Trump May Not Like Alternative Energy, but Investors Should

Source: By PAUL SULLIVAN, New York Times • Posted: Monday, January 9, 2017

GIVEN what President-elect Donald J. Trump has said about his energy strategy — he favors coal and wants to end federal subsidies to the clean energy industry — does it still make sense to invest in wind, solar and other alternative sources of power?

The answer is an emphatic yes, according to investment advisers, who say clean energy companies will continue to thrive during a Trump administration, regardless of what the president says or does. The sector has become as much about getting returns on investments and catching the next technological boom as it is about reducing greenhouse gases and helping the environment.

And clean energy is creating jobs in every state, not just the ones that have oil or gas in the ground. Even the most politically conservative states, like Kansas and Iowa, are leaders in wind power and are likely to continue investing in it.

“No longer is there a trade-off between what you believe in and what you can make money off of,” said Nancy Pfund, a founder and managing partner of DBL Partners, which made early investments in SolarCity and Tesla.

She predicts that investors “are going to redouble their efforts to migrate their portfolios to a 21st-century energy economy.” Even without subsidies, she said, alternative energy sources will be well positioned to compete with coal and other carbon spewers.

“It really has to do with the cost of wind, solar and electric cars compared to where we were 12 years ago,” Ms. Pfund said.

And there is momentum in the sector. Bill Gates, the Microsoft founder, recently announced a billion-dollar investment fund to put money into energy research and the reduction of carbon emissions.

But the challenge for all investors during the Trump administration and beyond will be to make sure that passions for change and innovation, or anger at environmental policies that favor fossil fuels, do not cloud sound investment analysis.

“Recently, people have taken the green mandate and said, ‘You need to invest in the future,’” said Chat Reynders, the chief executive and chairman of Reynders, McVeigh Capital Management, a $1.3 billion asset-management firm. “People have chased some investments that weren’t timely or were not quality investments in order to participate.”

For example, back in the 1970s, some investors were eager to back manufacturers of solar panels. But what was then a cutting-edge technology with high barriers to entry is now a commodity, with prices dropping as more manufacturers enter the market. This is good for the consumer, but not great for investors in the panel makers.

And solar power has very much gone mainstream. Walmart, which has panels atop its stores as it works toward 100 percent renewable energy use, and other companies have become huge producers and consumers of solar energy.

“You can’t put the genie back in the bottle when it comes to the economics driving solar, wind and battery storage,” said Thomas Van Dyck, managing director in the SRI Wealth Management Group at RBC Wealth Management.

“The economics are such that in California, wind and solar are the cheapest form of power you can put in place,” Mr. Van Dyck said. “If you’re a long-term investor, you need to look at these long-term trends.”

Despite the economic forces lining up behind clean energy, investors and analysts caution that people interested in investing in this area should be prepared for a rough ride in the short term.

“If you’re a long-term investor and looking out five to 10 years, it’s a no-brainer,” Mr. Van Dyck said. “It’s like looking at Intel or Microsoft in the 1990s — they had some cyclical issues, but look at them today.”

An often-cited cautionary tale of passion trumping economic reasoning is Solyndra,the solar panel maker best known for spending $527 million in government loans before collapsing.

R. Paul Herman, the chief executive of HIP Investor, an investment rater and portfolio manager, said investors looking for broad guidance should keep three things in mind. They should look for companies that are trying to save money and reduce risk through clean energy. This is the Walmart example.

They should monitor their investments in fossil-fuel producers closely, lest their stocks plummet again as renewable energy gets cheaper and the value of their reserves diminishes. And those with a longer-term investment horizon and a higher tolerance for risk should look for companies focused on energy innovations.

The last is the holy grail. Ms. Pfund’s firm, DBL Partners, had great success investing in Tesla and SolarCity, but she said she was not looking to mimic those investments today.

“The last thing I’m going to do is keep investing in the same old, same old,” she said. “The venture-backed electric car company was a smart investment 10 years ago, but today it’s things like storage — the batteries in a Tesla or stationary storage — that are going to play a huge role in the electric grid of the future.”

With storage, the energy created by the sun and wind can be used on demand — or on cloudy, calm days.

Mr. Reynders said he was steering clear of solar panels but liked companies that install the panels. He also said he thought the Trump administration would be good for alternative-energy investment, though not as its cheerleader. If the administration follows through on Mr. Trump’s plan to cut clean-energy subsidies, it could force a shakeout in the industry and prompt investors to pay closer attention to company fundamentals.

For investors with a greater appetite for risk, there are certainly longer-term energy investments. One is graphene, a superthin, incredibly strong material that can be used as a conductor. Its promise is for batteries of the future, and probably much more.

William Page, portfolio manager for global environmental opportunities strategy at Essex Investment Management, said he saw the potential in investing in graphene but was avoiding it for now.

“We don’t want to invest in a technology that might work in the lab today but it’s not something that is a viable investment today,” he said. “We want something that is profitable today.”

Like Mr. Reynders, Mr. Page thinks that companies that install solar panels are a good investment. He also likes LED lighting installation — not the exactly the sexiest clean energy investment, but one that is environmentally sound and profitable today.

At the opposite end of the risk spectrum, Matthew Weatherley-White, co-founder and managing director at the Caprock Group, said people could make alternative energy investments in themselves, as it were.

“Say you have $10,000,” he said. “Do you want to invest in a solar panel company or in a solar array for your house?”

Of course, it depends on whether you are a city or country dweller. “In Idaho, where I live, there’s 6 percent internal rate of return for a solar array, so you get paid back in 18 years,” Mr. Weatherley-White said. “That might not blow the socks off as an investment, but it’s pretty predictable.”

In places like California, where state policies favor solar power, that rate of return could be three to four times what it is in Idaho, he said. Still, it comes down to a question every investor should ask: “Where am I going to invest for a positive financial return and an environmental impact?”

And in the United States, it is the states rather than the federal government that may wield the greatest influence over the clean-energy sector. “While the Trump victory for some was disturbing or took the wind out of their sails,” Ms. Pfund said, “the federal government can only do so much.”