You know I favor microcap technology investing.
My rationale is simple (and irrefutable)…
No other investment on Earth rewards investors greater for hitting the bull’s-eye.
The problem is the bull’s-eye always moves.
Case in point: Roughly 10 years ago, the bull’s-eye was squarely fixed on alternative energy.
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With oil prices above $100 per barrel , the rush toward “green” was fanatical.
Ethanol underscores the lunacy, as it now ranks among the greatest booms and busts in history.
Yet solar, wind, geothermal, biomass, hydroelectric and tidal power companies still exist. And some even thrive!
So should we be nibbling on shares?
Or is green energy a lost (investment) cause in a world of cheap gas?
Here’s what you need to know now…
This Is Impossible to Ignore
I know I’m going to catch some heat for this, but climate change is real.
The extent to which humans are responsible for rising temperatures is under debate. But temperatures are rising around the world.
And the scientific evidence that links fossil-fuel burning to carbon emissions is vast and credible.
With that said, the U.S. government has propped up the renewable energy (RE) industry through extremely generous subsidies.
In fact, as of 2016, 59% of total federal energy tax preferences ($11 billion) went to RE, according to the Congressional Budget Office.
The Trump administration is stocked with career oil and gas professionals, however. And they’re working to eliminate RE subsidies.
Operating costs are high for many RE companies like First Solar Inc. (NASDAQ: FSLR). And without federal financial intervention, these industries would likely collapse.
In the short term, the pressure will likely keep a lid on renewable energy stocks. But in the long run, the best RE companies will not only survive but thrive.
So if you’ve got a strong stomach for volatility, buy now — and hold onto your hat.
Shaping Our Energy Future
As Jonathan mentioned above, many of the subsidies that renewable energy companies receive are declining — and the investment money is drying up.
Yet all that money has produced some genuine technological advances.
CFL light bulbs, which the government forced us into, were a poisonous boondoggle that gave off a lurid light. But LED technology has galloped ahead and given us new energy-efficient light bulbs.
Electric cars appear to be a real prospect through improved battery technology. (Though I wouldn’t bet on Elon Musk’s subsidy-devouring project.)
We’ve seen innovative power-generation technologies hit, too.
While wind power turned out not to have much technological potential… and geothermal power causes earthquakes… solar power is another matter.
With the continuing decline in costs and improved efficiency of solar cells, this now appears to be cost-effective in some areas — even without subsidies.
Availability is an issue, however. The fact that it doesn’t work on cloudy days is also a problem. But this can be solved by putting arrays in deserts toward the equator.
Either way, based on cost and environmental benefits, solar power will clearly be a substantial part of our future.
The Guggenheim Solar ETF (NYSE: TAN) is an excellent way to get a broad exposure to the solar power sector, including microcap players.
While solar power underperformed in 2015–16, with several bankruptcies in the sector, it has done well in 2017. As a result, TAN is up 30% on the year.
Even for the environmentally skeptical, TAN deserves a spot in your portfolio.
Don’t Fall Into This Trap
Gambling that companies will go green for green’s sake is a losing bet.
Sure, the Apples and Googles of the world love to tout their eco-friendly practices.
But come on! Apple and Alphabet are sitting on $269 billion and $100 billion in cash, respectively. So they have all the excess profits in the world to spend on initiatives that don’t necessarily deliver a return.
For them, green for green’s sake is good for public relations.
For the majority of companies, though, there needs to be a more direct return on investment. Specifically, a return on their core business.
As investors, if we’re going to wade into the alternative energy space, we need to focus on technologies that deliver a combination of benefits. That is, reducing harmful emissions and cutting costs.
After all, as Nobel Prize winner Milton Friedman observed in 1962 (emphasis mine), “There’s one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
The collective actions of companies throughout history underscore this reality. Unless green technology boosts profits, it won’t enjoy mainstream adoption.
Do such green technology unicorns exist? Absolutely!
Take ClearSign Combustion (NASDAQ: CLIR), for example.
It makes a green industrial burner that allows the world’s most notorious polluters — Big Oil — to reduce nitrogen oxide emissions by as much as 90%. For those unaware, NOx is a key precursor to harmful smog.
Because of the unique and patented design of ClearSign’s Duplex Plug & Play burner, it also increases efficiency by up to 4%. This allows companies to reduce fuel costs to operate equipment… or increase throughput to produce more “product” with the same amount of fuel. So much so that the payback period is less than two years in most applications.
In other words, it boosts corporate profits.
It’s no surprise then that several companies are already paying for its technology. Including an unnamed supermajor, PBF Energy Inc. (NYSE: PBF), Delek U.S. Holdings Inc. (NYSE: DK), Cenovus Energy Inc. (NYSE: CVE) and Andeavor (NYSE: ANDV) (formerly known as Tesoro).
It’s no surprise either that the country’s toughest regulators are co-funding test installations, which is a precursor to eventually mandating usage.
Bottom line: Don’t just invest in green stocks for the sake of being green. Be smart and focus on companies that can actually deliver green results for everyone — the environment, corporations and investors.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily