One of the questions I get asked most -- and like least -- at cocktail parties (other than "What do you do?" a question for which I've yet to develop a satisfactory elevator pitch) is "What renewable energy companies should I invest in?" Um, excuse me. I think I see someone I know across the room.
I'm very pleased that I can now refer such folks to "Identifying the Opportunities in Alternative Energy" (download - PDF), just published by Wells Fargo Private Client Services. It's intended for the relatively well-heeled, but it's actually a pretty good primer on alternative energy resources (hydro, wind, solar, hydrogen, biomass, and -- yes -- nuclear), along with an analysis of their respective advantages, disadvantages, and outlooks.
Here's the gist, from the executive summary:
If you are interested in allocating some of your assets to alternative energy, you have a number of options spread across three tiers of opportunity. First, you may want to consider large established companies that are operating in established growth markets, such as nuclear, hydroelectric and wind energy. Second, there are small (and some large) publicly listed companies in developing energy technologies such as biomass, solar and fuel cells. The third tier is privately held, non-listed companies developing experimental technologies such as nanotechnology-based solar panels.
In the first tier, it is possible to add individual, well-established publicly traded companies to your portfolio. To ensure adequate diversification and access to the potential for rapid growth in second tier, smaller publicly listed companies operating in newer technologies, you may want to consider investing in an exchange traded fund (ETF) or a mutual fund that specializes in renewable energy.
The final tier, comprising privately held, venture-funded companies, only is available to accredited investors. This includes individuals or couples who jointly have more than $1 million in investable assets; an individual who earns more than $200,000 per year; or a couple who earns more than $300,000 per annum. If you meet the criteria, you also need to consider whether such investments are suitable for you.
Wells suggests you might also consider exchange-traded funds, or ETFs, which are funds that trade just like stocks but which track an index (like the Dow Jones Industrial Average). For example, PowerShares WilderHill Clean Energy ETF (ticker symbol PBW), tracks the WilderHill Clean Energy Index, a portfolio that holds 40 U.S.-listed companies specializing in the production of clean energy, such as wind, solar, and hydrogen-fuel cells. The fund invests at least 80 percent of its total assets in common stocks of clean energy and conservation companies.
Now, back to the party.
On a smaller, more local scale, an experiment with community based financing of solar in Oregon
One thing to understand about the Powershares ETF (PBW) is that it tracks an index and therefore does not care (or at least take any action) if the stocks in the index do well or not. In other words, it's not a true managed fund. Maybe that's not a big deal because index funds have shown to beat managed funds most of the time anyway. The only other open-end mutual fund I know of in the clean energy space is the New Alternatives Fund (NALFX).
Anyone investing in this space is going to need to take the long-term investment view. Many of these stocks are new, and haven't reached profitability yet. Recent investor interest (e.g. ethanol-related stocks) has pushed their values up considerably and there are likely to be pullbacks when the profits don't emerge as fast as the short term investors wanted. Many of them are based on new business models or technologies, which may not be the winners in the long run.
Then again, go ahead and throw your money in the pot. It'll be like the dot com boom. There will be a lot of investment, a lot of people making a lot of money on stocks going sky high based on unreal expectations, some fallout, and failures, etc. But in the end, we'll have a better, stronger clean energy industry because of the investments that kicked it off.
In my opinion, the best way to invest in alternate energy is first to invest in energy efficiency in your own life. The returns on insulation, air sealing, compact fluorescent lights and other measures generally beat the most aggressive mutual funds in the market. After building efficiency measures, personal investments in efficient transportation are great. Then, prudent investments in solar domestic hot water generally return about 6% to 8%. (Your mileage may vary of course). One needn't seek out an index fund or mutual fund to make great energy investments!