The energy debate in the US is highly politicized and therefore, in the current environment, highly partisan. It often seems that, depending on which side of the political divide you give allegiance, you are obliged to cheer for big oil and despise any other energy producers or vice versa. Rational analysts understand that the stock market, like life, is rarely that clear cut.
Those who have been predicting the end of oil look pretty silly as US production continues to expand and prices and demand remain fairly stable, while those who maintain that the energy revolution is upon us live, like most revolutionaries, in a permanent state of disappointment. The truth lies somewhere in the middle.
Let us, for now, make the assumption that no long term environmental damage as a result of the new techniques is ever found. Hydraulic fracturing has provided a way to tap into vast oil and gas reserves that were previously considered unrecoverable. This is good for US energy independence, but the huge increase in supply could well have long term detrimental effects on the price unless met by increasing demand.
On the clean energy side, although the revolution is not in full flow, there is a major shift in attitude around the globe that those in the US obsessed with the political debate are prone to miss. Clean energy technology has been heavily subsidized for a while, and for emerging economies with limited oil reserves it is no longer necessarily more desirable to import oil than to utilize solar, wind and geothermal power. The same can be said of established economies too. Angela Merkel was recently re-elected in Germany on a platform that included a commitment to continue the country’s shift away from fossil fuels and nuclear energy, despite rising costs. No US politician on the right (where Merkel sits) would voice such a policy.
So there is good and bad on both sides. Oil companies will continue to make vast profits, but cannot last for millennia, however how many of us invest with that kind of time horizon? “Alternative” energy as a sector has been disappointing in terms of the actual performance of many companies for a while, has seen several failures and took a beating on several fronts in the last couple of weeks, so is it time to give up on the alternatives and buy XOM, BP and CVX?
In short, the answer is no. Not only is renewable energy the future, but there is also good money being made in the sector right now. As with any nascent technology, however, there will be winners and losers. If you invested in internet search, your results were somewhat different if you chose to invest in Alta Vista rather than Google (GOOG). When GOOG went public, it already had a record of making money and for now, that ability to turn a profit, rather than potential, is what investors should look for first.
The problem with potential in the clean energy sector is that it is easy for the stock price to get ahead of itself as I, back in August, suggested was happening to Tesla (TSLA). Even a company with a proven profit record, however, can become a victim of exaggerated expectations. It is sometimes possible to see evidence of this in a stock’s performance.
The above chart for Cree Inc. (CREE) would be a case in point. The stock has been bought quite aggressively in the week running up to the last two earnings releases, but the big gaps down show what traders thought of the actual numbers. Despite this, CREE still trades at a premium to the market in general at a P/E of over 36.
On the other side of the coin are companies who have consistently made money and continue to grow profits faster than the market’s or analysts’ expectations.
In the last week of November, First Solar (FSLR) demonstrated the opposite of CREE’s pattern. The stock was sold off as earnings approached, but a huge beat gave the stock another boost at month’s end. A stock doesn’t have to be under pressure to be undervalued though.
The 1 year chart for battery maker Enersys (ENS) is one that would often scream overbought, but in this case, I believe there is even further to go. ENS is not just profitable now, but has posted growth in both revenue and profit in every year since it went public in 2005 with the exception of recession hit 2010. Despite this, expectations seem to be in control, with a P/E around 18.
While people in the US are arguing about the political desirability of fossil fuels as opposed to renewable energy there are several large countries for which solar, wind and geothermal energy are no longer “alternative”, they are simply a fact of life. There is money being made but investors should avoid the hype and look for companies that have proven that they can make money.
Both TSLA and CREE will probably be fine in the long run, but in both cases expectations have gotten a little out of hand. With FSLR and ENS, however, the opposite seems to be true, so for now they represent a better chance, in my opinion, for a decent return from a still growing sector.