Historically, energy hasn't exactly been the most dynamic sector in which to invest. Sure, oil and gas prices could swing up and down with the market, but outside of coal and oil, there haven't been many other options. That isn't the case anymore, though, because today the emergence of other energy options is uprooting the long-held positions of those traditional energy sources.
So, we asked our contributors to dig through the energy market and share some companies that could be very smart investments that play off the alternative-energy boom. Here's what they had to say.
Dan Caplinger: One of the biggest challenges that investors face is figuring out which of the many companies in a given sector will be the big winner from a favorable trend. For instance, in the solar energy arena, many producers of solar cells have turned out to have an apparent competitive advantage over their rivals, leading to disparate performance that has put a premium on having picked the right company from the outset.
One way to deal with the challenge of stock picking is to look for diversified exchange-traded funds that target an entire industry. The solar ETF Guggenheim Solar (TAN 1.57%) is a good example, with shares having advanced an average of 22% annually over the past two years. The ETF has just over two dozen holdings, with its largest happening to be one of the best performers in the industry so far this year: SunEdison (SUNEQ). Exposure to Chinese solar producers has weighed on the ETF's results in 2015, but that diversification has helped moderate losses compared to investing directly in individual stocks.
Similar ETFs cover other areas of alternative energy, such as the WilderHill Clean Energy Portfolio (PBW 0.58%) and its broader holdings of fuel-cell, electric-vehicle, and thermal-energy companies, as well as solar businesses. By betting on the whole industry, you can avoid the need to find the winners early on and instead focus on the prospects for alternative energy more universally.
Tyler Crowe: Perhaps the only thing that has changed the energy landscape more than the spectacular growth in solar and wind power projects has been the emergence of cheap natural gas in the U.S. It's not just having a massive impact on power generation, but it's also making rather noticeable changes to our oil-heavy transportation sector. While it may not be noticeable on an everyday basis, natural gas is slowly becoming a player in the long-haul trucking and fleet-vehicle markets, and one company that is the most visible sign of this change is Clean Energy Fuels (CLNE 19.78%).
Clean Energy Fuels is building the one thing that has always prevented natural gas from being a viable transportation fuel: a fueling infrastructure. Today, that doesn't look like the most lucrative company to invest in, especially considering the massive amounts of capital that it will take to build a suitable fueling network. That said, Clean Energy Fuels has grown its fueling network to more than 550 stations that fuel close to 35,000 vehicles a day and has more than tripled revenue over the past five years.
It will probably take a while before Clean Energy Fuels is able to turn a sustainable profit as its growth spending still outpaces the cash it can generate from operations, and investors should keep in mind that the company is in a pretty low-margin industry that won't blow your minds with profit. But as a more robust fueling network is built, it should be able to turn that network into a profit center. For an investor who has the patience to see this through, Clean Energy Fuels could be a smart way to profit from this emerging shift to natural gas as a prominent transportation fuel.