Renewable energy investment: here’s what success looks like—and what it doesn’t look like

A number of investors have been wondering if now is a good time to “green” their portfolios with a renewable energy investment in environmentally friendly companies.

We think there are a number of green stocks with investment appeal. But you’ll want to use caution when looking for opportunities in this area. Many green stocks may need a long time to move from the research or concept stage to profitability. We focus instead on those that have a sound base of other operations to offset these added risks.

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A renewable energy investment faces rapidly changing technology

Renewable energy stocks like solar power and wind power have dominated the green stock expansion of the past couple decades. Extensive investment in these areas has quickly moved the technology forward for their entire industries.

For example, advances in manufacturing techniques continue to steadily push down the prices of solar cells and solar panels. As well, alternatives to costly silicon, which is currently used in most solar cells, are emerging.

Note, though, that focusing on renewable energy stocks that are solely focused on developing or using a single technology—and don’t have a source of conventional power production like hydroelectric or natural-gas fired plants to provide cash flow—adds a lot of risk.

That’s because they constantly risk being overtaken by competitors with a superior product. As well, customers may hold off purchasing their solar or wind equipment if they believe a new technology is about to emerge. For these reasons, we also think you would be far better off investing in companies with the research budgets to keep ahead of the competition and move quickly to embrace new technological developments.

A renewable energy investment is a form of theme investing

Theme investing can pay off—but it can also turn out badly for investors, especially those who get in late or forget about investment quality.

The reason why is straightforward. 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 financing it needs to overcome competition and profit from it.

How we analyze stocks that are part of a popular theme

Before we give any investing 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 as concern over the environment has grown. However, like all investment themes, our investing advice has always been that you must choose your renewable-energy investments 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, high government deficits cast doubt on how long governments will keep paying subsidies for renewable energy development.

To cut your risk, our investing advice is to focus on renewable 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.

What a good renewable energy investment looks like

While selecting top renewable energy investments, 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 renewable energy. We make sure they’re not in any insecure or politically unstable regions.

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. When they do it right, research and development spending is more like a long-term investment than an expense. In some cases, the seemingly high-priced renewable energy investments 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.

Do the current political and environmental issues around the world improve or hinder your desire to invest in renewable energy?

Renewable energy stocks might feel good, but they can drag down a portfolio if they aren’t on top of technology. Have you invested in any renewable energy stocks that started strong then lost steam?