What happened
In what's becoming a wild ride for investors, clean energy stocks crashed this week. The market had been shifting back toward growth and higher-risk stocks early in 2023, but that momentum just reversed again.
Shares of some of the riskier clean energy companies have been hit hardest. According to data provided by S&P Global Market Intelligence, shares of industrial electric vehicle company Proterra (PTRA) were off by 20.3% as of 11:20 a.m. Friday morning since the close of trading last week. FuelCell Energy (FCEL -4.39%) was down by 14.4%, and Workhorse Group (WKHS -2.43%) dropped 16.1%.
So what
The drop in clean energy sector players this week was largely driven by a broader market sell-off. Federal Reserve officials spoke in multiple places this week about their plans to continue to raise interest rates over the next year in order to fight inflation and cool off the economy, and investors were weighing how that would impact various types of businesses. Only a week ago, it seemed likely that the central bank's series of boosts to the benchmark federal funds rate would soon come to an end, but after the Labor Department released a report last Friday that showed that 517,000 new jobs were created in January as the unemployment rate fell to just 3.4%, it appears more likely that rate hikes will continue.
Higher interest rates have a number of negative impacts on clean energy companies. And higher rates generally push stock prices lower as investors put more emphasis on near-term cash flows and less on long-term cash flows.
This can make it harder for growth companies to raise money from the equity and debt markets. Proterra, FuelCell, and Workhorse are all burning cash in their businesses, and that's not a sustainable situation over the long term.
PTRA Free Cash Flow data by YCharts.
As interest rates rise, it becomes harder for the market to support companies that may not generate cash for years or even decades. None of these companies has a clear path to profitability, and that's ultimately what investors are looking for.
Now what
I think now is a tough time to invest in speculative stocks, especially in the energy industry. There are lots of companies making more money than ever in oil and natural gas, and if these start-ups can't compete yet, then one has to wonder -- when will they be able to?
Investors can find plenty of well-run, profitable renewable energy stocks to buy -- companies that don't need to rely on capital markets to stay afloat and have already found product-market fit.
While the future may be in products like electric trucks and fuel cells, that doesn't mean that every business that sells those will be successful. I think the market is realizing that the days of easy money policies are gone, and they aren't coming back anytime soon. That's why clean energy stocks are down big, and I don't see a significant recovery coming in the near term.
Believing in the future of energy is one thing, but investing in it is something completely different. Energy companies live by the laws of business, and in energy, that means cash is king. And cash is something these companies don't have easy access to right now.
