Hated Sector; Big Potential
Renewable energy probably tops the list as one of the most hated and worst-performing sectors. Still, as an investor, I can’t help but see some opportunities today.
It’s no surprise that a number of ETFs are on the market to invest in the sector, and they’re different enough from one another to merit more careful consideration. But first, a bit of background is in order.
It’s understandable why renewable energy is being shunned like the plague. Since the financial crisis of 2008, developed-country governments are mired in debt. Why would anyone touch a sector dependent on government subsidies to survive?
Not only is Europe drowning in debt, subsidies for solar and wind are set to expire soon here in the U.S. unless they’re extended.
Then of course we’ve had advances in energy drilling technology—mainly hydraulic fracturing—that have made the U.S. an oil and gas powerhouse once again, pushing down natural gas prices to record lows and making wind or solar considerably less attractive.
Common sense tells us to stay away from renewables at all costs. There really is very little reason why investors would flush money down the drain investing in such an overhyped, uneconomical sector, right?
Based on all the negativity I’m reading in the media, I too, see little reason to invest in the space. And the presidential election coming up in a few weeks only adds uncertainty to the sector as a whole.
Markets obviously feel the same way. Many companies engaged in the renewable energy space are trading at or near 52-week lows, with some trading at all-time lows.
If you look at the returns of all renewable energy ETFs, you get a sense of just how much these funds have been money drains over the past several years and, for the most part, since their inceptions.
Now buying a stock simply because it’s gotten hit hard might be the single dumbest reason to buy it. Trading a stock at a 52-week low to play a turnaround in a downtrend is certainly a fool’s errand.
I still remember what my boss used to tell me back when I was an equities trader: “You know what happens when a stock hits a 52-week low, right? It goes even lower.”
Still, I think you have to separate trading from investing here. As an investor focused on the long term, and with the renewable energy sector the brunt of one-sided pessimism and extreme negativity, I wonder if there are some bargains out there.
It’s important to remember that markets are forward looking. Well before the public’s final acceptance of the “demise” of renewable energy, stock prices will likely have bottomed.
In fact, this may have already happened for some companies.
Investment themes and popular trends also change over the course of years. Back in early 2001, did you think gold was a good buy when it was trading for $260 an ounce? What about emerging markets in the late 1990s? We all know what happened from there.
I’m not saying that some bigger themes will change anytime soon.
But central banks are flooding the world with liquidity, and all that money can very likely show up in commodities, including oil. And a spike in oil prices is exactly what renewable energy needs to make sense economically.
Let’s also not forget that in the wake of 2011’s Fukushima nuclear disaster, Japan and Germany—the world’s third- and fourth-largest economies, respectively—are looking to rid themselves of nuclear power in the coming decades.
As for the United States, as much as pundits are predicting catastrophe because of our debt problems, I still think the U.S. is the place to invest in the sector. Europe is in even worse shape than the U.S., and I still think the innovation here is unmatched if the need for such innovation becomes imperative.
Be careful when making fruit-basket comparisons; you’re likely to come up with lemons.
Movers and shakers in the ETF world are often just the opposite.
With the S&P 500 topping 2,000, it’s worth understanding how you ended up in the wrong large-cap ETF.
Pimco is going back to what it does best—generating alpha through fixed-income exposure.