Topic: Growth Stocks

Investor Toolkit: How to avoid the pitfalls of green energy stocks and other investment themes

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “How to avoid the pitfalls of ‘theme investing’”

Theme investing can pay off from time to time. Today’s popular investment themes include green energy stocks, such as solar, wind, and geothermal, and emerging markets, such as China and India.
However, theme investing can turn out badly for investors, especially those who get in late or forget about investment quality. Here’s how:

  • Popular themes can distract investors. When you indulge in theme investing, you allow a theme or concept to take a central place in your investing decisions. Usually the theme or concept includes some prediction about the future that has some truth in it, and will make noticeable changes in society. You may assume that if you can just get aboard that theme or find an investment whose future is tied up with it, you are bound to make money.

    In other words, you are buying what you might call a “Big Idea” without making certain that a particular investment has a workable business concept, or the management strength and integrity that it needs to overcome competition and profit from it.

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  • 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 come around to the view that the theme 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.

    Mind you, facts support most popular investment themes. Keeping those facts in mind can help you spot stocks with extra potential. But if you let the theme make the decision for you, you are sure to overlook risk.

How we judge stocks that are part of a popular theme. Before we give any advice on stocks that are part of a popular theme, we always look for clear signs of investment quality.

For example, the theme of renewable energy has become more popular in the past few years, as concern over the environment has grown. However, as with all investment themes, we’ve always recommended that you choose green energy stocks very carefully to profit. That’s because many of these companies have only limited investment appeal.

These firms often need a long time to move from the research or concept stage to profitability. As well, many governments are cutting subsidies for renewable energy development as they struggle with high budget deficits.

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 renewable-power production.

Suntech Power: A good example of a stock tied to the green power theme

A member of our Inner Circle service recently asked about Suntech Power Holdings (symbol STP on New York), a China-based company that designs, develops, makes and markets solar cells and panels.

Suntech’s products are used by public utilities, and in homes, offices and factories. Clients use Suntech’s solar equipment to generate power for the electricity grid, and for off-grid uses, such as mobile-phone networks. The company sells its products to solar distributors, engineering and design firms, installers and property developers.

Suntech’s revenue has moved up steadily since 2006 on strong solar-power demand, particularly in Europe and China.

The company’s shares jumped 17%, to $9.37, in the wake of the Japanese earthquake/tsunami/nuclear disaster. That’s because some investors believe solar power could gain if the disaster slows the use of nuclear energy. The shares have since drifted down to around $7.63.

Our buy/sell/hold advice on Suntech, based on the company’s current market position and the outlook for solar energy, is only available to members of our Inner Circle. You can’t get it anywhere else! (Note: If you are a current Inner Circle member please click here to view Pat’s recommendation. Be sure to log in first.)

If you’re looking for authoritative advice on investment issues, or fundamental analysis of stocks you’re considering buying (or selling), you should join Pat McKeough’s Inner Circle. It’s Canada’s most exclusive investment group.

Inner Circle members always get clear, concise investment advice that’s 100% independent, and untainted by commissions or other undisclosed influences. We guarantee it. Click here to learn more.

Next Wednesday, June 22, 2011, Investor Toolkit will show you how you can profit from growth stocks with less risk.

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