Options for Investing in a Stimulated Green Economy

January 15, 2009 by  
Filed under Investing

Based on what I’ve read so far, I’m unlikely to be a fan of the Obama stimulus plan.  But all of us who are skeptics need to be practical about it.  Even though I won’t be receiving any direct stimulus money, plenty of others will.  So maybe those of us who will not be directly stimulated (that sounds a little naughty doesn’t it?) need to find a way of indirectly profiting from those who will receive the next round of massive government expenditures.   One path for such profits is investing in industries where most of the stimulus money will be spent.

Obama said this week that he wants to double the production of alternative energy in the next three years.  That will take a lot of government money.  Thus, whether the goal is reached or not, businesses that are able to attract significant government energy funding are likely to experience a nice bump in their respective share prices.   At least that’s the logic. 

So what are our options for investing in a green economy that will be stimulated by the Obama plan? 

The first option is to do nothing.  You either assume (or pretend) that the money will not be spent in the private alternative energy sector or that if it is spent, it will not actually provide any tangible results of a type that would excite investors.  If you are in this camp, you are probably thinking that green energy investing will become “Dotcom Investing, The Sequel.”  Lots of hype, hope and not much else.  No one wants to experience another era of grossly inflated P/E’s spread across an entire industry.

Surprisingly, Mr. ToughMoneyLove is not in the “do nothing” camp.  The reason is that the energy sector should be a component of every long term investor’s asset allocation.  It’s been part of our portfolio for a number of years.  More specifically, we have owned (and continue to own) significant positions in the T. Rowe Price New Era mutual fund (PRNEX) and in the Vanguard Energy ETF (VDE). 

So this brings me to option 2: Invest in a traditional energy fund or ETF.  The hope here is that the Obama stimulus money will be so diversely distributed that all energy companies will benefit.  This may be a false hope.  Most of the conventional energy sector funds are heavily weighted toward production and distribution of oil and other “non-green” energy sources.  Obama is no friend of the oil companies so I’m not feeling any love for the old school energy funds, including the two that we own.

A third option is to invest in stocks of individual companies that are specifically focused on alternative energies.  This would include solar and wind as well as businesses actively working to develop new vehicle battery technologies.   This option scares me because it is so hard to predict which of these companies will emerge as a winner.  Not only do their expensive R&D programs need to pay off with patentable innovations, they have to raise enough capital to penetrate a large market (at least in Obama’s vision) in a relatively short period of time.  To identify the winners takes too much guesswork for my precious dollars.

Finally, a fourth option is to invest in a mutual fund or ETF that narrowly focuses on alternative energy. Two that I am aware of are Market Vectors Global Alternative Energy (GEX) and PowerShares WilderHill Clean Energy Portfolio (PBW).

Here is a summary of the PBW ETF from Reuters and the fund manager:

The Fund is based on the WilderHill Clean Energy Index and seeks investment results that correspond generally to the price and yield … of that equity index. The sectors covered include Energy-Alternate Sources, Semiconductors, Electrical Components and Equipment, Chemicals, Electric, Electronics, Computers, Auto Parts and Equipment, Biotechnology and Agriculture. 

PowerShares WilderHill Clean Energy Portfolio’s top 10 holdings include SunPower Corp.,  Echelon Corp., Cypress Semiconductor Corp., Cree, Inc., First Solar, Inc., OM Group, Inc., Universal Display Corp., KYOCERA Corp. ADR , Suntech Power Holdings Co., Ltd. ADR, and Applied Materials, Inc.

GEX is summarized this way:

Companies in the Index generate over 50% of their revenues from alternative energy and/or related technologies, and are engaged in five core industry sectors: alternative energy resources (solar, wind, bio-fuels, water and geothermal), which constitute approximately 70% of the Index; distributed generation, which constitutes approximately 3% of the Index; environmental technologies related to alternative energy, which constitutes approximately 9% of the Index; energy efficiency, which constitutes approximately 4% of the Index, and enabling technologies, which constitutes approximately 14% of the Index.

PowerShares also has a global alternative energy ETF (PBD).

The problem is that these alternative energy funds have been terrible performers.   GEX is down 60% in the last year.  PBW is off 68%.  That’s counter-intuitive for those who are optimistic that alternative energy has a future in the private sector.  My assessment is that the companies owned by these funds are, for the most part, not making any money.  Being on the bleeding edge of any new industry often means that success is measured by your burn rate, not your earnings.  That may have worked in the dot com era but not now.  I wish one of these funds showed some signs of positive life so that I would be encouraged to invest.

To be honest, I’m not sure what I’m going to do as a long term energy play strategy.  For now, I’m keeping PRNEX and VDE but I’m looking for better ideas.  What are yours?

Photo credit:  Dimitri Castrique

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3 Responses to “Options for Investing in a Stimulated Green Economy”
  1. Matt SF says:

    Well said. The alternative energy industry (especially solar) experienced their own bubble that mirrored the run up in oil, so it’s not surprising to see them down 50-75%. If you overlay the USO (oil) and solar stocks (FSLR), you’ll see close similarity after oil peaked at $147/barrel.

    It’s difficult for most to invest in these panicky times b/c we sell when we should be buying (my apologies for the lecture), but I think the easiest way to pick stimulus package based investments is two fold:

    1) Pick sectors that you know will see a business increase in 1-5 years. Obama touts wind and solar the most.

    2) Find stocks that have been beaten down in those industries, and buy while they’re cheap. If you’re unsure, buy a few shares each month just like you would do in your 401k account.

    Solar is probably my favorite play since they’ve been been creamed, and I might go with the ETF appropriately named TAN.

    If you want to hedge your bets against the unknown, or if you’re unsure that alternative energy will take off and oil will always be king, buy a few oil stocks or hydrocarbon MLPs/Trusts that pay > 10% dividends.

  2. Curt says:

    I wouldn’t invest in them unless they have an international market, which I doubt many do.

  3. MasterPo says:

    If alternative energy (i.e. wind and solar) were such a great business and sooo much in demand they wouldn’t need government subsidies and stimulus programs to promote them.

    When the technology matures DECADES from now it *might* be a viable industury.

    But we are far from there now.

    But what do you expect from a man who has promised to put the coal industry out of business…

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