Industry Profile – Investing in Clean Energy

For years, we have talked about the imperative of fossil fuel divestment and a shift to renewable energy. Yet our portfolios have had few publicly traded renewable investments. You might wonder why this is.

There is a difference between a good concept and a good investment. As investors deeply concerned about climate change, we believe that a rapid transition to renewable energy is essential to heading off the worst impacts of climate change. However, over the years, scores of clean-energy companies have lost money or gone out of business. A company needs a commercially viable product, financial strength, and capable management. Perhaps most important to value investors like us, a company needs to be profitable or have a path toward profitability, and the stock must be attractively valued. Few of these stocks have made the cut.

Take two examples from the business of generating electricity from fuel cells, Ballard Power (BLDP) and Fuel Cell Energy (FCEL). Ballard’s stock sold for $3 in 1996, $132 in 2000, and $.50 in 2013. In the past 12 months, it has soared from $1.70 to $16. Over the past 28 years, Ballard has lost a total of $4 billion. Fuel Cell Energy’s stock was $250 a share in 1999, $7,700 in 2000, and has declined ever since, now selling for less than $3. The company was barely profitable in the mid-1990s and has had losses ever since. Analysts expect both companies to continue to lose money for at least the next three years. As environmentalists, we’re excited about the potential of fuel cells, but as investors interested in capital preservation, we’ll stay on the sidelines.

Solar energy stocks also have generally been poor investments, with many companies going bankrupt. Fortunately, engineering progress in the last decade has resulted in plummeting generation costs of solar (and wind) power, making wind and solar cost competitive with conventional fuels, even without the need for government subsidies. There continues to be, however, intense competition and a risk of technological obsolescence.

Despite these risks, we have identified four clean-energy stocks that meet our high standards. Hannon Armstrong (HASI) is one of our largest holdings. The company went public in 2013 as a lender to developers of renewable-energy generation projects. As a mortgage real estate investment trust (REIT), Hannon profited from the difference between its borrowing costs and the lending rates it charged to developers. In the last couple of years, Hannon has retained its own renewable energy assets, which adds to its appeal. In addition to paying an attractive dividend (rare for a clean-energy stock), the stock has risen over the years. Since our first purchase of the stock in September 2014, Hannon has returned 210%, versus 80% for the Russell 2000 Index. After a 53% return over the past year, versus -1% for the index, we consider Hannon stock to be quite overpriced, yet it’s still a core holding.

Vestas Wind Systems (VWDRY) is a Danish company that is the global leader in manufacturing and servicing wind turbines. The company has been through tough times. The stock fell from $45 in 2008 to $2 in 2012, and the company nearly went bankrupt because of faulty products and weak finances. With new management, a healthy financial condition, and plummeting wind power costs, the company has since thrived. Since we first bought the stock in February 2017, it has returned 105% (including 86% over the past year) versus 55% for the S&P 500. Like Hannon Armstrong, we consider Vestas to be overpriced but still a core holding.

Ameresco (AMRC), a Massachusetts-based company, was historically a contractor for energy conservation projects. The company had low and unpredictable profitability. The stock fell from $17 in 2010 to less than $5 in 2016. We had very small holdings for many years, but we increased our purchases when the company made a strategic change to develop and own its own energy assets (solar fields and landfill gas). This has increased the predictability of the company’s cash generation, with has enabled investing in more projects, as well as expanding into the southwestern part of the country. With the stock up 110% over the past twelve months, we think AMRC is overpriced, albeit with excellent long-term prospects.

First Solar (FSLR) is a Tempe, Arizona, manufacturer of solar panels. It continues to face serious competition from Chinese manufacturers, who use silicon to make their panels. First Solar, however, uses a thin film of cadmium telluride to make its panels, which has kept it ahead of the competition in terms of generation costs. Yet First Solar must continue to spend large sums to remain competitive. The company is the least predictable of our four renewable energy stocks. The stock has had mixed returns over the years. We think it is overpriced after returning 32% this year, and it is the smallest of our clean-energy holdings.

You might be wondering why Tesla, the electric vehicle trailblazer that has captivated investors for years, is absent from this list. For much of the past 15 years, Tesla’s stock was a speculation rather than an investment, as the company was unprofitable for the entire period. Cumulative losses were nearly $7 billion, and the stock returned less than half that of the S&P 500. As the company turned profitable for the first time this year, the stock has soared 850% over the past year, resulting in a stock market value (capitalization) of $400 billion. This amount of money would almost be enough to buy all the outstanding stock of Volkswagen, BMW, Daimler Benz, Toyota, Honda, AND General Motors, which generated total revenues of $1.15 trillion in 2019 versus $30 billion for Tesla. The mania over Tesla is reminiscent of the mania for technology stocks in the 1990s, when a handful of fast-growing stocks sold for more than the total value of about a dozen market stalwarts in various sectors. While we like electric vehicles, we just don’t think the market value reflects the company’s actual value. Tesla holders, beware.

Though the recent surge in most clean-energy stocks has made them generally overpriced, we continue to research potential portfolio additions for when the stock market falls to a more reasonable level so the sector can be an even larger portion of our portfolios.

Please note this article is for information purposes only and not an investment recommendation. Clean Yield clients and staff may be invested in these securities. Please talk to an investment professional before considering any investment purchase to learn more about risks involved. Past performance is no guarantee of future performance.