In spite of some headwinds from natural gas, there remain some opportunities for green-energy investors. But selecting investments in the current market will be challenging. For example, First Solar (FSLR), a photovoltaics company that was trading at $129/share last summer, was trading around $18 in May. Similarly, Vestas Wind Systems (VWDRY), a wind turbine manufacturer, has seen its stock plummet from $11.5 to less than $3. While stock price does not directly affect a company’s operations, it can hamper its ability to secure operational loans and drive up interest rates on its bonds.
To be successful, the green-energy investor must understand the market drivers. Increased domestic natural gas and oil production are providing the United States with very low conventional energy prices. And they are headed lower as utilities and fleet services convert to gas. NSTAR, for example, a Boston utility, has been converting and has announced electric rate reductions of over 30 percent. These low prices steepen the competitive challenge for renewable generators.
And there are other dynamics. The economic malaise in Europe has forced Germany and Italy to curtail their renewable incentive programs. And domestic fallout over Solyndra has hampered the Obama administration’s loan program for renewable startups.
Still, there are prospects for green energy. Energy costs in overseas markets remain high and many countries have limited fossil fuel distribution systems, making them ideal candidates for renewables. In the United States many incentive programs remain healthy. Ironically, many renewable manufacturers use conventional energy for their processes and will benefit from the lower prices. Diversified green-energy companies who capitalize on these opportunities will flourish.
Many investment vehicles are available to tailor a portfolio to an individual’s goals and risk tolerance. For example, investment-grade corporate bonds can safely produce steady income. On the other hand, stocks (also called equities) can produce spectacular returns, but are volatile. Mutual Funds and Exchange Traded Funds (ETFs) offer a viable means to invest in equities without direct exposure to the risk of individual stocks.
A bond is a debt instrument in which a company receives investor money and promises to repay the loan with interest. Maturity periods for bonds range from a few months to decades. The quality of bond — its rating — is based on the integrity of the issuing company. The highest rated bonds pay the lowest interest rates. Long-term bonds pay more than shorter ones.
While smaller renewable energy companies typically do not issue bonds, large ones that are diversified into renewables do. One is General Electric (GE), which operates a wind turbine manufacturing subsidiary.
One can find and buy bonds through a broker or online resources. Yahoo! Finance and Investinginbonds.com provide excellent and free online tools for the do-it-yourselfer. The major brokerage houses, such as Fidelity Investments, offer the same tools plus services, such as managed portfolios, training and counseling.
The bond market is much bigger than the stock market, so bond searching is facilitated by focusing on specific trading sectors that contain companies of interest. However, most green-energy companies do not trade in the energy sector, as might be expected. For example, Vestas Wind trades in the Electrical Equipment industry of the Industrial sector. First Solar trades in the Semiconductor industry within the Information Technology sector.
Mutual funds contain professionally managed equity portfolios. The investor buys shares in the fund, which in turn is invested in the stock portfolio. Profits and losses are distributed to the fund’s investors. Some mutual funds invest in bonds rather than stocks, or both.
Funds are tailored to meet objectives. For example, Calvert Global Alternative Energy Fund (CGACX) focuses on capital growth. It invests in companies such as Ormat Technologies (ORS), a geothermal company. When you buy into Calvert, you are buying a little bit of Ormat.
The downside of a fund is the management fee, which burdens investor returns. Also, funds are not structured for liquidity or rapid trading, sometimes imposing redemption fees or other loads.
ETFs are similar to funds, except that they trade like a stock. Powershares Global Wind Energy Portfolio (PWND), for example, holds wind stocks in its portfolio, including Vestas.
Only those with a stomach for risk and a thorough market understanding should invest directly in equities. Productive investing requires time, energy and expertise to find companies that will perform well in today’s market. A novice investor should consult a professional advisor who has green-energy experience.
Generally, there are three factors to consider before buying stock: business fundamentals, technical indicators and news. Business fundamentals include profitability, earnings per share growth, and price-to-earnings ratio, etc. Technical indicators measure the direction and trends of the stock’s price. When both are positive, the stock is a candidate for buying. But news can trump both of these. Last winter, First Solar’s stock price plunged dramatically following bad news about German incentive programs and the company’s earnings.
A wonderful and free online resource for finding renewable energy funds, ETFs and stocks is Alt Energy Stocks.
Innovative renewable energy companies will continue to find opportunities to prosper. The careful and prudent green-focused investor will share in the profits.
Disclaimer: At the time of writing on May 7 the author had no investment positions on any company discussed in the article nor had he planned any positions for at least 72 hours following. Nothing in the article should be construed as specific investment advice or guidance. Investments should be based on personal goals and needs and where applicable, made with the advice of an investment professional. Past performance of any investment entity is not a guarantee of future performance.