Longtime clean energy investors know there are dangers at every turn. Whether it's the promise of a better technology that doesn't take off, an emerging market that never emerges, or a promise of lower costs that never turns a profit, we need to be careful out there. This week, I highlighted the three companies I think are the best bets in the clean tech sector, so today I'll highlight three others that I'd stay away from.
Batteries are coming -- no really, they are
When President Obama signed the stimulus package in early 2009, one area getting lots of funding was advanced battery technology and manufacturing in the U.S. Since then, two recipients of funding, A123 Systems (Nasdaq: AONE ) and Ener1, have done nothing but disappoint. It's the classic case of investors buying into a story that's written on loose-leaf paper but never quite makes it to hardcover.
I gave up on Ener1 a while ago, but right now, investors need to watch out for A123 Systems. The company has promised us that financial performance is going to turn around soon, but with a massive amount of manufacturing capacity, we need to see a hockey stick demand curve to keep up.
A123's $146.9 million of cash on hand gives it some time to ramp up, but operations burned $152.4 million in cash over the past year -- and that will continue unless there's a huge pickup in demand. A123 is hoping for the best, but I'm taking a wait-and-see approach. It's disappointed before.
I would much rather make a bet on a company like Quantum Fuel Systems (Nasdaq: QTWW ) that has an ownership position in Fisker, a customer that A123 is relying on.
We've tried growing fuel before
If you haven't heard about the emerging technology of having algae produce fuels, then you haven't heard of the "next ethanol." It took years to prove that growing corn and turning it into fuel was actually costing us more than it helped, and I'm not seeing a big difference here. Syntroleum (Nasdaq: SYNM ) is the stock I'd avoid in the algae fuels space, which I think will head down a similar path as ethanol.
That doesn't mean there aren't opportunities out there for algae. Solazyme (Nasdaq: SZYM ) can produce many high-quality byproducts using algae, but let's not kid ourselves that we're going to replace oil tankers with algae farms. The sun's energy could be more efficiently turned into solar power to fuel electric cars.
The solar shakeout begins
The solar industry has too much capacity for current demand, which is leading to lower panel prices for manufacturers. The margin pressure has already caused some manufacturers to warn that results won't be as strong as originally anticipated, and we're in for a shakeout.
So, who is the pick to fall first? How about Canadian Solar (Nasdaq: CSIQ ) , which has some of the lowest margins in solar? Last quarter, gross margins were just 14.7%, compared with 27.5% at crystalline silicon leader Trina Solar (NYSE: TSL ) . Canadian Solar isn't as vertically integrated, which leads to a lower margin, but it also means the company could be squeezed from both sides.
Canadian Solar is also relying heavily on Europe, which accounts for more than 75% of revenue in the first quarter. Solar manufacturers are quickly transitioning to new markets like the U.S. and China in an effort to lower reliance on a few European demand sources, but Canadian Solar is behind the curve of solar leaders.
Beware of landmines
Watching out for dangers in clean tech stocks is tough when the industry is in such a great growth phase. If you can stay away from the biggest risks, your winners will look that much better when they pan out.
Do you disagree with my list or have a stock that you think is a risk that isn't worth taking? Sound off in the comments section below.