A few years ago there was a lot of buzz about the "smart grid" and the amazing investing potential it had. The overall concept centered around a grid that could adapt and react to supply and demand changes, integrating renewable energy, variable electricity costs, and energy storage into an aging grid.
Today, a smarter grid is still a hope for the industry, but the hopes for some of the industry's once-promising companies are fading. High expectations met a utility business that's extremely slow to adapt.
Throwing in the white towel on demand response
This week, Comverge (Nasdaq: COMV ) , a company that coordinated demand response, sold itself to private investors for $49 million -- a measly $1.75 per share. As recently as 2007 the stock was trading for up to $37 per share. But years of losing money took its toll, and the company finally found an alternative to public markets.
EnerNOC (Nasdaq: ENOC ) is in the same business and hasn't had much success, either. A sliver of hope emerges here and there, but the demand response business hasn't provided any sort of consistent value for shareholders.
Grid storage hasn't materialized, either
You could throw Ener1 and A123 Systems in this group of smart grid stocks, as well. They had plans not only to supply batteries for electric cars, but also to provide the storage the grid needs to adapt to renewable energy sources.
Ener1 was the first to throw in the towel and declare bankruptcy last month after sales failed to meet expectations. A123 Systems (Nasdaq: AONE ) may be on the chopping block next, after continuous losses and a recently announced $55 million recall. I took a lot of heat for pointing out A123's shortcomings last week and making an underperform CAPScall, but since then the stock is down 30%, and Chapter 11 may be the next stop. A123 has come with pockets turned to the public markets one too many times, and I don't think equity investors are buying its story again.
Nor has renewable energy been profitable
I'm a big fan of renewable energy, but overall the investment hasn't been a winner. First Solar (Nasdaq: FSLR ) has been the poster child of high expectations and increasingly disappointing results. Chinese manufacturers that have lower costs, receive government subsidies, and are willing to sell modules at below cost have overrun the company. How do you compete with that?
China may be stealing renewable energy market share, but that doesn't mean Chinese manufacturers have been a better investment. Suntech Power (NYSE: STP ) and Trina Solar, two of the largest Chinese manufacturers, are down 66% and 73%, respectively, over the past year.
Wind stocks like Vestas, which trades on pink sheets in the U.S., haven't performed any better, falling more than 50% in the last year.
Is it time to give up?
Does all of this failure mean that the smart grid will always be a poor investment? I tend to think there is some hope, but patience may be the key. Trying to pick winners before the market does can burn you, so wait for companies that can prove consistent profitability before diving in too deep. Bankruptcies have been commonplace in both private and public companies, so stick with quality companies with quality balance sheets and be ready to hit the eject button if signs of trouble emerge.
I lean toward watching industries that are growing and have some solid financial foundation for investment. Solar and wind power will continue to grow demand because they've reached grid parity and will be able to produce electricity for less than traditional sources. So there will eventually be some winners emerging from the industry. Who, when, and where? That's yet to be determined.
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