Caterpillar (NYSE:CAT) Rising Sea Levels, Blue Chip
DuPont (DD) Blue Chip Portfolio
FPL Group (FPL-OLD) Blue Chip Portfolio
PG & E (NYSE:PCG) Blue Chip Portfolio
Archer Daniels Midland (NYSE:ADM) Ethanol, Blue Chip Portfolio
John Deere (NYSE:DE) Blue Chip Portfolio
Siemens (SI) Transmission & Distribution
Owens Corning (NYSE:OC) Energy Efficient Homes
The ABB Group (NYSE:ABB) Transmission & Distribution
Magna International (NYSE:MGA) Clean Cars
General Cable Corp (NYSE:BGC) Electricity Transmission
Quanta Services Inc. (NYSE:PWR) Electricity Transmission
ITC Holdings Corp. (ITC) Electricity Transmission
Dow Chemical (DOW) Energy Efficient Homes
Honeywell International (NYSE:HON) Performance Contracting
United Technologies (NYSE:UTX) Geothermal
Trinity Industries, Inc. (NYSE:TRN) Rail Services

Investing, Like Life, is a Compromise

This portfolio is being heavily weighted towards engineering, industrial, and utility companies. However, most of these companies have truly international operations, insulating them from a likely US recession and declining dollar. They're also uniformly profitable, often with low price to earnings ratios, and relatively high dividend yields.

Nor are these as green as a company like Interface (IFSIA). A diversified investor must make compromises. Those compromises can be made at the portfolio level by mixing some dirty stocks in with the clean ones, or they can be made within the companies themselves.

Our choice is not between a diversified portfolio of green companies and a diversified portfolio of green-ish companies representing compromises of our green ideals. In reality, our choice is between a risky portfolio of highly volatile green stocks, and a much better diversified portfolio of companies working to help the environment in many way, but nevertheless embodying real-world compromises of green ideals.

The Priuses of the Stockmarket

These Blue Chip stocks are the Hybrid cars of the stockmarket. While they are a lot cleaner than a normal car, they still burn gasoline. Eventually we may all be able to drive Electric Cars charged with Wind or Solar. Until that day comes, we'd be a lot better off if most people drove hybrids or diesels. Just as the cost of ownership and the environmental impact is lower with a high-mileage car, the environmental impact of these companies is lower than most, and I expect those benefits to translate into better returns for investors in the long run.

If we're lucky, we can use our profits to all buy Tesla Roadsters and charge them with Solar.

DISCLOSURE: Tom Konrad and/or his clients have positions in these companies mentioned here: GE, SHCAY.PK, JCI, WMI, AA, CAT, DD, FPL, ADM, DE, SI, OC, ABB, MGA, BGC, PWR, ITC, DOW, HON, TRN.

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