Investing in Cleantech

This past month, Red Herring ran an article asking whether it is too late to get into "cleantech" -- as investments in alternative energy sources such as solar, wind, and biofuels are now commonly called.

It is a good question, and one that has been on my mind a lot lately, as I have been considering recalibrating my portfolio to include a slightly larger emphasis on energy-related investments.

Proceed with caution
The article doesn't take a hard stand on the question. On the one hand, it notes that two major clean-energy indices are already down more than 30% this year. On the other hand, it concludes with a quote saying that "famously smart" people like Virgin CEO Richard Branson, Bill Gates, and Warren Buffett all have one thing in common -- "they are all putting their money into clean energy."

What is a person to make of this seemingly contradictory information? My assessment can be captured in one simple phrase: proceed with caution.

There has been no shortage of news about cleantech recently, and much of it has centered on the need to develop new alternative energy-related technologies to help combat global climate change. For instance, in May, Wired magazine featured Al Gore and his "pro-growth, pro-tech fight to stop global warming." In August, MIT's Technology Review profiled a number of energy-related technologies in its cover story about climate change. Similarly, the entire September edition of Scientific American was dedicated to the topic of how cleantech could "power the economy and still fight global warming."

Besides being utterly convinced of the reality of global climate change, what I took away from these articles was that while the overall energy "pie" will continue to grow in order to meet growing world demand, how the slices of the pie will be split among coal, oil and gas, nuclear power, wind, solar, hydrogen, and biofuels remains largely unknown.

Further complicating the matter is that how the size of the slices will be determined could very well depend on issues that are only tangentially related to the effectiveness of these technologies. Tax policy, the regulation of carbon, ethanol, and wind subsidies -- as well as the lobbying influence of the oil, gas, coal, and nuclear industries -- could all play a huge role in determining the outcome. And it is this uncertainty that is the basis of my "proceed with caution" message.

Follow the ads
Although cautious, I remain intrigued by finding opportunities in the emerging field of alternative energy. In fact, every day I scan numerous informational sources in the hopes of finding insights that might lead to such opportunities.

It was in this capacity that I pursued TheWall Street Journal today. The first thing that captured my attention was a front page article on Shi Zhengrong -- a man who is now reported to be China's richest tycoon. It just so happens that he is also the founder of Suntech Power (Nasdaq: STP  ) , a Motley Fool Rule Breakers recommendation.

What also caught my attention was a small paragraph stating that while the company has experienced tremendous growth in the past few years, most of it has taken place in Japan, Germany, and to a lesser extent, the United States.

What was surprising was that the China market -- a market desperately in need of clean energy -- remains relatively untapped. This suggests that the company still has plenty of room to grow.

But, as I continued to read the Journal, I also noticed something quite different. In the front section alone, United Technologies (NYSE: UTX  ) , Toyota (NYSE: TM  ) , and DuPont (NYSE: DD  ) all had sizeable page ads touting their commitment to alternative energy.

In United Technologies' case, the ad showed a "green" building that was using, among other things, the company's advanced fuel-cell power plant. DuPont, meanwhile, played up its partnership with BP (NYSE: BP  ) to develop biobutanol -- an advanced biofuel manufactured from sugar beet, corn, wheat and other renewable resources. And Toyota claimed to be making Kentucky bluegrass a little greener by manufacturing its new hybrid Camry in the state.

Look at the big trends
Now, such eco-friendly marketing is nothing new. For some time now, BP has been touting its initials as standing for "beyond petroleum," and last year General Electric (NYSE: GE  ) began its well-publicized "eco-imagination" campaign.

Although investors should take such media campaigns with a heavy dose of skepticism, there is some madness to their manipulation. All of these companies understand that cleantech isn't just something they should do because they want to appear sensitive to the plight of the environment; they are pursuing it because there is big money to be made in the field.

Last month, I attended a conference at MIT, and one of the sessions was on energy. Something one of the speakers said has really stuck in my mind, and it speaks directly to this point. He said that in the next 25 years the world will need to produce 10 to 30 terawatts of new energy. I had a hard time comprehending what 30 terawatts of energy was until he added some perspective by saying that it was the equivalent of adding 100 new ExxonMobil-sized companies to the economy.

Fool's final word
When put in these terms, the push toward "cleantech" doesn't seem like a bubble. Instead, it sounds more like a solid long-term investment opportunity. However, because there are still so many competing technologies, and serious questions still linger about how the government might tax, subsidize, and regulate the use of this energy, it is still too early to assess which clean technologies will emerge as the big winners.

Therefore, to be on the safe side, I encourage investors who are interested in beefing up their energy portfolios to focus their attention on those companies that are actively investing in a variety of alternative energy technologies, whose reach is global, and whose valuations are modest. Even though the P/E ratio is not a stand-alone metric, companies like United Technologies, GE, DuPont, and Toyota qualify based on their earnings multiples.

They aren't the most exciting companies, but if cleantech is in the midst of a bubble, they have the advantage of being less likely to blow up in your face.

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If you are interested in research for the next cleantech superstar, consider taking a free 30-day trial to ourMotley Fool Rule Breakersnewsletter.

Fool contributor Jack Uldrichis fair-skinned and doesn't like to get burned. He does not own stock in any of the companies mentioned in this article, with the exception of GE. The Fool has a strictdisclosure policy.


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