Sustainable Industries | Columnists | 5 investment strategies to play in cleantech

Neal Dikeman

5 investment strategies to play in cleantech by Neal Dikeman - 5.5.08

The market is always a topsy-turvy place, and today, in the current era of uncertainty caused by the mortgage debacle, that is true in spades. But those of us working in the cleantech sector are doing so because we believe it is the future. But if we believe in the cause and in the future growth of the industry, it strikes me that we ought to be developing our personal investment strategies around cleantech, too. So I came up with five possible investment strategies to play in cleantech.

Transmission and distribution (T&D) investment gap
Ten to fifteen years ago, as a nation and across much of the world, we were heavily underinvested in both electricity generation capacity and transmission capacity, as measured by growth in infrastructure investment compared to growth in electricity demand. Over the last 10 years, the generation capacity investment gap has largely eased, at least in the United States, but the T&D investment gap has not. For all of us who believe in the growth of the alternative energy sector, this is huge because, on top of that gap, for roughly every new dollar spent on renewable energy generation, industry has to spend an equivalent amount on T&D. If that doesn’t seem intuitive, put it this way: The best spots for wind and solar tend not to be near the biggest power lines. Playing the T&D investment gap strategy might mean an investment in ABB (NYSE: ABB), GE (NYSE: GE), or other heavy industrials. I would counsel that in a globalized world, investors should play this strategy with an eye toward including manufacturers inside and outside of the United States.

Green market leaders
Over the past few years, a number of major multinationals have reinvented themselves, redefined their product lines and reinvigorated their brands through green technologies and products. Two of the big ones who come to mind include Toyota (NYSE: TM) and GE.

Toyota has reinvented itself as the green car company around a predominantly small car fleet and its flagship Prius product (which is still quite small as a percentage of the company’s overall profits). GE, through a series of judicious acquisitions, from Enron Wind to Astropower in solar, built a very strong product portfolio, and combined it with the company’s traditional strengths in power systems and lighting to anchor a re-architected corporate vision called Ecomagination. So, one could conceive of a “green market leaders” strategy that says to buy stocks, such as GE and Toyota, that are in the Top 10 in their industries, and also the green market leader for that segment.

Solar growth
It’s hard to invest in cleantech without having a solar strategy of some sort. The sector has been growing at 40 percent per year and shows no sign of stopping. While the index is currently way down, the sector isn’t likely to go away, and growth means money to be made for investors. The challenge is not buying stocks with inflated price-to-earnings ratios. My favorite plays might include Sharp Corp., which is the world leader in solar module production, Applied Materials (Nasdaq: AMAT) or pure-play darling First Solar (Nasdaq: FSLR), more because I like their product positioning and cost advantages, rather than because of what I know about the stocks themselves. As for me, I’d rather play the big boys, with a little of the pure plays mixed in, since most of the pure plays are not yet the market leaders.

The green side of Big Oil
While I have been saying oil prices should drop for two years now, it stubbornly refuses to follow orders, and at $100 per barrel, the oil companies are throwing off record amounts of cash, with limited places to reinvest it in their traditional businesses. Many of them, including BP (NYSE: BP), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) have been investing heavily in alternative energy and renewables, both in production and in technology development. I would expect that to accelerate as their capital budgets continue to grow. Some of the companies actually have bigger market shares in particular alternative energies than they do in oil production. So, if you are looking to develop an anti-inflationary investment strategy (energy prices are always one of the big inflation drivers) that includes good exposure to alternative energy, as counter-intuitive as it may seem, you have to consider Big Oil.

Low carbon
The other major drivers underpinning growth in various cleantech sectors have been climate change, the Kyoto Protocol and greenhouse gas emissions reductions. Like the “green market leaders” strategy, another strategy that has taken my fancy is to again take the Top 10 companies by sector, and pick the one in each sector with the lowest exposure or most upside from a carbon constrained world. I will admit, while the first four strategies are pretty straightforward to manage, this one may be like throwing darts.

One of the best things about crafting a cleantech investment strategy is it keeps us focused on aligning what we believe in with where we spend our money. That is always a good exercise, regardless of the outcome.

In the interests of full disclosure, virtually all of my personal retirement money is still in broad-based index funds. I firmly believe in dollar cost averaging and diversification; I make personal investment decisions at the speed of growing grass; and I currently own none of the stocks mentioned in this column (but I’ve been thinking about changing that).

Neal Dikeman is a columnist for Sustainable Industries. In real life he is a partner at boutique energy merchant bank Jane Capital Partners LLC, the blogger behind CleantechBlog.com and the Chairman of Cleantech.org.
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