A number of buzzworthy investing ideas have caught on with fad-hungry investors in recent years. One hot area of late has been “cleantech” — the idea of companies that profit from cleaning up messy businesses or replacing pollution-intensive processes with innovative methods that dramatically reduce the environmental impact. The catch-all covers everything from water filtration companies to solar stocks.
It sounds like a sexy area, with big growth and no-brainer appeal as the world goes green … right?
Wrong. It turns out there ain’t much money in cleantech despite all the purported appeal.
Take this recent report from BostInno about how Boston venture capitalists — as well as those elsewhere in the U.S. — continue to abandon cleantech. Author Walter Frick shows how 2012 investment in cleantech collapsed about 33%, and the momentum still is moving to the downside.
Click to Enlarge And check out this chart, showing VC investment sliding back to 2009 levels and threatening to plunge to a seven-year low in 2013.
The exodus has many reasons. But a short list includes:
Affordable “Dirty” Alternatives: Crude oil has only briefly crossed the $100 mark since the 2008 commodity crash, though we admittedly are approaching the century mark once again. However, natural gas remains at very affordable levels; and when old sources remain cost-effective, there’s not as big of a push from a financial perspective to explore alternative energy. This analysis goes to other areas of cleantech, too. Consider ethanol, which got lots of bad press in 2012 thanks to sky-high corn prices. A recent report shows that corn-based biofuel is approaching parity with conventional gasoline prices. So if it’s equal in cost and more troublesome to produce, how is it a better alternative for energy?
Legislative Headwinds: With the focus on spending cuts, cleantech incentives are on the chopping block big-time. Consider that the wind production tax credit barely squeaked out an extension in the fiscal cliff negotiations, and is hardly a guarantee beyond this year. That’s not good for beginning-stage cleantech companies that rely on tax breaks and incentives to grow. This uncertainty goes for residential credits, which could entice homeowners to make purchases from green companies as well as direct business credits. And lest you think Congress will “invest in the future” by defending cleantech, remember that Solyndra remains a recent reminder of government largesse gone awry. There’s also the obvious lack of a serious U.S. climate policy to bolster the industry.
Performance Is Ugly: If you want a more tangible reason that cleantech stocks are trouble, simply look at share prices. Recent IPOs include Solazyme (NASDAQ:SZYM), which has a technology system that turns algae into high-value oils. Despite high-profile partnerships with the likes of Dow Chemical (NYSE:DOW) and Chevron (NYSE:CVX), Solazyme stock is down 60% since its June 2011 offering. Another is Gevo (NASDAQ: GEVO), a company that develops biobased products that are an alternative to petroleum products. GEVO is down more than 85% since its February 2011 IPO. Then there are the more entrenched players that are bigger than startups but still struggling mightily. Solar supplier Applied Materials (NASDAQ:AMAT) has been pretty much dead money since mid-2009 and is off more than 30% from pre-recession levels, and solar “leader” First Solar (NASDAQ:FSLR) is down 85% in five years with no turnaround in sight.
I’m not saying there isn’t a future for this sector. I hope that there is, for the sake of the environment. But why would you expect any of this to change in 2013 based on the current conditions and medium-term outlook?
Cleantech is a great buzzword but not a great investing thesis. As investors, we need to keep in mind that the next big thing is rarely ever as easy to invest in or as wildly profitable as the pundits want us to believe.
Think about the short-lived 2010-11 fad in rare earths, with Molycorp (NYSE:MCP) going from $20 to over $70 in less than a year … before crashing to the $10 range, where it sits now. Or further back, think about dot-com stocks that were “sure things” based on the way of the future.
There are many reasons to be skeptical of cleantech in 2013 … as well as “the cloud,” “big data” and other fashionable sectors that will purportedly change the world and make you a millionaire overnight.
- From a year ago, but relevant: “Why the Clean Tech Boom Went Bust” (Wired)
- Even industry blogs admit “our sector is at a pretty low point right now,” including a prediction of continued consolidation in solar. (Cleantech Investing)
- All that aside there remains growth. Case in point: This report showing green jobs on the rise despite the recent headwinds. (Brookings Institution)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.