Topic: Growth Stocks

Green stocks: Look for financial appeal

Green stocks have a lot of conceptual and emotional appeal, but may offer 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. So they may not be profitable for investors.

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. But it’s relatively easy to launch a 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.

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.

Here are a couple of examples of green stocks and their risks:

Ethanol:

Ethanol fuels produce less greenhouse gas emissions than gasoline. Ethanol is made from plants, which absorb carbon dioxide during their growth. On a full fuel cycle (i.e. from plant growth to use of the fuel in a vehicle), a 10% ethanol-gasoline blend is estimated to reduce greenhouse gas emissions by up to 4% if the ethanol is made from grains, and up to 8% if it is made from cellulosic biomass.


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Ethanol as fuel has a lot of conceptual appeal, especially with investor interest rising for lower-polluting energy sources. However, many companies focusing on ethanol will have difficulty showing profits for a number of years. Several new ethanol plants will open in the next few years, which could lead to oversupply and lower prices. Falling oil prices could also undercut ethanol’s appeal.

Wind power:

Wind power is a clean and renewable source of power, but it still draws objections from environmental groups. As well, it has encountered a number of technical problems

One key problem with wind power is that it generates fluctuating power output, due to the variability of wind speed. But wind speed also changes from day to night, and there are seasonal and even annual changes in wind strength. This variability means that utilities must maintain back-up power capacity or costly storage, equal to their reliance on wind power.

Large numbers of wind turbines on a “wind farm” take up a lot of space. In some cases, the space between the wind turbines can be used for agriculture. However, a wind farm dominates the visual landscape and is unacceptable in tourist areas or nature preserves.

If the wind turbines are located in populated areas, noise from turning blades can spark public opposition that makes it difficult to win regulatory approval. The obvious solution is to locate the turbines in remote locations. But that requires a bigger investment in long-distance transmission lines.

Risking a large amount of capital for a technology that still is considered new and unproven makes it necessary in most cases to rely on government subsidies to attract investors. Removal of these subsidies would make most wind power companies unprofitable.

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