Many green chip stocks aim to profit in renewable energy—an area of investing in which we recommend caution
Although their name is based on blue chip stocks, green chip stocks, which are typically environmentally conscious investments, can be very volatile. Green chip stocks have a lot of conceptual and emotional appeal, but may offer only limited investment potential.
Investments in environmental or green stocks may need a long time to move from the research or concept stage to profitability in the face of high initial costs and uncertain government subsidies). As such, they may not prove profitable for investors.
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It’s hard to set up any company that grows into a profitable business. It’s even harder to profit in pioneering fields like those that green stocks generally focus on with the environment and alternative energy. But it’s relatively easy to launch a green chip stock promotion that purports to have answers to social problems, or ways to profit from emerging green technology. That’s why stock promotions, of green stocks or anything else, are always more common than legitimate start-ups. Still, even the legit start-ups mostly wind up going broke.
Themes like green energy stocks can cause you to overlook crucial details
An interest in green chip stocks is an example of theme investing. Theme investing can pay off from time to time. However, theme investing can turn out badly for investors, especially those who get in late or forget about investment quality.
Themes like green energy stocks can cause you to overlook crucial details. A key problem is that if the theme is your overriding investment consideration, it’s all too easy to get sloppy about the details. You may be interested in environmental preservation, but that doesn’t mean you should invest.
You may come around to the view that the premise of green investing is so powerful that you can safely disregard p/e ratios and other measures of value and risk. You may wind up basing investment decisions on offhand projections or self-serving advice from promoters.
What top green chip stocks would look like
While selecting top green energy stocks, look for well-financed companies with no immediate need to sell shares at low prices. These stocks typically have strong balance sheets with low debt.
We look for an experienced management team with a proven ability to develop energy. We make sure they’re not in any insecure or politically unstable regions such as the Congo and Venezuela, or in countries with little respect for property rights and the rule of law such as Russia or Mongolia.
Successful renewable and green chip stocks use steady research spending to come up with pioneering technological advances—and successful investors now recognize that research and development spending is a valuable hidden asset.
Companies have to treat this research spending as a day-to-day expense, much like maintenance or tax payments. So research spending comes right out of their current years’ earnings. But when they do it right, research and development spending is more like a long-term investment than an expense.
When it pays off, it can yield dramatic long-term gains. In some cases, the seemingly high-priced renewable green chip stocks like energy stocks may be cheaper than they appear at first glance, if you give them some credit for the funds they invest every year in research and development.
Cut your risk in green chip stocks by sticking with investments that have a sound base of other operations
To cut your risk, we recommend that you focus on green energy stocks that already have a sound base of other operations, preferably businesses that provide steady revenue streams. That helps offset the risks of expanding into new fields like renewable-power production.
For example, risks like subsidy cuts are one of the main reasons why we continue to recommend that you focus on solar energy stocks that have a sound base of other operations—such as hydroelectric or wind power—to offset the added risks involved with investing in solar power. An energy company that is solely developing technology in solar power can be a very risky investment.
All in all, green stocks should never make up more than a modest part of your portfolio. Our view is that if you want to invest so that you make money and help the environment, your best bet is to build a portfolio of well-established companies, spread out across the five main economic sectors. Then, donate some of your profits to worthwhile socially conscious organizations.
Do you own any green chip stocks worth talking about? Share your story with us in the comments.
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